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

August 2014 By Andrew Brenneman
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"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 latter 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.

 

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