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What we want to do this time is think through the business model of these offerings and try and figure out if it can work or not. The reason we were interested in this analysis is because of the way Scribd and Oyster pay their authors, which is different from how Amazon does it.
Refreshing the Mind: Some Key Facts
The subscription fees for these services are quite low. Kindle Unlimited charges $9.99, Oyster will set you up for $9.95 a month and Scribd is the cheapest at $8.99.
KU offers you around 600 000 titles, Oyster 500 000 and Scribd 400 000. All of these come with the ever expanding tag. The vast majority of these titles are from independent publishers. Most of the major publishing houses are not part of these services.
How They Pay the Authors
Amazon pays the authors and publishers for the title in Kindle Unlimited program from a pre-allocated fund. This could presumably be based on the number of subscribers they have in the program, and hence should be in tune with the revenue they generate from it.
To understand the scheme, let’s assume that the monthly global fund amount allocated by Amazon is $1,000,000. All titles on Kindle Unlimited were read 500,000 times. Mr. X’s book was read 5000 times. Mr. X will earn 1% (5000/500,000 = 1%) of the total allocated amount, i.e, $10,000 for that month.
The more books borrowed per month means that payout per book will be lower. The opposite holds true– the fewer number of books read per months implies higher payouts. This means that authors cannot know beforehand how much they will get per sale. But Kindle Unlimited has capped its outflow to the authors beforehand.
The story for Oyster and Scribd is different. For an Independent author to publish on Oyster or Scribd they have to do it via Smashwords. The Smashword agreement with these two goes something like this:
The first 10% of every book can be read for free like a sample. If a reader reads an additional 20% more, author/publisher gets royalty for full sale of the book which is 60% of the price. Scribd also pays if the reader reads first 15% to 30% of the book and this is called a ‘browse credit’. For every 10 browses, author/publisher gets a full sale credit.
This means that the payment these services make to the authors depends on the price of the book (and number of times it was read, of course). This does not guarantee a cap on the outflow. If the readers read too much, these services could be in red.
So, Can They Make Money?
If average price of the e-books is $3.99, then given how Scribd and Oyster pay out, it means that three books will wipe out the monthly subscription fee, leaving nothing for Oyster or Scribd. But, does it really work this way? Not really, say the numbers.
Statistics point out that the typical American reads only 5 books per year. “Heavy readers” who make 28% of the American population read 11 or more books a year. PublishingTechnology.com argues that for Scribd and Oyster clients to break even on their approximate yearly investment of $120 they will have to read between 15 and 17 books. We can assume from this that the average price of a book on Scribd and Oyster is roughly around $7.
Here’s a magical table that explains how Scribd makes money.
Note: Sribd charges a customer $107.88 per year (8.99 x 12)
|Average price of e-books(in $)||No. of books Average Readers read||No. of books Heavy Readers read||No. of books Optimum Readers read||Scribd’s Royalty Outflow per read(60%)||Scribd’s earning from Average Readers annually(in $)||Scribd’s earning from Heavy Readers annually(in $)||Scribd’s earning from Optimum Readers annually(in $)|
This table explores different scenarios and the amount of money Scribd makes in each. We have varied the average price of the books from $5 to $9. Depending on the number of books read and the average price, the money made by Scribd varies. But in all cases, Scribd does make money.
The average and heavy readers, however, do not utilize the money they have spent on the subscription service. If they had just bought the books they read, they would save money over their subscription fee. It is safe to assume that they will figure this out and over time gravitate away from the service. So we created mythical creatures called Optimum readers, who read just enough number of books to completely utilize the amount of money they have paid to Scribd. In other words, Optimum readers break even for themselves.
It turns out that Scribd makes a LOT of money not only with average and heavy readers, but also with optimum readers.
Can Something Happen to Wipe Out the Profit?
|Average price of e-books(in $)||No. of books Transformed Readers read(7xAvg Reader)||Scribd’s Royalty Outflow per read(60%)||Scribd’s earning from Transformed Readers annually(in $)|
In this table, we have considered the worst case scenario for Scribd. We create another mythical creature – the Transformed Reader. This guy reads about 7 times the average reader (and 3.5 times the heavy reader) With the Transformed Reader, the whole business model of Scribd could be in trouble. Another scenario we can consider is if the average price of the books rises dramatically. This too could mean trouble for Scribd.
But we need to remember that these scenarios are purely hypothetical and highly unlikely. The number of books read by an average user is not going to rise so dramatically unless our governments decide to pay us to sit at home and read books. The average price of the books is not going to rise overnight either, especially if the majority of listed books are Indie. Even if the average price rises, Scribd can always increase the monthly subscription a little. For now, Scribd has gotten its math right.
It’s almost comparable to the gym memberships that increase during the month of January. While some will utilize it thoroughly, a big chunk eventually stops going to the gym but continue to hold the membership thinking what if I need it some day?
We had started with the question of whether the basic math works out for subscription services other than Kindle Unlimited, given that they do not cap their outflow. It turns out that unless the scene changes dramatically, it does work out for now. However, if these services become popular, they need to keep an eye out on the changes authors and publishers will make in how they publish e-books. Indie authors might choose to write shorter work as it is more likely to be read and bring credit. They might also increase the prices of the e-books, especially if subscription services start eating into their revenue from other channels. But then, if they do grow into an effective channel, they might learn an arm-twisting lesson or two from existing powerful players J and force authors into keeping the prices low.
Only time will tell!
Written by: Jandre, Jaya and Srishti