Saturday, January 10, 2015

The Effect of Amazon’s Subscription Service

Kindle Unlimited (KU) has interesting features for readers and authors. To summarize the basics of their subscription service:

As a reader you have unlimited access to download and read (but not keep) any of their listed books (~700,000 available) for $9.99 per month.

Amazon pays authors an unspecified amount each time a KU subscriber selects (and at least partially reads) one of their books.

Which Readers Will Choose KU?

Which readers will utilize this service? After the thirty-day free trial, only readers who expect to obtain greater value by purchasing the KU service than the $9.99 cost will continue in the program. That only makes sense. If the average Kindle book available for KU retails for $2.99, it only takes four books a month to be ahead of the game. Of course, if you select books listed for $0.99, it requires ten per month to be worthwhile.

Ah, but national bestsellers often cost more than $10.00. Just a single one would make it a valuable program. Problem: the big five publishers have chosen (correctly, from their standpoint) to withhold most of their titles from KU.

Regardless, let’s assume Ms. Reader pays Amazon her $9.99; how is her behavior likely to change?

(1) Any book not in KU has an added cost; any book in KU is free for the month. All other things equal, Ms. Reader chooses books in KU.

Author implication: Those who choose KU are less likely to buy books not part of KU.

(2) All things equal, we all like a bargain. That suggests Ms. Reader will choose more expensive books. She’ll “save” more. Free books are no longer as attractive—all KU books are the same “free.”
Author implication: The cachet of “free books,” already diminished in value by the sheer volume of available books and the large percentage of free books that are not worth reading because of inadequate editing and poor formatting, will further decrease. Why read a free book when I can read one that costs $2.99? Why try a new author when I can read all the backlist of an author I know and like?

Authors will need to evaluate whether maintaining the first in their series as a “perma-free” book is still the best strategy. Will it be better to price that book at (say) $2.99, but periodically have advertised promotions to provide free books to those not participating in KU?

Amazon’s Author Payment Mechanism

Amazon pays authors for loans from KU from a pool it sets up. What is the size of the pool? Here’s a quote from Amazon’s Q&A: 

We review the size of the KDP Select Global Fund each month, in order to make it compelling for authors to enroll their books in KDP Select.

I read this statement as “We’ll find the lowest possible payment that keeps authors in the program.” Each author receives a proportionate share of the fund based on loans of their books once the reader has completed 10% of the book (first time only). I know Amazon supporters will consider that a jaded statement. The proof will ultimately be in what happens to the level of per loan payment after Amazon has fully marketed the KU program.

Author implication: The Amazon formula does not consider book price; therefore, on relatively high-priced books the author will lose money compared to an equivalent sale. For lower-priced books the opposite is true. Of course, that assumes a book loaned through KU has reduced books sold one-for-one. Early anecdotal evidence was that more books were loaned than were lost in sales. More recent anecdotal evidence is that total author income has decreased.

Bonuses for Top-selling Authors

Amazon also pays top-selling KU authors a bonus. Whether Amazon pays the bonus out of a separate fund or the same “global fund” is immaterial. Money is fungible and Amazon is the only one who decides the size of the global fund, so it is only a question of pulling the money from their right pocket or left pocket.

In business a useful rule of thumb is the “80/20” rule. For example, many businesses find that 80% of profits arise from 20% of their customers. I am guessing Amazon finds that roughly 20% of its authors account for roughly 80% of revenue. Keeping these 20% happy is much more important than keeping the folks who sell a few books a month.

The bonus program is a way to entice those authors into the program.
Author implication: Two major decisions an author must make are traditional publishing or indie publishing, and if indie publishing, whether or not to go exclusive with Amazon for ebooks. (I can see no compelling reason to be exclusive with any other retailer; Amazon has approximately 70% ebook market share.)

Since the bonus program is determined monthly, the group of “hot” authors will rotate. However, it will always favor those with large lists in the KU program over newer authors with a small number of titles.

Writing more and faster is a winning strategy for authors if they can keep the quality of their product high.

Other Predicted Effects on the Publishing Market

Assuming Amazon can retain popular indie authors for KU, I anticipate more readers will decide $120 a year is a good deal even if books by the major publishers are not available. The three most popular genres for ebooks are Romance, Mystery/Suspense/Thriller, and Science fiction/Fantasy.
Younger adults are accustomed to subscription services for audio and video, and also more accepting of new technologies. This combination makes them receptive to subscription services for ebooks. I expect people who heavily read indie published authors will rapidly gravitate to the subscription service.

Readers will join a subscription service for only three reasons: (1) it is the only way to receive the goods (not applicable for books) or (2) it saves them money or (3) the convenience is worth the extra cost. Amazon has made it so easy to download an ebook onto a Kindle or app, there is very little additional convenience to be had. Therefore, Amazon’s subscription service will survive because it saves customers money.

If readers are saving money, it means authors will earn less.

This may not happen immediately; Amazon has shown that it is willing to invest to gain market share before reaping profits. But Amazon did not introduce KU to lose money long term. By the end of 2015, I predict those who exclusively rely upon Amazon will earn less than they would have before the introduction to KU.

That said, it does not mean those authors will be economically better off leaving Amazon’s exclusive products in order to sell across multiple platforms. Remaining solely under Amazon’s banner with its additional benefits may still be the best decision, but by the end of 2015 significantly more of the publication profits will flow to Amazon than to the author.

~ Jim

[This blog originally published on Writers Who Kill 1/2/2015]