Is there a Pearl Inside the Recently Launched Oyster? Challenges and Strategies for E-Book Subscription Services
Oyster, a start-up from New York announced earlier this week that it had raised $3 million from blue-chip venture-capital investors to create a “Spotify for ebooks”.
The book industry took notice and some commentary was quite negative, as in “how naïve are these guys to disregard the complex rights and commercial framework of the book publishing industry”?
First of all, “Spotify for ebooks is just a catchy pitch,” to quote Justo Hidalgo, co-founder of Spain’s 24Symbols, one of the first start-ups pioneering this business model. Spotify is a household name thanks to its sleek service and rapid growth. Thus “Spotify for ebooks” quickly conveys what a start-up wants to achieve. Unfortunately, both Spotify and Netflix are low margin businesses at this point and thus unprofitable for their investors. The jury is till out on the subscription model being great for investors in any industry. The model is easy to understand though and holds enormous consumer appeal, and so almost a dozen start-ups are now chasing this prize in trade publishing.
Secondly, capitalism thrives on creative destruction and disruptive innovators. It is the strength and folly of technology start-ups to sometimes pioneer new approaches because they are ignorant of “why it is not possible”. Unfortunately commercial challenges tend to be much, much harder than technological challenges, but nothing is impossible.
What is Oyster up against?
Well, first of all, trade publishers are like clams. They love chatting about new technology, new models and new initiatives and in that sense it is very understandable that Oyster CEO, Eric Stromberg is seeing a lot of “momentum”, that magic word in Silicon Valley. However, when it comes to granting rights and signing contracts, publishers can positively “clam” up.
We have witnessed outright hostility in past months to any form of lending by the big six trade publishers. Simon & Schuster and Macmillan refuse outright to make their ebook titles available for lending (any subcritpion model is basically an “all you can eat” lending model for a fixed monthly price). Random House, Penguin, Hachette and Harper Collins are doing so only under very restrictive conditions. Why? The fear is that ebook lending would cannibalize ebook sales. Is that fear justified? Yes. The notional exceptions such as O’Reilly’s Safari Online, which caters to professionals, competes with free technical content from blogs and offers a service that is complimentary, not competitive with books sales, and therefore not really an exception to the rule. Thus the obstacles of getting content from publishers are not technical in nature, but commercial.
(This is not to mention all of the complicated issues around compensating publishers, authors and agents for their work in a way that makes everyone happy; that’s a topic for a whole other post.)
Oyster’s pitch, like that of many traditional circulation libraries, is that they provide a new form of a discovery service. However, the problem is that discovery is a “nice to have” for publisher, not a pain point. Publishers are keen on “discoverability” that leads to an intent to buy their book and that means sales. Consumer discovery is too diffuse for publishers to measure a tangible benefit. At Jellybooks, my start-up, we have learned that the pitch of “helping book buyers with what to read next” falls on deaf ears. Libraries have learned the same. (It figures, I guess, because clams don’t have ears, as we all learned in biology class.)
Secondly, there is the pricing issue. What are consumers prepared to pay? After all, borrowing a book from the local library is free, costs nothing, zippo. Anecdotal evidence suggests that $10/£10/€10 per month is the magical upper limit for mass consumers and for which they expect a service that is dead-easy to use and from the comfort of their home or on the go (Overdrive which powers most local libraries cannot be described as easy or convenient by a long stretch). This is the same price at which Amazon sells a single best-selling ebook from mainstream publishers. Challenging! Where is the opportunity?
Well, book reading competes with watching video, playing games and surfing social sites on the Internet. There may well be a segment of ravenous, but highly price-sensitive readers, who don’t buy the latest best sellers, and who would be interested in access to a vast catalog of back-list titles for a modest fee per month. Being back-list reduces the risk of sales cannibalization. Oyster’s pitch that it would generate incremental revenue (which circulation libraries do not create) may actually bear fruit in this case. However, a subscription service for front-list would almost certainly reduce the potential revenue pie for publishers and authors. Music subscriptions are commercially attractive to record labels because piracy is rampant and the annual spend on singles comparably low. Much, much more money is spent on buying books, thus a subscriptions service priced at $10 is unattractive commercially to both publishers and authors.
Thirdly. Publishers are slow to sign deals, but readers will expect a “complete” catalog and will feel cheated, if they pay “full” dollar, only to discover that many titles they want are missing. The solution would be to focus on specific genres. One example is Sci-Fi. Authors writing about the future are among the most innovative out there and more inclined into bullying their publishers to participate: think of a Cory Doctorow, a Neil Gaiman or a Charles Stross. They are prime candidates for exploring new and innovative services. Sci-Fi readers also fit the target audience of ravenous, but price-sensitive. They also are more likely than other readers to play computer games or watch action flicks, so prime territory for experimentation — and for expansion.
The other solution would be to offer the subscription service for free, but funded by advertising. Advertising in books? Enough said.
So, Oyster has a tough time ahead in securing content. They may need a barnacle strategy for surviving in harsh, frigid and turbulent waters as opposed to the cosseted life of oysters that thrive in calm and warm waters. I wish them every bit of luck. The founders are great and fabulous guys (met some of them during Book expo America in June) and the book industry can only benefit from first-rate talent experimenting with new discovery algorithms, new user interface models and fresh ideas. The commercial difficulties that Oyster will face can be overcome. Maybe there is even a “pivot” in the near future.
These are exciting times for being in publishing.