You know what's cool? A billion dollars, that's what's cool.

You know what's cool? A billion dollars, that's what's cool.

I’ll let you in on a secret. Nothing gets me hotter than a big juicy subscription based revenue stream. It’s not just me, anyone who can read a balance sheet feels the same way.

Every CFO in the world nurses a secret fantasy of taking subscription revenues out for a lobster dinner and maybe a show – then slipping back to the boardroom for a bit of show and tell with the shareholders.

From mobile phones to car insurance. From movie rentals to organic veg boxes. A robust, profitable subscription model is the business model that keeps on giving (usually by direct debit).

So what’s so great about subscriptions? Well, you get your money up front for starters - always good for the cash flow. You can use this cash-at-hand to invest in expanding your customer base without running up debt on the balance sheet. And best of all it’s predictable income. Income that’s hitting the balance sheet every month like clockwork. Income that allows businesses to plan effectively for the future.

Of course publishing is no stranger to the subscription model. You could argue that we were the first to recognise the potential and build a viable worldwide industry on the back of it. It’s no surprise that 6 of the worlds Top 10 publishers (by turnover) built their businesses almost entirely from subscription models.

All of this astute empire building was of course done by Academic & Professional publishers (not their financially incontinent bo-ho cousins in Trade). Most of these pioneers were based in the UK or Europe and the scale of their success over the last 60 years is staggering. Ever since Bob Maxwell rode an army jeep into the Springer Verlag headquarters in1945 and ‘liberated’ their customer’s name and address files all the  way back to Oxford, academic publishers have known they were onto a winner with subscriptions.

All the current hand-ringing about the viability of subscription models is only coming from one section of the industry – Trade publishing. This soul searching is most often met by the amused/bemused smiles of Academic & Professional publishers who have been doing very nicely out of subscriptions for decades thank you very much.

There are essentially two sides to this argument.

  • Academic is Academic. Trade is Trade. They’re different. Subscriptions will never work in a B2C environment.
  • Screw that. Who wants to make a big pot of cash?

Anyone want to make a guess which side of this discussion I’m edging toward?

And why am I so positive that subscriptions will work for Trade publishing? Well mainly because I’ve seen the numbers, I’ve modelled the scenarios and I’m sitting here watching the theory being put into practice.

Almost exactly 3 years ago I was in New York working for a large media company from the West Coast who had hired me and a handful of others to investigate the viability of an “all you can eat” subscription model for publishing.

In the best think-tank tradition we delivered two answers.

  •  “YES - it’s very viable. Licence to print money. Bloody gold mine.”
  • “NOT YET – the big publishers will never sign up. They’re only just getting to grips with the idea of eBooks for chrissakes. Give the poor darlings time."

It’s therefore with a certain amount of satisfaction that I’ve witnessed the entry of Scribd and Oyster onto the playing field

(In the interests of full disclosure I should also make clear that despite the fact that the money behind Oyster comes predominantly from West Coast investors – I’ve never worked for Oyster or advised them and I don’t have any connection to them or any insider knowledge of their business model or operating practices.)

So let me try and explain briefly why the subscription model for trade publishing is viable for everyone involved - the platform, the publishers and the authors.

Like everything in business it mainly comes down to the numbers.

Let’s compare the two consumer facing media/entertainment subscription businesses that are most widely quoted in connection with what a subscription model for books might look like – Spotify and Netflix.

On the surface Spotify seems to offer a fairly good analogue for publishing. The content on Spotify is created by individuals and distributed and marketed by 3rd parties through the Spotify platform. Exchange “music” with “books” – “musicians” with “authors” – “Record Companies” with “Publishers” and BOOOM – looks like we got ourselves a model guys.

In this case though, nothing could be further from the truth.

Here’s why. It’s all about the rate of content burn and the size of the content library needed to sustain it.

If you subscribe to Spotify for $10 per month you could potentially be streaming music all day every day. Tune after tune. For hours and hours at a time.

Obviously some people will be heavier users than others but let’s say an average user listens to spotify for 2-3 hrs a day (on their commute, at lunchtime, in the gym etc) they could easily end up listening to upwards of 1000 tracks per month. In this scenario that gives $0.01 from each $10 to divide between Spotify, the record company and the musician. Not much cream there.

Spotify makes some cash because they’re getting their cut from hundreds of millions of plays. The record companies make some cash because although they’re receiving micro-payments, they’re getting them across vast catalogues of content. The musicians however with a limited number of pieces of content loaded on the system receive almost nothing.

Even with a massive content library, when content burn can average 1000 pieces per month $10 just doesn’t provide enough income for everyone to be happy. Spotify are constantly struggling with this fundamental hole in their business model - it may well do for them yet.

Netflix has two significant differences to Spotify that are specifically relevant to a subscription model for publishing;

  • Netflix has a deliberately smaller range of content. It doesn’t pretend to offer comprehensive access to every movie and TV programme ever made. With a few notable exceptions, it doesn’t pay content producers top dollar for new releases and the latest programming. The Netflix offering is designed to fill in the gaps in people’s viewing. It offers convenience to fit in with its customers’ lifestyles. It’s not, and never has been, designed to replace going to the movies or buying the latest release from iTunes or Amazon.
  • Netflix has a hugely smaller rate of content burn compared with Spotify. Even if a customer watched 4hrs per day they’d still only average around 60 pieces of content per month. That rate of content burn frees up much more cash to be distributed between Netflix and rights holders.

For these reasons any subscription model for publishing has far more to learn from Netflix than Spotify;

  • A successful model won’t try to rival Amazon for range of titles. Our research showed that for $10 per month users will quite happily live with ‘backlist’ titles and they’ll still shell out for “event” or “must have” books. A successful model will offer a large but limited catalogue of content that can be licensed more cheaply and which won’t undermine existing sales channels.
  • The rate of content burn for books is significantly lower than either music or movies. Most subscribers would be hard pressed to read more than 10 pieces of content per month, again freeing up more cash to be distributed between the platform and the rights holders (both publishers and crucially in this case authors).
  • A subscription model for books most closely mimics gym membership. Sure, some super-users will squeeze the model till it squeaks to get the best value but most users will settle into a semi-regular pattern and a large proportion will use it only very occasionally. (Crucially though with a subscription model, customers are paying even if they don’t access the service – unlike the current ‘pay as you go’ model used by traditional retail channels such as Amazon). 

Despite the fact that Scribd has a huge pre-existing user base, of the two entrants into this market I'd say that Oyster is the one to watch. Scribd still carries too much baggage from the days when its' users played fast and loose with copyright law. My feel is that many publishers will remain resistant to it for some time to come.

Oyster on the other hand has serious financial backing from serious people with a track record of building successful innovative businesses. Crucially the investors in Oyster are not people who want (or need) to flip a quick buck by making a splash and cashing in with a fast sale to a larger competitor. I believe they’re in it for the long haul and that they’ve seen the huge potential of this market. Aiming for Netflix’s 28 million paying subscribers might be too much of  a stretch but if they can get close to matching Spotify’s numbers they’re already looking at half a billion dollars of revenue every year.

And where does this all leave publishing? Well a lot will depend on what publishers (and crucially) Amazon do next.

Harper Collins is making some ballsy decisions to lead by example (and have cleverly hedged their bets by providing both Oyster and Scribd with content). I’m certain that their bullishness will pay off for them and that other publishers will pile in after them (probably on less generous terms) before the end of the year.

Supporting a secondary subscription market offering selected ‘backlist’ titles that doesn’t undermine existing sales channels offers huge potential benefits to publishers. Not least the fact that potentially it evens up the balance of power between them and Amazon.

The single biggest threat that both Scribd and Oyster represent to Amazon is that if they gain serious traction they could critically undermine the investment Amazon has made in developing its’ propriety e-reading devices.

My first thought when I heard about Oyster was, “$9.99? Brilliant, I’m totally in” my next thought was “Dammit, I won’t be able to use my Kindle”. I can’t imagine I’m the only Kindle fan who will be having that internal conversation when it comes time to update my e-reader.

For this reason it seems unlikely to me that Amazon is going to sit out this round and let Scribd and Oyster fight it out. The only thing that’s stopping Amazon piling in with a rival kindle friendly offering before Christmas is the willingness of publishers to play ball with them.

So should publishers allow Amazon to go head to head with fledgling players for control of this new supplementary income stream or hold back from signing those licensing contracts with the Seattle giant till they see where the land lies?

It’s a choice that could define our industry in ways we can’t begin to imagine yet.

One thing’s for sure. There’s a pile of cash to be made here. Consumers want this - it’s a model they’re comfortable with. As always, someone will emerge and offer them what they want. Who that is and who reaps the benefit in the end will depend on the strategic decisions taken by publishers about who to grant subscription licenses to and when.

Never boring is it?


Chris McVeigh currently divides his time between Los Angeles and Europe where he advises media businesses on opportunities in the publishing industry. He is the founder of a marketing agency for publishers.