Point of View
POINT OF VIEW
Drop the Moral Hazard and grasp the potential of flat-rate models for audiobooks
WORDS Niclas Sandin
I
N SCANDINAVIA, THE growth of audiobook sales has been led primarily by the adoption of what we call the flat rate model, whereby users can listen to an
unlimited amount of books for a fixed price, averag- ing €15–€17. This has created extreme growth in new revenue streams for publishers and at the same time atracted new audiences for authors. But when I meet various international publishers
there is hesitation about this business model. Why? I have come to the conclusion that the main reason is that the industry wants to avoid the phenome- non that in economic theory is referred to as Moral Hazard. A Moral Hazard can occur whenever there is an agreement between two parties and one part has an information advantage and can change its behav- ior and operate with higher risk since the negative consequences end up being shouldered by the other part. In the long run, a Moral Hazard has the poten- tial to lead to market failure. Most publishers I have met are convinced that their audiobooks can reach new audiences when they become available with just one tap on a smartphone. There is also endless curiosit about the insights that can be afforded when consumption becomes digital and is within a service, and can therefore be tracked. On the other hand, I have also encountered concerns about the long-term effects of these busi- ness models. The creation of great books demands an investment of both time and resources. If audio- book sales through a flat-rate service are seen as a big future revenue channel by publishers and authors, they must have the potential to really contribute to this investment and not just create additional, on-the-top revenues. To understand the contribution made by these new channels, it must be possible to extensively forecast and track the revenue level of a single book in comparison to other channels. This demands greater transparency than publishers have experienced so far. For the most part, this lack of transparency seems
to afflict those instances where services plan to pay publishers through a calculated revenue share model. For the service, this model removes most of
the unknowns since they always know what margins they have to play with. Conversely, for publishers and authors this model is like writing a blank cheque. This is because the revenue level for a book fluctu- ates and is decided by factors beyond their control: for example, the monthly price of the subscrip- tion and how many books by other publishers and authors are consumed as well. This raises ques- tions such as: “What do we get during the free trial when there is no revenue to share? What happens if you change the customer price? Do you calculate consumption by the time spent or by the number of books—and how does that affect revenue? If you add other media, such as podcasts, how does that affect the model? What happens if you only get heavy listeners, and more books have to split the same revenue figure per month?”
Model behaviour I believe that when the revenue level is decided by factors beyond the control of one of the parties, it raises concerns of a Moral Hazard for publishers. This is inherent in the revenue share model. In order to create a sustainable business model, we have to remove this Moral Hazard from negotiations. This is especially important for BookBeat, since we are fully owned by Bonnier AB where the core busi- ness is, and always has been, and will continue to be, publishing. The model has to be transparent and easy to understand for both parties and be adjustable through open discussion when new circumstances arise. As a consequence, we kept it simple when we decided on a model: price levels for a book should be decided beforehand and the only thing that affects the revenue is how popular the book is. Once we have this in place and have agreed on price levels for different kinds of books, we can move the discussion forward as to how publishers and authors can grab the potential of these services. Since the spring of 2016, we have been doing this successfully in Sweden and Finland, and we found a wealth of interesting details in the data. In my talk at FutureBook (“What the Data Tells us about Audio Consumption”), I will share some insights about who our listeners are, what and how they consume and how, in the long term, this can benefit publishers. See you there! ×
Niclas Sandin is the c.e.o. of BookBeat, a digital subscription service start-up operated within Bonnier AB, its Scandinavia-based parent company. He will be speaking at AudioBook Revolution.
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FutureBook | 2nd December 2016
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