Calculating the Publisher’s Cut in Subscription Services: Revenue Share vs. Breakage

Calculating the Publisher’s Cut in Subscription Services: Revenue Share vs. Breakage

“The Subscription Model” got a lot of airtime at BEA this year, as book publishers explored delivery models that have the ability to generate recurring revenue through subscriptions. The buzz was so pervasive that it was difficult to escape the discussion. Not only did BEA’s sessions cover subscription, the topic was also covered during the IDPF Digital Book and BISG’s Making Information Pay conferences, the later of which recently completed an industry study on subscription. In an effort to stand out from the crowd, some sessions advertised the fact that they were NOT discussing the subscription model.

There are three factors at work that has driven this focus of interest on subscriptions. First, the launch of a number of high-profile initiatives, such as the consumer-oriented Oyster service, has gotten the attention of the industry since the beginning of the year. Second, there is increased clarity among publishers as to the level of revenue they can expect from ebook sales. And while ebook revenue is clearly a welcome and significant new revenue source, for most publishers, it is insufficient to fully replace lost print sales—something else must fill the gap. Finally, there is the observation that, broadly speaking; the digital media economy is increasingly shifting to the subscription revenue model, as opposed to discrete transactions for individual products. HD Netflix subscription is far more indicative of the road ahead for digital media delivery than Blu-Ray disc sales, or even pay-per-view. As fellow members of this digital media landscape, book publishers are contemplating what significance the “subscription economy” has to their strategy.

Many players in the subscription game are aggregators. Companies like Oyster and Safari create, market, and deliver subscription services that provide access to digital content from many publishers. One of the interesting aspects of the subscription marketplace is the emergence of two contrasting models that address the manner with which publishers participate in the revenue generated by such aggregation subscriptions.

The Subscription Revenue Share Model

A straightforward approach used by a number of aggregation services, such as Safari, the Subscription Share Model is an extension of the traditional revenue share between publisher and distributor. In the case of aggregation services however, the revenue is further split among a large number of publishers. For example, if the subscription service provider were to take 40% of revenue, the remaining 60% must be further divided across all of the participating publishers. The split among the various publishers may be based on percentage of page views or percentage of titles to which the subscriber is given access. In either case, if there are a large number of publishers participating, each with a large number of books, then the percentages that result for each book could become very, very small.

The Breakage Model

In an effort to entice the participation of publishers who have been unimpressed by the Subscription Share Model’s sometimes-paltry payouts, newer entrants to the subscription aggregation field, such as Oyster, have forwarded a radically different revenue share approach. In the so-called Breakage Model, the aggregator will pay the publisher the wholesale price for the title once the customer has read beyond a specified percentage of the book—say 10%. It is an all-or-nothing cliff based on that percentage. If the reader only accesses 9% of the book? Sorry, no cigar, no publisher share.

This offers more potential upside to the publisher. If publishers feel their title is engaging and can get the reader past that 10% mark, then they can make the equivalent of an ebook sale. This promise has assisted Oyster’s impressive achievement of getting 500,000 titles into their subscription program.

The aggregator in this model assumes significant risk. In a scenario in which most subscribers furiously read up to 10% of many, many titles, the publisher payouts may well exceed total subscription revenues raised. On the other hand, if subscribers to such services are truly “casual” readers and stay safely below the threshold, then the aggregator would end up paying few publisher bounties and generating a very healthy margin.

While the Breakage Model represents a brave, iconoclastic approach to revenue share, it sets the interests of the publisher at odds with those of the distributor. Publishers will desire the user experience of such services to facilitate immersive reading, at least to the point that the reader reaches the 10% threshold. The service provider on the other hand is incented to create an experience that engages and retains the subscriber, but keeps the user flitting from title to title to stay below the threshold for any given title. This will be extremely easy for the service provider to do by creating an interface replete with competing distractions. The models could not be less alike. If the Subscription Share is akin to a business partnership, then the Breakage Model is more like a casino, with the players (the publishers) trying their skill and luck against the house (the aggregator).

It is far too early to say whether one of these models will come to dominate the field or whether they can peacefully co-exist. One truism that has emerged time and time again, as we enter the adolescence of digital publishing, is that it is exceedingly difficult to make any generalities across all publishing market segments. Each market segment requires solutions that take into considerations its unique characteristics. For this reason, we may well see both of these models—and others—continue to be used to support the varying needs of different market segments as the subscription economy evolves.