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July 1, 2015, 3:20 p.m.
Business Models

What Scribd’s growing pains mean for the future of digital content subscription models

It turns out that ebook subscription models don’t work very well when people read too much. So what happens next?

Netflix earned more than $5 billion in 2014. No wonder companies want to be “the Netflix of” other kinds of digital media — ebooks, magazines, music.

That’s not easy to pull off when you don’t have Netflix’s deep pockets or 62 million subscribers — oh, and when you’re trying to sell something to read rather than watch. We saw new cracks in the subscription model for text Tuesday, when it became clear that subscription site Scribd is pulling thousands of romance titles from its site.

Mark Coker, the CEO of self-publishing site Smashwords, revealed the news first, linking to a letter that Scribd had sent publishers. In the letter, Scribd wrote:

We’ve grown to a point where we are beginning to adjust the proportion of titles across genres to ensure that we can continue to expand the overall size and variety of our service. We will be making some adjustments, particularly to romance, and as a result some previously available titles may no longer be available.

What’s the problem? Well, Scribd (and rival service Oyster) pay publishers by the read. (When a user downloads and reads a certain percentage of a book, the publisher gets something like what it would make for a sale.) That was the main way it was able to get them to agree to make their books available to it; the publishers didn’t really have anything to lose. “We bore the majority of the risk when establishing a business model that paid publishers the same amount as the retail model for each book read by a Scribd subscriber,” Scribd noted in its letter.

And romance readers are famously voracious when it comes to ebooks. It turns out they are reading so much that they are becoming too expensive to Scribd.

“We’re working hard to establish more mutually beneficial terms with our publishing partners, so that we can continue to grow our catalog,” Scribd CEO Trip Adler wrote in a blog post. “Mutually beneficial” is a nice way of saying “less generous for publishers.”

Scribd can’t afford to keep paying publishers the retail price of a book when so many people are actually, well, reading the books. If the hope was that ebook subscription services would be more like gym memberships — where people pay but then don’t go — romance readers have turned the model on its head by using the “gym” too much. That means Scribd might need to find a new business model, or enact a tiered system where users who read more pay more.

But that would make it less like Netflix and more like Netflix’s failed and widely mocked Quikster, which would have separated split off Netflix DVD rentals into a separate paid business. “Consumers value the simplicity Netflix has always offered and we respect that,” Netflix CEO Reed Hastings said in admitting defeat. Scribd’s primary value proposition is offering a big pool of content for a set (and low) monthly price. As it becomes more complicated, it may also become less attractive.

What’s the demand for a library of text?

Reading about Scribd’s troubles, I kept thinking of another streaming media service — not Spotify but Next Issue Media, which offers unlimited access to more than 100 digital magazines. It’s $9.99 per month for monthly magazines and $14.99 per month if you want to add weekly magazines like The New Yorker.

Next Issue is a joint venture between major magazine publishers — Condé Nast, Hearst, Meredith, Time, and News Corp are all owners/investors (along with Canadian publisher Rogers). Without a third party involved, the publishers share the risk and reward. In some ways, it’s surprising that Next Issue is still around: The company won’t share how many subscribers it has, and its CEO left this year. Yet investment firm KKR invested a whopping $50 million in Next Issue in January. “Today’s consumer demands mobile access to large catalogs of premium content, anytime, anywhere,” a KKR exec said in the release.

When it comes to text-based content, though — ebooks, magazines, newspapers — that statement is far from proven. Scribd has showed us that certain types of very active readers do, indeed, demand mobile access to large catalogs of content and want to pay a flat fee for it. But we don’t know if casual book readers want this. In Scribd’s case there clearly aren’t enough casual, set-it-and-forget-it users to subsidize the heavier readers.

Next Issue, as a joint venture among publishers, can limp along for longer (even if it didn’t have a fresh $50 million to spend). And both Netflix and Next Issue show us what a future for an ebook subscription service might look like.

First, Scribd might need to move to a different pay-out model. In fact, Amazon’s Kindle Unlimited recently did just this: Rather than paying authors when a book is borrowed and a reading cutoff is reached, it will pay them for individual pages read. Scribd’s threshold for how much of a book a reader has to read before the publisher gets a full payment is reportedly low, around 10 percent. Switching to a page-based model would reduce payments to publishers because people who dip into a book briefly and then don’t finish it would cost Scribd less.

Second, Scribd could switch to a model that is actually more Netflix-like. Netflix doesn’t pay studios by the stream; instead, it licenses content from them for set periods.

Finally, it is possible that a middleman model doesn’t work well for ebook subscriptions. A book publisher could offer a subscription service on its own, including just its own titles. Publishing consultant Mike Shatzkin has suggested that Penguin Random House, now the world’s largest book publisher, should launch its own ebook subscription service. And it’s never made its books available to an outside service, so maybe it does have its own plans.

Way more people watch TV and movies and listen to music than read books or magazines. That’s why we’re starting to see that Netflix is Netflix, Spotify is Spotify, and ebook and magazine subscription sites are, well, something else.

Photo of MIT library Chris Devers used under a Creative Commons license.

POSTED     July 1, 2015, 3:20 p.m.
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