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

"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.