The Sobering Economics of Ebook Subscription Services

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I am always a bit skeptical about consumer surveys, because they paint too rosy a picture. Consumers are more likely to state that they might buy something at a certain price when asked versus when they have to part with cold, hard cash.

Thus given that such surveys are overly optimistic, a recent UK survey pours bucket loads of ice-cold water on the economic attractiveness of ebook subscription services for publishers.

Consultancy Olivery & Ohlbaum surveyed 1,461 readers in the UK and found:

— 61% were prepared to pay up to £5 for such a service
— 33% were prepared to pay up to £10 for such a service
— 5% were prepared to spend between £10 and £15 for such a service
— 1% were prepared to pay £15-10 per month for such a service
— And zero, absolutely zero were prepared to pay more than $20 per month

Now it’s $1.6 to the pound, but for all intents and purposes (VAT, etc.) one could just substitute $ for £ in the above to get an approximate picture for the U.S.

In short, consumers love the idea of a “Spotify for ebooks” (29% of readers surveyed said they were VERY interested in such a service), but they are not willing to pay more than what they pay for Spotify (£5 with ads and £10 per month without ads). See also Netflix pricing.

Lets do the math for a publisher:
— £5.00 per month paid by the consumer is
–> £4.58 after VAT has been deducted, leading to
–> £3.21 assuming the service operator gets a 30% cut, of which
–> £0.48 would go to a BIG 6 publisher with 15% market share (assuming revenues are split roughly proportional to market share)

That’s it, less than 50 pence per month goes to a BIG 6 publisher for a reader that gets all you can eat access (by comparison an ebook priced at $9.99 nets the publishers £5.83 after VAT and 30% retail margin, so if they sell that same reader one book per year through retail, they come out ahead by £0.07).

If you are small publisher with 0.1% market share it would be 3 pence per month per user, so 1 million users of the service would net this small publisher £3,000 per month for all their titles, so if that was say 200 authors and 50% author royalty, then that would be £7.50 per month per author for a 1-million user service.

CORRECTION: The paragraph above had said “If you are a small publisher with 1% market share….” It has now been corrected to say 0.1%.

Sobering economics.

Related: Spotify for Ebooks

Andrew Rhomberg

About Andrew Rhomberg

Andrew is the founder of Jellybooks, a start-up focused on exploring, sampling and sharing ebooks. He previously worked at txtr (whitelabel ebook retail platform), Skype (internet telephony), Reciva (internet radio), gate5 (now Nokia Maps), and Shell (oil). He holds a science Ph.D. from MIT. Follow him on Twitter at @arhomberg.

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6 thoughts on “The Sobering Economics of Ebook Subscription Services

  1. Can you please link to the study referenced in this post? I couldn’t find it anywhere on Oliver & Ohlbaum’s website, blog, or elsewhere through Google.

    • They presented the study on Monday at a meeting in London and I can share a copy by email, but it has never been posted online (so far) and I don’t have the permission to do so. They may though post it online in the near future.

  2. Ok, so how does Netflix survive? How does Spotify survive? How does Amazon provide online streaming to its Prime members (and book borrowing too)?

    • Netflix (the digital streaming service, not the DVD service) provides mostly back catalogue. They try to get the latest block buster, but they struggle mightily . Also it casts a bomb, hundresd of millions of dollars and maybe soon billions.

      Spotify is still loosing money, lots of it, despite $300 million in revenues. However in music piracy is so pervasive that the subscription services and radio services like Pandora compete with users pirating music, not buying stuff. Thus for record labels this is a good deal. They money they make through Spotify, they don’t loose through reduced music sales. However, note the many complaints of artists how little revenue they see. As one put it 100,000 songs plays on Spotify equals revenue to artists from sale of a single CD.

      As for Amazon. In terms of movies, it is the same as Netflix (it costs a bomb). In terms of books, they often buy the book to loan it out one single time. In other words they are subsidizing the service, throwing money at it. With money, at least enough of it, you can solve ANY problem.

      Back to our original problem. A $5/month service might (might!) be commercially feasible for back catalogue (titles older than 6-12 months), but not for a service with the latest block buster releases.

      It is not a technical challenge (technically all this is easy), and the issue is not if there are users who’d subscribe for $5/month, there are. It is a commercial problem for the content creators and they can block anything, if they see so fit, because there is no “right of first sale” as there is for printed books in libraries or DVDs at Netflix. IN other words, the servcie provider MUST have their consent.

  3. I was rather surprised to read this post. At the end I did question some of the assumptions made. To find the right price level to where a subscription should is placed is a relatively simple calculation based on book purchasing levels of different groups of customers. We could divide the entire population into groups based on the number of books they read each month/year, with his we would obviously find that the most ravenous readers would be very interested in a subscription because they would save money. The most interesting finding of the analysis would be the point where we find the reader group who today spend say 50$/year on books but who would be interested in a 10$/month subscription based on perceived reading levels, interest in availability etc.
    Based on the Olivery and Ohlbaum survey I would assume that 50-60% of that reader group would pay 10$/month. People tend to answer those kind of surveys with a lower value than what their real pain level is at.
    The subscription could be further refined into levels for example roofs of 3/5/10 books per month for different subscription levels, providing a tremendous perceived value for readers (3 book*aprox. 10$>10$).
    The publisher math also seems strange, it is most certainly possible to create a system of number of downloads per publisher divided by total downloads equals a part of the subscription revenue this would also encourage smaller publishers to join and “punish” small level of catalogue provided.
    End result for a reader with a normal yearly purchasing level of around 50$ to end up paying 120$ possibly with a little remaining physical book purchases. The upside for the reader is however availability, ease of use and reading levels most likely going up.
    While my data is solely based on a very small survey: namely my own purchasing patterns when it comes to having a Zune music subscription. The fact of that experience is that I pay at least double in subscription fees compared to pre-subscription CD purchases with a consumer who is however very happy about the increased availability.

    • I observe that Netflix, Spotify and others operate with a minimum of tiering and in price ranges not far from those being discussed.

      Also any ebook subscription service is anchored in price against free availability through libraries. $5/month is not so much what the user pays for content, bit for the convenience of a better user interface in this case.

      There are off course exceptions – niches – where different price points may work for both users AND content creators. A service focused on professional content – see Safari Online 0 and in some ways Reuters and Bloomberg.

      In the mass consumer market, my bet would be on a service that only carries titles 6-12 months AFTER publication. This was also my feedback Oyster when I met them this summer in NYC.

      It is absolutely correct that small publishers with little visibility benefit form being part of these services in the absence of the BIG 6 (soon to be BIG 4) and we see this already with services like 24Symbols.

      However, I maintain my opinion, that getting the latest releases form the top publishers to offer a genuine “Spotify for ebooks” will be Mission Impossible.

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