From author Jake Kerr:
One of the single most misunderstood developments in the publishing world is the various book subscription services: Oyster, Scribd, and, especially, Kindle Unlimited. This has led to widespread misinformation on everything from their economics to their impact on authors. Let’s take a look at the whole structure and see if we can provide a bit more clarity.
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For the user, a subscription only makes sense if they save money. There is simply no other reason to embrace a subscription model when direct sales still exist (as is the case for practically all these services).
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So if this is great for the consumer why would a business embrace this model? Well, the answer is that you are sacrificing profit on a small group to sell to a larger group, making more money in the process. If the average existing user saved 30% via the subscription model, if you increase your user base by 40% then you are making more money.
In short, the underlying assumption of the subscription model is that pent up demand is significantly constrained by pricing. Of course, you can just drop your price across the board, but that ignores an important point: Subscription models can live alongside direct retail models. So just lowering the price makes no sense, since you could conceivably sell at a higher margin to some of these people, having the best of both worlds.
This underlying concept of the subscription model is critical for authors: If you cannot gain a greater percentage of readers generating new revenue than the revenue you are losing in the price cut, then this is a bad deal.
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One of the things you hear in the publishing industry are horror stories about musicians making pennies from services like Spotify. This is used as a dire warning of what Kindle Unlimited can do. However, the music industry is different in a lot of ways. Hit songs get played by individual subscribers over and over and over again. Each play generates a small amount of money. If each play were paid the same as a sale, then subscription services would quickly go bankrupt. Music is also split between performance and song-writing royalties. If you think Amazon is screwing writers, think about what musicians get from airplay on terrestrial radio. You know how much that is? Zero. Each time you hear an Andy Summers riff from The Police on the radio, he gets nothing. Because broadcast radio doesn’t have a performance royalty. Sting, however, gets royalties, because he is the songwriter.
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Back to subscriptions, despite these differences, the actual core economics are the same. You have a set revenue number per subscriber, and people are drawn to “hits,” which will suck up the majority of the money. For Spotify, if the average listener listens to 100 songs a month for their $9.99 subscription fee, that means that each play will generate 10 cents. That 10 cents will also have to be split among the publisher and the performers. Now imagine that 90 of those plays are for “Blank Space” by Taylor Swift. That means that there is only a single dollar to be split by everyone else. Of course, if listeners actually listen to 1,000 songs a month, that’s a penny per play and most likely means more artists are getting paid (albeit less per play).
Link to the rest at Jake Kerr and thanks to Barb for the tip.
Here’s a link to Jake Kerr’s books