Managing Royalties for Subscription Publishing
Over the past decade, the publishing industry has seen a transformation in business models due to the digitization of content. Now more than ever, consumers are seeking to get the content they want at their fingertips – from e-books to audiobooks to interactive online tools, from online streams to downloaded materials for offline use.
On the supply side of this equation, publishers have been forced to change the way they produce and distribute content and consequently their business model.
To broaden and engage their readership, publishers have embraced the subscription model, where subscribers pay a recurring fee for access to content. In order to attract and retain readers onto the platform it becomes increasingly important for publishers to tailor the content to the reader’s likes and wants. That’s why this shift in the industry has been referred to as the ‘Stories as a Service Era’ by The Poynter Institute.
This trend only intensifies as the online education format and platforms, such as LinkedIn Learning, Udemy, and Coursera, are expanding their global footprint in the education domain. Education group Pearson have picked up on the consumer trends in their launch of Pearson+, a subscription-based app that gives students access to over 1500 textbooks as well as new modes of learning. Digitizing learning tools has enabled publishers to gamify learning, creating new ways in which students can interact with material. Undoubtedly, the 2020 COVID-19 pandemic is only serving as fuel to the fire – not only in publishing and education, but also several other industries, like broadcast and gaming.
Steps to Subscription-Based Rights & Royalty Management
Behind the content put online is a business model that becomes more and more complicated as the digital transformation occurs. To produce the high-quality products that engage readership, publishers must first understand how to manage subscription rights and royalties.
To best succeed with the subscription model, it’s vital to
- Understand whether you have the rights to sell your content as a subscription
- Define compensation models that govern how authors are paid
- Determine how to manage usage for subscription products
- Manage royalty accounting to accrue properly
- Produce royalty statements factoring in usage
Do you own the rights needed for subscription publishing?
Before being able to publish products onto your subscription platform, you have to determine what rights you do or do not own. Owning the rights to one aspect of a product doesn’t necessarily mean owning the rights to another. Rights may vary depending on markets you’re selling to, formats, subscriptions, and even a product’s sub elements which may have their own rights. You may own the rights to publish content in one country but not another, on a website but not as an e-book, and so on.
Managing rights gets complicated. That is why it is important to have a platform in which you can automatically update your licenses, keep track of rights, and share information with your team. Simplifying this step will make publishing your product much easier and will enhance the experience of your users and authors because you will be able to get content to market quicker and safer.
Compensation Model for Book Subscription Platforms
For publishers, revenue comes directly from the subscription base – the amount of people paying the monthly or annual fee to gain access to the products. This revenue model, however, presents a particular challenge to the publisher when it comes to royalty payouts. Many publishers sell subscriptions to an entire platform that consists of an online library with content from multiple authors – such as e-books, articles and research papers – without knowing which particular material the consumer will read or without restricting access to anything in particular. Think of this as an electronic version of an all-you-can-eat buffet. However, the publisher does not consider the sale of the subscription as the sale of any particular property in the library just yet, and thus cannot know to whom and how much of the royalties to pay out and for which e-book(s). In terms of royalty payouts, the sale of an e-book is recognized only if and when the consumer actually reads it (or listens to it, or watches it).
Royalty Accounting Designed for Usage-Based Subscription Models
Subscription royalties are calculated based on usage, but the challenge here is twofold. First, the revenue collection and royalty payouts are asynchronous. A 12-month subscription to an online portal can be sold on Jan 1st, but the consumer can read a particular e-book six months later. Furthermore, publishers often publish their electronic content on multiple platforms, including 3rd party platforms. That usage data from various platforms is reported with different frequency, often not monthly.
In such cases, the publisher may accrue royalties at some default rate until usage data becomes available later, at which point the actual allocation will be done and the royalty expense trued up.
The second challenge is determining how to allocate a fixed revenue for the entire library to a particular author, given that which e-books and how many times they are accessed varies.
To solve this problem, the publisher may choose to allocate the revenue to particular SKUs at the same proportion as that of the SKU’s usage. For example, if a particular SKU A was used 10 times in a given month, and the total usage across all SKUs was 200, it’s usage proportion then is 5%. Consequently, 5% of that month’s subscription revenue would be allocated to SKU A.
This, however, is a simplistic scenario based on the assumption that all SKUs in the library are weighed equally. Such models quickly become more complex when publishers add more variables, such as weighting SKUs differently, or adding certain discount rates depending on the platforms the usage occurred on, and so on.
Generating Royalty Statements to Account for Subscriptions & Usage
The more complex the algorithms become, the more they become a possible source of contention between publishers and authors, most of whom are long accustomed to the traditional paradigm of 1-to-1 direct relationship between royalties and quantity sold. Royalty statements, in cases of traditional sales, expose these three fundamental variables, all of which are specific to a given author — sales from the book, contractual royalty rates and the earnings. With usage models, while the rate and earnings are straightforward, the sales from the book may seem like a riddle to the author. If the statement shows the result of the total allocated revenue per SKU only, it then leaves it unexplained how the publisher arrived at that.
Consider this example. The author’s statement shows from a SKU earnings of $20, the contractual royalty rate of 10%, and sales of $200. The statement is missing the quantity sold. But the quantity sold is the usage of that SKU. If we assume that the usage is 1000 (reads), the price of the book then would be $200/1000 = $0.2, which is nowhere near a realistic figure. The royalty statements then should expose the fact that these earnings pertain to usage models, governed by a different clause of the author’s agreement and that the above calculation isn’t applicable. But does this mean then that the statement should display the total revenues from subscriptions and the method of allocation, in which case it would also have to show the total usage across all SKUs? But what if the SKUs were sold across multiple platforms and the total usage between them were different?
Publishers, of course, do not report such exhaustive details on statements to authors; such a level of detail is more suitable for auditors. Transparency is critical for a publisher to gain and guard an authors’ trust. When reporting royalties, the key is finding the right balance and presentation of additional data and usage reporting that allows authors to gauge the popularity of their content while also reassuring them that they’re being fairly compensated. Understanding the breakdown of their royalties alleviates tension between publishers and authors and also allows authors to improve content based on their ratings.
The growing popularity of electronic subscription sales is bound to result in even more complexity surrounding contractual agreements and royalty calculations. The role of technologies capable of supporting new transformative business models, and doing so transparently, therefore, will only increase – as in most other areas of modern economies.
To learn more about what you can do to seamlessly transition into the new era of publishing, check out FADEL’s Coffee Talk Webinar Series hosted by the Book Industry Study Group (BISG).