Tuesday, September 13, 2011

Amazon Subscription Service Will Rewrite Book Contracts


The Economics of Book Publishing Just Changed Big Time

“[T]he dirty little secret of the media industry is that content aggregators,
not content creators, have long been the overwhelming
source of value creation.” 
--  Jonathan A. Knee, The Atlantic

It comes as no surprise that Amazon is exploring a Netflix-like subscription service for digital books. But what might Amazon's subscription book service actually look like for subscribers, authors and publishers?  And how will the definition of “Subscription Revenue” impact authors and publishers financially?   I believe how Amazon and the "Big Six" ultimately define the term "Subscription Revenue" will be the subject the next great digital book debate.  Subscription book services are on the march. They make sense for both publishers and readers for reasons discussed in an earlier post.  But with regard to authors, what their financial rewards will be is cloudy.  A royalty based on subscription revenue is a complex formula, and what trickles down to the author, ultimately, will be defined by both the Subscription Revenue definition hacked out of Amazon and the Big Six, and pre-internet author-publisher agreements that may not have contemplated this new business model.  .  

Below is a snap shot of subscriber terms gathered from allied industries which was compiled for a digital rights publishing course I taught at New York University this summer.  Looking at it, what's clear to me is that the new metric of an eBook’s financial success is not just the number of books purchased and stored on devices, but revenue from advertising and other sources.  It's about monetizing readers.    

In order to launch a subscription service offering downloads or streaming books, in addition to entering into terms of service agreements with subscribers, Amazon must obtain rights from publishers.  In this blog, I intentionally sidestep the rights issues in order to focus on the term “Subscription Revenue.”  

In book publishing, Net Revenue generally means gross proceeds from defined revenue streams minus enumerated expenses.   However, only a portion of subscription revenues will actually be attributable to subscription fees for downloads and streaming of books.   The obvious sources of revenue that make up the subscription revenue stream will include advertising and sale of information about subscribers. What percentage of advertising revenue attributable to a particular book is fair or reasonable?   If anyone is able to negotiate a viable Internet music-style (not Netflix) subscription model, it’s Amazon.   My best is on them..  Subsidiary issues then become the mechanics for ensuring the accuracy of reporting, which no doubt will be challenged.  

With regard to Jonathan Knee's assertion that content is no longer king (see the above epigram), I'm not convinced.  Cable television, which is a classic subscription model, suffers from annual rate increases because cable companies are at the mercy of their content providers.   As such, provided publishers negotiate wisely, Amazon will be a most excellent partner. 

Here's the comparison of business models prepared by Adam Ness for my NYU class:      

Compare Subscription Business Models

  • Service-Subscriber Terms
    • Unlimited content model
      • In exchange for a periodic fee, the subscriber receives access via streaming to unlimited content.
      • Examples
        • Netflix[i]: Unlimited on-demand streaming of movies and television shows for $8/month.
        • Rhapsody[ii]: Unlimited on-demand streaming of music for $10/month.
        • Sesame Street[iii]: Unlimited e-books accessed via a computer or “widget” for $4/month. 
        • Disney Digital Books[iv]:  Unlimited e-books accessed via a computer or iPad app for $9/month or $80/year.
      • Advantages
        • Many consumers like the idea of unlimited content.
        • The consumer can become tied to the service because if the consumer discontinues the service they lose access to their content.
        • In the book context, there may be less interest in retaining a copy of an e-book than there may be in retaining a copy of a particular song, so consumers may especially be drawn to an unlimited content e-book subscription model.
      • Disadvantages
        • Consumers may not like the idea of paying for something that gives them nothing to keep permanently.
    • Bundled content model
      • In exchange for a periodic fee, the subscriber receives a pre-determined number of downloads which become the member’s to keep.
      • Examples
        • Audible[v]: 1 downloaded audiobook per month for $15/month or 12 downloaded audiobooks per year for $150/year; 2 downloaded audiobooks per month for $23/month or 24 downloaded audiobooks per year for $230/year.
      • Advantages
        • Subscribers are able to keep their content. 
        • The content can be played/viewed on more devices.
        • Internet connection is not required to play/view content.
      • Disadvantages
        • Consumers have less incentive to continue their service because they can keep the content they downloaded.
        • Consumers may be interested in a limited number of works, and once they have downloaded them all they can cancel their subscription.
        • License fees may be higher for this type of service because it competes with the e-book market instead of being complementary to it.
    • Hybrid model
      • Combination of unlimited online content and either a limited number of downloads or discounted downloads.
      • Examples
        • Napster[vi]:  Unlimited on-demand streaming music on computer and home theater devices for $4-5 per month (depending on length of commitment); adding streaming on mobile devices doubles the price.  With the mobile plan, the member can save up to 100 songs on their phone for off-line listening (access to the saved songs is discontinued if the plan is cancelled).
        • Safari Books[vii]: Online access to 10 books per month for $23/month or $253/year; or unlimited e-books access via a computer for $43/month or $473/year.  Members also get 5 download tokens per month which can be used to download PDF versions of books.
      • Advantages
        • “Best of both worlds”

  • Service-Copyright Owner Terms

    • License for a term
      • Negotiate the license for unlimited use of the works within the service for a set term.
      • Netflix reportedly negotiated 3-4 year terms with film studios
      • Advantages
        • More predictable because the fees paid to the copyright owners will not fluctuate based on access.
      • Disadvantages
        • The service has limited bargaining power when it comes time to renew the license.
        • Licenses for new works can be costly.
    • Per-download/per-access license
      • The copyright owner is paid a fee each time his or her work is downloaded or access.
      • On-demand music streaming services account for the songs they play and pay the Performing Rights Organizations accordingly.
      • Advantages
        • Less commitment up-front.
        • Allows the marketplace to determine the value of a work, which can be a negotiating chip with the copyright owner.
      • Disadvantages
        • Service runs the risk of an unpredicted high rate of access, and could potentially operate at a loss if the access fees exceed the membership fees.
          • This is risk is more limited with a bundled content model because members can only access a certain number of works


[i] http://www.netflix.com
[ii] http://www.rhapsody.com
[iii] http://ebooks.sesamestreet.org
[iv] http://disneydigitalbooks.go.com
[v] http://www.audible.com
[vi] http://www.napster.com
[vii] http://www.safaribooksonline.com

Related CopyLaw articles:


Will Amazon Launch a Cloud Based Book Service?

How the Cloud, Expensive Hardcovers, Free eBooks & Windowing Can Save the Big Six

Amazon's New Imprint: Publishers Should be Scared. Very Scared.

I want to thank attorney Adam Ness, a former Master of Law Intern at Benjamin N. Cardozo School of Law,  for his assistance in research involving subscription models in allied industries. 

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