Part 1: KU or KO? On streaming, subscription and big data

Part 1: KU or KO? On streaming, subscription and big data

Editor's note: The FutureBook community’s Eric Briys, pictured, co-founder of France’s Cyberlibris, has provided us with this extensive discussion of ebook subscription services. We have it for you in two parts.
• Part 1: How does (should) subscription really work? Data, pricing and money talk 
• Part 2: Is there life beyond (proper) pricing? The hidden treasure of reading data

With the expected (feared?) news that Amazon has embraced the “all you can eat” subscription model, Kindle Unlimited (KU) is on everybody's mind, lips, and pens. Movies have been Netflixed, music has been Spotified and, now, books are following the same path.

In a recent post here at The FutureBook, 24symbols co-founder Justo Hidalgo is urging publishers to recognize that subscription services do bring tremendous value to the publishing ecosystem.

In the midst of the Amazon/Hachette battle, the KU announcement has at least one merit. It raises lots of comments, arguments and counterarguments: Will KU make the publishing industry KO? Is it good news or bad news and for whom? Do “all you can eat” subscription services have a bright future?

Well, as always, nothing is either totally white or black nor totally new or old. Nothing is either bad or good. It all depends. KU or not, the devil still lies in the details. Subscription, streaming, advertising as paying third party are hardly new concepts. Think of radio, TV etc. They have been around for quite a while. The only difference is that the Internet gives them a new lease on life that may or may not be disruptive.

To avoid hasty conclusions on these potentially disruptive effects , a step back and a wider perspective are needed. The following lines try to achieve this. They are the output of my business musings and ruminations after almost 14 years of book streaming and subscription. This is one specific (biased?) angle, but hopefully a good one to start with.

How does (should) subscription really work? Data, pricing and money talk

Cyberlibris, the French firm I co-founded 13 years ago, has been a very active player in the ebook and digital-libraries arena since then. Over time, Cyberlibris -- along with French and international publishers -- has carefully crafted an “all you can eat” subscription streaming based business model for ebooks. At the time Cyberlibris was founded, “DSL” and “wi-fi” did not even exist! We started our journey with the academic world and expanded it to Main Street along the way. This has been a long road and a great place to observe and act.

Our view -- nothing fancy but easy to forget -- has always been to put the reader/user at the forefront.

Indeed, understanding reader frustrations, when and where they materialize, helps a lot when designing a proper anwer to such frustrations. Take the example of the academic world. It is a strong international community. You don't have to invent it. It is already there. The challenge, however, is to find ways for its members to become more efficient learners, teachers, and researchers. And, in that respect the reasons for learners’, teachers’ and researchers’ frustrations are numerous. How come the book I want to read for the exam is not available? How come I can't give my students several books to read for the course? -- and so on and so forth.

Analyzing these frustrations (which, by the way, mean that publishers too often leave money on the table), we designed several services including ScholarVox, a service dedicated to business schools, and ScholarVox Sciences, a service dedicated to engineering schools. These are community-based digital libraries marketed on a B2B basis where books are accessible 24/7, streaming-wise, with no restrictions on the number of simultaneous readers. Most of the above quoted frustrations were gone. But, the design would not have been complete without a properly designed pricing scheme. Fail the pricing and you fail everything.

The pricing model has to be simple, easy to understand and, last but not least, fair. It has to properly align partners’ incentives. After days of reflection and market research, we concluded that an “all you can eat” subscription/streaming model with revenue sharing was what was needed. Schools, universities subscribe on a yearly basis on behalf of students, professors and librarians. In a sense, they (yearly) rent books which they never own as opposed to the physical library where owned books are stored. So 11 years ago we went live!

You may wonder why we did not opt for an individual subscription model.

First it is costly to chase subscribers one-by-one.
Second, the whole idea is to embed the digital library into the teaching process and this can only be done at the institutional level.
Third -- which is in fact first -- to avoid what insurance companies call adverse selection or anti-selection.

At the end of the day, the best metaphor I can offer for what we do is "group insurance." Indeed, in group insurance, corporations buy a global insurance policy on behalf of their employees. This is usually good for the insurance company because with a large group of people at once the law of large numbers has a better chance to work and, more importantly, the issue of adverse selection may turn out to be less severe. In other words, with a large group, if you do the pricing job properly, you will benefit from the law of large numbers (not everybody has a claim at the same time) and you won't end up carrying high-risk people only, namely those who should have paid a lot more in the first place.

Why is all this relevant to the “all you can eat” subscription model? Well, schools subscribe to a global "reading insurance" policy (they pay the lump-sum annual subscription fee) on behalf of students, professors and librarians. What does this policy cover? Reading needs. And, it turns out with a large crew of students and faculty that heavy readers are compensated for by light readers, a kind of law of large reading numbers! Not all students are workaholic. ;-)

For this to be successful, publishers (and authors for that matter) have to be fairly compensated. Here is how it works. Publishers get a share of the “global insurance (subscription) premium” that schools have paid to Cyberlibris. We pay each publisher according to its percentage share in the total number of consultations across all publishers. By consultation, we understand a book page viewed on screen (one consultation) and a page printed (one additional consultation). Each month, each publisher receives a detailed royalty (consultations) statement which yields the overall amount to be invoiced and the split of that amount across books. This means that each time the same page is read again, a new payment is due. This is in sharp contrast with the sale of a book where -- whether or not the book is read -- the same single amount is paid, namely the one-time price of the book.

This begs the ultimate question: How do you (fairly) price this insurance premium to make everybody happy? Well, somehow, using actuarial principles, just like an insurance actuary would do. In insurance, what they call the fair premium is the expected value of the claim, that is, in a nutshell, the probability of having a claim multiplied by the size of the claim. To get to this number right, actuaries blend "art and science" in their computations.

In our case, one has to figure out what the expected level of consultations is going to be given the size of the academic crew, the type of digital library it accesses and, last but not least, the time users spend on the service. One crucial element is indeed time. Time spent will determine how many pages can be consumed in that time span. This is where gathering data points is crucial and, in the end, gives you an edge. Because we have been in this business for the last eleven years along with more than 300 publishing partners, we have gathered a rich set of data to feed our pricing scheme. Somehow, a successful subscription service is one where smart time and content actuarial practices are in place. In the end, data and money talk.

Publishers often have a hard time understanding that the subscription price is not an increasing function of the size of the catalog. Indeed, the temptation is to conclude that the more books available, the higher the price should be. Publishers are inclined to believe that the more they are, the less they will receive. But this misses an important point: People have only limited time to read. Access to twice as many books will not make them read twice as much.

Moreover, users may be tempted to conclude that they pay too much for books that they will never read. Where does size matter then? In two areas.

The first one states the obvious: The catalog has to be appealing. It will never have everything (who has everything?) but it matches what users needs (again the design issue). In turn, being relevant means that you attract more and more users, which defeats the idea of declining revenues.

The second one is that with a large catalog, you have the ability to versionise, namely to market specific libraries to specific audiences. Books may indeed have several lives in several services.

In the end, what induces readers to spend time on the service is the curation of the catalog. A well-managed curation yields relevance and serendipity. Serendipity, because there are far more books that we don't know than books we do know. I am always surprised in my own field (I used to be a finance academic) by the number of finance books – non-bestsellers, not to mention non-finance books -- I should have known about!

The insurance analogy may help understand why many artists, such as David Byrne, complain about music streaming services such as Spotify and Deezer. These are individual subscription services which incur the risk of attracting heavy music listeners (the adverse selection phenomenon) who should have paid a lot more. Everybody pays $9.99 per month. But for some it is too much and others not enough. As Nobel Prize-winning economist Georges Ackerlof would put it, you end up with a “market for lemons”. To add insult to injury, music is a non-rival activity: You can drive and listen to music (something you can't do with a book unless it is an audiobook).

To make things worse, it seems that $9.99 is a kind of psychological threshold. People don't want to pay more. So you end up with heavy listeners who don't pay the right price.

As a matter of fact, the same holds true for book individual subscription services. The risk is that they attract heavy readers and end up with an unbalanced portfolio of subscribers.

My guess is that carefully crafted vertical services have a better chance to succeed than horizontal ones. Indeed, in vertical ones, you attract “aficionados” who are less elastic to price than subscribers of horizontal services. Furthermore, aficionados are more willing to add a new subscription (provided it makes their day) to the whole set of subscriptions we all have to pay (Internet, phone, TV etc.). With aficionados the right price will be paid even if it is north of $9.99.

To be fully honest and to conclude this first section, there is one frustration that quite early on our clients voiced.

They told us that even though they truly enjoyed the simplicity of, say, ScholarVox, they felt frustrated by not owning the books. But when you think of it, especially in the area of academic publishing (where obsolescence is quite rapid), you never "own" physical books. Yes you do own a book published in a given year. But, you will have to purchase the new edition in 3 years’ time (otherwise patrons will complain that the library is not up to date).

As a result, it is as if you were renting the book except that the cash-flow cycle is not the same as a true rent. You pay, say, $60 one-shot for a print copy and $60 again three years later. Ignoring discounting, this is a $20 per year rent! Not to mention the fact that you will, one way or the other, have to get rid of the old copies because of lack of physical space. So the subscription model is not that remote from the ownership model in that example. Again the devil lies in the details: All books are not born equal!

As the years went by, we expanded our subscription services from the academic world to the corporate world, to the public libraries sector, and to families. We now cover the full reading cycle of any individual -- education, business and family -- and we have readers in roughly 40 countries.

The economics of subscription services is simple and subtle.

Simple because everybody knows what it stands for.
Subtle because (and sadly enough nobody really talks about it) the room for mis-pricing is significant.

Any pricing error can be paid for dearly and the unfortunate result is some sort of Gresham’s Law in which bad money drives out good. Pricing is not something that you draw from your hat. Pricing has to be part of the service design. Mis-pricing is a good warning of a poorly designed service where one does not really know who the readers are going to be. As a result, both readers and publishing houses are dissatisfied and rightly so.

It should also be emphasized that most of the recent subscription services do not rely on a genuine shared-subscription scheme. As far as I see it, they are, more or less, kind of Ponzi schemes: They pray that they won't have to cash out to publishers more than they cashed in. Each time a book is, say, 10-percent read, the service has to pay publishers the wholesale price. In other words, these services pray that lots of users won't read much and that they will continue attracting this type of readers.

This is bad because fully read books are treated the same way as partially read books. Rather unfair indeed. How come, now that we can distinguish between fully read books and partially read books, do we not take advantage of it?

The unfortunate result is that instead of growing the pie and then sharing it, publishers capture the funding of these new services and, in the end, strangle them.

Money changes hands without triggering growth. In a properly priced revenue sharing model, this will never happen: You can't pay more than what is available to share. Incentives are fairly aligned toward growing the pie. This pricing mis-design is bad both for the service and the publishers, not only on straight monetary grounds but also on qualitative grounds.

Indeed, if you rely on the fragile assumption that people should not read much, you won't collect what is the true gem of a subscription service : The reading data.

And, if you do, it means that your readers read too much and you end up broke before capturing the gem data !

Part 2: Is there life beyond (proper) pricing? The hidden treasure of reading data

Main image - Shutterstock: Africa Studio