The mathematics of Kindle Unlimited and the ebook subscription business

As we all wait with bated breath for the 15th (or thereabouts) of the month which will reveal August’s borrow rate for ebooks on Kindle Unlimited (my bet is on a range of $1.60-$1.70), I thought I’d set out a few numbers I’ve crunched about the effects of the first couple of months of Kindle Unlimited and the ebook subscription business in general.

Incidentally, I’ve never quite understood why numbers get crunched, when did that usage start? It’s everywhere now, but let’s face it, numbers are not crunched, they might be gently manipulated in some cases of creative accounting, but by and large they come to no harm, let alone suffering the fate of being crunched.

This is a bit of an epic post, so here are a few key points.

Key points:

  • Massive 133% rise of nearly a million borrows to 1.5 million ebooks in July under Kindle Unlimited

  • Self-published authors have the advantage with Big Five not taking part

  • Ebook subscriptions are vital market for Amazon

  • Kindle Unlimited could have 150,000 subscribers already

  • Big rise in borrows is boosting authors’ incomes

  • Is this the end of the 99c ebook and the rise of shorter, more expensive ebooks?

Kindle Unlimited is a borrowing service, exactly like a library, but electronic. It is also decidedly not Unlimited, as you are limited to a maximum of 10 ebooks in total at any one time. So, for example, if you have 10 ebooks out on loan, then you are blocked from borrowing any more, but if you ‘send back’, say, four ebooks, so you only have six on loan, then you are free to borrow up to another four to the maximum of 10. You can also borrow audiobooks but I’m not taking audiobooks into account in this article.

Other ebook subscription services

This is a different model from the two major players in the ebook subscription business, Oyster Books and Scribd.

Oyster offers an unlimited subscription service for books at $9.95 a month and the service is only available in the US at present. However, you have to carry on subscribing to keep the books as users have no permanent access to books when they stop subscribing.

Scribd charges $8.99 a month and is available worldwide. There is no limit on the number of books that a subscriber can read, but, again, if you cancel your subscription you lose access to your books.

Entitle seems to be the only company in the ebook subscription sector that allows readers to keep the ebooks they download even if they ditch their subscription. It is only available in the US  but it’s a moot point if this really is a subscription service as it offers a range of monthly prices to download books. For example, it’s $9.99 a month for download credits for just two ebooks, so you’d really need to study the choice carefully to get your money’s worth.

Incidentally, the cost and nature of subscriptions are not even mentioned on the pages available immediately on the Entitle website, they aren’t even mentioned in the FAQs.

All three of the services mentioned above feature ebooks from some of the big traditional publishers, while they are largely absent so far on Kindle Unlimited.

The Kindle Unlimited difference

Kindle Unlimited differs from all these in being a library service with a limit of 10 ebooks on loan at any one time. Amazon has offered a library service for some time in the form of the Kindle Owners’ Lending Library (KOLL), which is still available to members of Amazon Prime but only allows one borrow a month.

Kindle Unlimited is, in fact, hardly different from the public library ebook loan system which is available for free through installing the OverDrive app. You have to be a member of your local library and then you can borrow ebooks in accordance with your local library’s policy and limits.

How ebook authors get paid

For authors, there are some basic differences in how they get paid for putting their work on to these subscription services.

The only route for self-published authors to take to get their books on to Oyster and Scribd is to go through a distributor such as Smashwords or Draft2Digital.

Borrows are then paid at the ‘normal’ rate for a purchase once a certain amount of a book is read. For example, a book distributed by Smashwords on Oyster would be paid 60% of the retail list price once a subscriber read more than 10% of the book, while the same payment would be made for a book on Scribd, but a read of at least 30% is required.

Authors who have books borrowed through Kindle Unlimited are paid out of the KDP Select Fund, which is set monthly by Amazon. Authors get paid when 10% of a book is read.

How Amazon uses the KDP Select Fund

The KDP Select Global Fund is the same fund that used to pay out on KOLL loans and was typically set at around $1.5 million a month.

In July, this year when Kindle Unlimited was launched, Amazon raised the fund to $2 million initially, but then, taken aback at the service’s strong start, it first added a ‘bonus’ of $500,000 and then another $285,000 (an odd figure, why not $250,000 or $300,000?) to take the fund for the month to $2,785,000.

The initial payment system also caused some confusion, so Amazon generously decided to pay out on all borrows made in July regardless of whether the 10% read limit had been reached, which was an admirable move.

The payment for borrows in July worked out at $1.81 (rounded up), which was down on previous months, such as the $2.20 which was paid per borrow in June on KOLL loans. However, this lower rate was offset by the fact that many authors were getting vastly increased borrow business, with some reporting as many as eight borrows for every 10 books sold.

Reports for August and into September indicate that the Kindle Unlimited business bandwagon is gathering pace, with self-published authors now reporting that borrows through Kindle Unlimited are outstripping their sales, some by a considerable ratio.

The KDP Select Global Fund was set at just $2 million for August, which seems low, considering the evidence from July, although here’s hoping that Amazon will add a bonus again, while September’s fund has been set at $3 million.

The ‘Global’ part of the fund’s name is not very appropriate at present, as the KU service is available only in the US currently, although KOLL is available worldwide. (KU has since been extended to the UK and Germany).

The possible payout trends

Now let’s have a look at wafting the numbers around a bit (so much nicer than crunching them).

As I’ve noted before, traditional publishers can take part in Kindle Unlimited, although many are choosing not to do so at the moment, and they get paid differently from self-publishers in that trad firms get the normal royalty rate for a buy when one of their books is borrowed. They also don’t have to sign up for KDP Select and make their books exclusive on Amazon, which self-publishers are obliged to do to become eligible for Kindle Unlimited.

It’s not clear whether Amazon pays trad publishers out of the KDP Select Fund, but I can’t imagine that could possibly be the case as they’re not even enrolled for KDP Select, so I’m excluding trad firms from the following figures, and assuming that the Kindle Unlimited/KOLL payouts are applicable only to indies.

  • For July, the KDP Fund ended up at $2,785,000 and paid out $1.81 per borrow. This is an easy one to work out and means if the whole fund was paid out, that there were 1,588,397 borrows in total in the month.
  • This compares with a KDP Fund of $1.5 million in June, when KOLL was the only Amazon borrowing game in town, with a payout of $2.20 per book. That works out at at total of 681,818 borrows for June.
  • That is a rise of 906,579 borrows month on month, which represents an increase of 133%.

These are impressive figures, but what if Amazon doesn’t add a bonus for August and keeps the fund at $2 million?

  • If total borrows stayed at the same level as July (1,588,397), then the payout would slump to $1.25 per borrow, compared with $1.81 in July and $2.20 in June, representing a 30% fall on July and down by 43% from June.

  • The payout in July was a 17% fall from June, so Amazon is perhaps prepared to see payouts edge down, and they might not add a bonus, or perhaps add a bonus to bring the payout up to somewhere around $1.60-$1.70 (which is my prediction).

  • The situation could be worse, much worse, in fact, in terms of payout if take-up of Kindle Unlimited rises again. For example, if borrows rose to two million for the month, then that would mean just $1.00 per borrow if the KDP Fund is kept at $2 million and Amazon doesn’t add a bonus.

  • If, however, July’s borrow figures prove to be exceptionally high, boosted by early adopters attracted by the launch and the free month’s offer, and borrows settle down to maybe around the 1.25 million mark, then payouts could be around $1.60 per borrow at that level on a $2 million fund.

  • But Amazon (who are the only people who know the real figures and trends) has set the September KDP Select Fund at $3 million, which suggests they are expecting borrows to at least stick around the 1.5 million.

Is Kindle Unlimited a sustainable business?

Now let’s look at the profit/loss figures. Is Kindle Unlimited sustainable for Amazon?

It’s not too difficult to assess this if you take just the KDP Fund as the yardstick, although this does ignore completely the cash paid out to trad publishers on Kindle Unlimited.

  • The Kindle Unlimited service costs $9.99 a month, so to break even on the June KDP Fund figure of $2,850,000, Amazon would need to have 285,000 paying subscribers.

That seems like a lot, but there are well over 30 million Kindle e-readers of one type or another reckoned to be in current use, plus hundreds of millions of iPads, tablets and smartphones using the Kindle app, so that figure would be easily achievable.

  • If every subscriber borrowed up to their limit of 10 ebooks and no more (no returning books and taking out new ones) in July, then there would have been perhaps 158,000 subscribers, using the July borrowing figure of 1,588,397.

However, it’s worth noting that the KDP Select Fund also covers payment on the Kindle Owners’ Lending Library scheme, which is one of the benefits of Amazon Prime membership, so this confuses the issue.

  • If instead of using the total figure for borrows in July, we take the increase in borrows from June, we might be closing in on a more realistic figure. The rise in borrows in July compared in June was 906,579, which would produce a figure of 90,657 subscribers if they all borrowed a total of 10 books in the month.
  • However, I think it’s more realistic to assume that borrows per subscriber were lower, at perhaps around five or six for the month, which would see the total figure of readers signed up to Kindle Unlimited in the region of 120,000.
  • They’d all be on the free month’s offer, so income would be nil, but if that 120,000 figure holds on the $8.99 a month deal, then monthly income for Amazon would be $1,078,800 from Kindle Unlimited, meaning a thumping great loss on any of the totals set for the KDP Select Fund, even taking into account a percentage of the Prime income with KOLL loans.

But it is early days yet and it is quite possible that the number of subscribers could rise steadily or sharply. After all, you don’t expect an immediate payback when you’re launching a major new business.

There is also the fact that we are talking about Amazon, and Amazon does not seemingly care less whether it makes a profit or not. The company overall has never made a meaningful profit in its 20-year history. It is more interested in dominating markets rather than making big profit margins, this is the company that made red the new black.

So it could be that the loss of a million or two a month might be considered secondary to taking over a market that may well become the leading channel for ebook business, and fending off a couple of upstarts who have had the temerity to push into Amazon territory.

But although Amazon overall seems nonchalant about profitability, on a more micro scale it appears to often insist on the books being balanced departmentally, so it will be very interesting to see the future fiscal path of Kindle Unlimited.

For the moment at least, it must be a very important part of its ebook business strategy as it cannot allow other firms to take over this space, and I would think its only possible course of action is to tough it out and suck up any losses. Amazon simply cannot afford not to be in the ebook subscription market.

Self-published authors are the beneficiaries

It has to keep its Kindle Unlimited authors on its side, so I would expect payouts to stay above $1.50 per borrow, hopefully well above but that remains to be seen.

As is well known, Amazon has fraught relations with many of the bigger traditional publishers, which are staying out of Kindle Unlimited at the moment but which have signed deals with Oyster Books and Scribd. This means Kindle Unlimited does not presently have the drawing power of the other ebook subscription services, although it does appear to have more books available, with around 600,000.

The beneficiaries of all this turmoil are self-published authors who, for the moment, really have much of the Kindle Unlimited field to themselves without the big publishers in competition.

But will Kindle Unlimited payouts be worthwhile?

The question is whether Kindle Unlimited is really worthwhile for indie authors.

The payout figures for borrows are going down, from $2.20 in pre-Kindle Unlimited June, to $1.81 in July when the Kindle Unlimited service was launched. Whether that latter level is held in August remains to be seen but, for ease of calculation, I’m going to envisage a payout of $1.75 per borrow for August. Remember, payouts will now only made if and when a book reaches the 10% read point.

  • A self-published author would get $1.75 on the outright sale of an ebook priced at $2.50, as that would be the amount received on a 70% royalty at Amazon.
  • For books priced higher than $2.50, an author would seemingly be losing money with a Kindle Unlimited borrow. For example, a book priced at $5.00 would get a 70% royalty of $3.50, so you would only be getting half of that amount at $1.75 through Kindle Unlimited. If you had a book priced at that level or higher, then you might think you would be better off by opting out of Kindle Unlimited.
  • But you also might think again if you look at the big rise in business that Kindle Unlimited has brought for many authors. If you’re seeing, for example, 100 borrows for every 100 sales compared with just a trickle of borrows previously, say, about 10% of sales, then that would be a very worthwhile increase in cash received.
  • For example, a $5.00 title with 100 borrows at $1.75 and 100 sales at $3.50 would net $535, while the surmised previous position of 10 borrows at $2.20 and 100 sales at $3.50 would have brought in just $372.

Many authors will never have ebooks with Kindle Unlimited because of the KDP Select requirement to be exclusive to Amazon. If you are selling well on other ebook retailers such as iBooks, Nook or Kobo, then you would be very reluctant to take your books away from a proven source of income to be in Kindle Unlimited. This narrows the field down even more and means authors who can focus on Kindle can benefit.

These are all, of course, highly theoretical calculations but they do show the range of possibilities, although there is also the question of whether and how Kindle Unlimited borrows will cannibalise outright sales. There is also the distinct possibility that the ebook business could move sharply towards largely becoming a subscription or borrow-based business in the future, perhaps the near future.

Is this the end of the 99c ebook?

The advent of Kindle Unlimited has brought a pricing problem for authors.

Ironically, in the light of Amazon’s mission to lower ebook prices, it seems inevitable that Kindle Unlimited could deal a heavy blow, perhaps mortal, to cheap ebooks and also to KDP Select Free promotions.

  • Subscribers paying $8.99 a month for up to 10 books are not going to see any value in downloading $0.99 ebooks and it’s unlikely they’ll be bothering too much with books at $1.99 either.
  • They’ll be looking to get at least their money back over a month, so possibly the lowest price point they’ll be downloading will be $2.99, but even that level might see some reluctance. After all, if a subscriber downloads 10 $4.99 ebooks a month, then they know they’re getting a good deal for their money.
  • If you’ve got a cheap ebook on sale at the Kindle store and the figures you’ve seen so far show your borrows as a substantial portion of your outright sales, you might want to consider raising your price to see the effect on Kindle Unlimited borrowing figures and calculate the borrow/sales differential.

Short orders

Another major point to consider in light of Kindle Unlimited is length of your book.

The KDP Select Fund pays out when 10% of a book is read. If someone borrows your book in August but doesn’t read 10% until October then you’ll still get paid when they reach 10%. But the reality is that people are unlikely to leave it that long, they’ll probably churn your book for something else without getting to the 10% point.

  • If you’ve got a 600-page saga, then the subscriber has to wade through 60 pages before you get your money. If you’ve got a 100-page novella, they could breeze through 10 pages in a matter of minutes to trigger your payout.
  • Some non-fiction ebooks have lengthy tables of content which take up almost 10% of a short ebook, especially when combined with up-front features such as title pages, copyright detail pages, etc.

Amazon has so far not set any parameters for inclusion in Kindle Unlimited and it would be difficult for it to do so really when you consider that, for example, detailed tables of content are usually a great source of help for readers.

  • The conclusion to be drawn is if you’re aiming seriously at the Kindle Unlimited market, you should be looking at writing and publishing short ebooks of around 100-150 pages at a price of around $3.99.

A series of short novels could be the perfect vehicle for a self-published author to make the most of Kindle Unlimited before the arrival of the Big Five, if they ever do arrive.

Meanwhile, beware, or be wary at least, the Ides of September when the KDP Select Fund borrow figures will be unveiled to a breathless public.


 

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