Tuesday, July 22, 2014

Unlimited Profit: The math behind how Kindle Unlimited is going to make Amazon a ton of money, and maybe you, too!

Ever since the rumors started about Amazon's $9.99 a month unlimited ebook subscription service, Kindle Unlimited (often described as a "Netflix for Books"), there's been a great deal of speculation and doomsaying about what this will mean for book sales. Specifically self-published and small press book sales since the Big 5 publishers aren't included in Kindle Unlimited's initial offering.

The basic breakdown goes like this: readers pay $9.99 a month for unlimited access to the Kindle Unlimited library, which currently boasts upwards of 600k titles, including bestsellers like The Hunger GamesLife of Pi, and every self-published title currently enrolled in Amazon Select, Amazon's exclusive publishing option. (Note, several big name indie authors like Hugh Howey don't have to play by the exclusivity rules. This is great for them! For the rest of us, though, being in KDP Select/Kindle Unlimited means we can only publish on Amazon. More on that in a sec.) Self published authors with books in Kindle Unlimited are paid their usual royalty when a reader hits the 10% mark. (UPDATE! I got this wrong!! Select authors are paid a fixed percentage of the global fund just like it was for the Kindle Lending Library, not their royalty. Last month, this worked out to $2.40 per borrow, which was fantastic for people selling $0.99 books, like myself, but not so great for authors with higher priced books who would normally earn more than that with a sale. I'm updating the rest of this post to reflect this information for the sake of accuracy, though my general argument remains unchanged. Sorry about the mix up!) Small publishers have different deals--some are paid when a reader first opens the book, some are paid at 10% like the rest of us--but everyone gets paid at some point when a Kindle Unlimited subscriber reads their book.

Now, if you're following the math above, you might notice a gap between the $9.99 monthly subscription price and the usual cost of books. Plenty of books start at $9.99. Even if you're buying all indies at $2.99 a pop, that's still only 5 books before you hit ten bucks and start getting books for "free." So how is it, then, that Amazon can afford to let people read all they want and pay authors their usual royalty on the books for only $9.99?!

Up until now, the answers I've seen to this question have either been "They're going to cut royalty rates on borrows! We'll all be getting paid pennies in no time! DOOOOOOM!" or some variation of "Relax, Amazon knows what they're doing."

Personally, I'm not really satisfied with either of these. I don't believe Amazon will suddenly slice the royalty rate on the authors that create all the content they're now selling. Authors, I might add, they've been working very hard on wooing away from traditional publishers for years now. Why would they undermine that just to shore up Kindle Unlimited? That's robbing Peter to pay Paul. It just doesn't make sense, especially not for a company as smart and far seeing as Amazon. On the other hand, I also don't believe in blindly trusting giant corporations to have my best interests at heart.

To truly understand why Amazon decided to launch Kindle Unlimited and how they hope to profit off it (and, hopefully, how we can, too), we need to understand the math behind the Kindle market itself. Naturally, of course, we don't have any exact numbers (Amazon doesn't share those with anyone) but we do have a lot of percentages and derived figures, and those numbers paint a very interesting picture, indeed.

But first, let's start by figuring out how many ebooks Amazon actually sells.


Digital Book World, the yearly professional conference for online commercial publishing whose job it is to know these sorts of things, estimated the total ebook market in 2013 to be $3 billion. Note that this number is for commercially published titles only and does not include self-publishing, which I think we can all agree is a pretty major gap in information.

Now, of this $3 billion commercial ebook market, Forbes reports that Amazon controls an estimated 65%, or $1.95 billion for 2013. (Barnes and Noble and Apple take up most of the rest).

So how many ebooks is that? Turning to Forbes again, they found that the average ebook on Amazon was priced between $4 and $10 with a skew toward the lower end of the price spectrum. Seeing this, they decided on an average price of $6 per ebook. Personally, I think the average is more like $5 a book when you count in all the $2.99 deals, but it doesn't really matter. What we're trying to figure out here is how many ebooks did Amazon sell in 2013. To get that, let's divide Amazon's assumed $1.95 billion in ebook sales for 2013 (a 65% cut of a $3 billion dollar market) by the estimated $6 per book, which gives us 325 million ebooks sold on the Kindle platform in 2013. If we divide by my number, $5 per book, we get 390 million, but what's 65 million between friends?

To make things simple, let's stick with Forbes's number and say Amazon sold 325 million ebooks. Is this number correct? Almost certainly not. Only Amazon knows the real number, which is probably much larger than 325 million since, again, that $1.95 billion in annual sales we used does not include self-publishing at all. But 325 million is good enough to illustrate my point about how the math behind Kindle Unlimited works, so let's move on to the Kindle itself.

It's not going out on a limb to say that the majority of ebooks sold on Amazon go to Kindle owners. But how many Kindles are in circulation? Going off reported sales from Amazon itself for Kindle going back to 2007, and assuming a 3 year replacement cycle, Forbes estimates there are 30 million Kindles currently in "live" circulation, meaning they're functional and people are actually using them to read books. (No double counting your old Kindle, only the one you actively use).

Now, here's where things get interesting. If we take the 325 million ebooks we estimated Amazon sold last year and divide those over the 30 million Kindles believed to be working right now, we get...about 11 books per Kindle.

That's it. 11 books per Kindle. 11 books per Kindle sold in all of 2013. And that's an average, rounded up. My personal Kindle has nearly 200 titles on it, 100 of which I bought this year, meaning I'm accounting for about 10x the average Kindle user alone. This means that somewhere out there, people have Kindles with no books on them.

*pause for soft sobbing*

And keep in mind, this isn't even accounting for people who buy Amazon ebooks but don't own Kindles. Once you add in all the Kindle app users who read exclusively on their phones or tablets, the average books per kindle dips even lower.

But let's say our math about is horribly off (and let's face it, when you're working with estimates, it always is). After all, that number didn't even count indies, and we know self-published authors sell a LOT of books. So this time, we'll err heavily in Amazon's favor and say that instead of 325 million, Amazon actually sold double that, 650 million ebooks in 2013!! That still works out to only...22 ebooks per Kindle per year, less than 2 ebooks bought per month by the average Kindle owner.

This is where the math behind Kindle Unlimited starts to make a lot more sense. Amazon is sitting on years of consumer data. They know the average Kindle user doesn't buy $9.99 worth of ebooks every month. So, if they could get a chunk of those people, the customers who've already invested in a Kindle, but who are only buying one, maybe two ebooks per month, and convince them to pay a flat reoccurring fee of $9.99 for the illusion of unlimited reading, that's a pretty great deal for Amazon. It gets even better when you consider the same customers might have been buying zero books most months if they're on the bottom half of the average.

Also keep in mind that Amazon isn't paying the cover price on the books they give away via Kindle Universe. They're only paying the royalty in the case of publishers, which can be as low as 50% of cover price, and the Kindle Lending Library pay out to self pubbed authors, which has historically been a little above $2 per borrow. This means that out of those 11 $6.00 ebooks the average Kindle owner buys per year, Amazon only has to pay out $22 - $30 dollars in royalties per year. When you subtract that from the $120 price for a year's worth of Kindle Unlimited subscription fees, it's clear that Amazon is making out like a bandit.

There are places where this breaks down, of course. If Amazon's lending fund can't keep up with the Kindle Universe demand and the monthly borrow rate dips down so low everyone freaks out and pulls their books out of the system, that would be bad. Or if everyone who signs up for Kindle Unlimited turns out to be a super reader who knocks back 50-60 books a year, the system doesn't work. Likewise, if all the publishers in Kindle Unlimited suddenly raised their prices to $9.99 across the board, that would also put a strain on things. But I think these things are unlikely to happen. Amazon has invested a lot on this project, they're not going to shoot themselves in the foot by letting per-borrow payout rates drop to a level where authors start bailing. And on the reader side of things, super readers with hundreds of books on our Kindles are outliers. Even after we doubled our estimate for Amazon's annual ebook sales, the math still showed that the vast majority of Kindle owners only buy one to two ebooks a month, if they buy ebooks at all.

These are the customers Amazon is after with KU. Not those of us who stuff books onto our Kindles like kids shoving candy into their bags on Halloween and then binge read until we throw up. We're the ones they lose money on, the necessary evil of any all-you-can-whatever system. Fortunately for Amazon, we're in the minority. Kindle Universe is targeting those people who like to read, but don't actually get to do it much. The people who see KU and think "wow! I can read all the books I want!", sign up for the monthly subscription, and then still only read one to two books a month because they just don't have time to read more (cause don't forget, Amazon only pays when people actually read the book, not when they put it on their Kindle).

It's just like me with all those movies in my Netflix queue. I put them all in meaning to watch, but nine months later I still haven't gotten past the first five. I watch maybe a movie a month, and yet I still pay for Netflix because it's not expensive and because I love knowing I can have all of Netflix on demand whenever I want. That's why the Netflix subscription model works--not because every user is a binge watcher, but because the vast majority of users aren't. That's how every unlimited subscription service works, and Amazon knows it, which is why they're forging ahead with Kindle Unlimited even without the support of big publishers. They have the usage statics that show they can make it work.

So, Kindle Universe is clearly great for Amazon, but what does it mean for authors? (Specifically self-published authors, since if you have a publisher, they're making the KU/no KU decision for you.) As I mentioned above, unless you're a big name with a special deal, having your books available in Kindle Unlimited means making them exclusive to Amazon and agreeing to accept a slice of the KU financing pool instead of your usual royalty. That's a lot to ask, even for a company who dominates the ebook market, but given the math above, I am not at all worried about Amazon cutting payments for books read through Kindle Unlimited, nor am I worried about the KU funding pool running out of money.

If reading rates for Kindle users stay the same (and they probably will. Even if you could get every book on Amazon for free right now, you're still limited by your reading time and habits. The average person who reads one book a month might go up to two or three because of KU, but they're probably not going to thirty), Kindle Unlimited will make Amazon bucket loads of money. This potential for profit is especially true when you consider that people are still going to be buying books that aren't in KU (because I don't stop buying Kresley Cole even if I have 600k other books I could read for "free").  If anything, I wouldn't be surprised if Amazon started adding more money to the KU pot every month to entice MORE books into Kindle Unlimited to lure in more paying subscribers to the system.

So should you make the jump? Well, that depends on your sales and your price. If you're currently selling the vast majority of your books on Barnes and Noble or Apple or whatever, going to KU doesn't make a whole lot of sense. Likewise, if you sell your books for a price that pays a royalty higher than $2.50, your slice of the Kindle Unlimited Fund is unlikely to beat the money you would get from a normal sale. But if your books are priced lower than $2.99 and you're already selling the vast majority of them on Amazon, you will probably profit. Of, if you're not selling many books anywhere, going to KU might help get your book into the hands of more readers willing to take a chance on something new. After all, to them, your book price shows as $0.00, and people will try just about anything for free.

This is probably the best thing KU has to offer indie authors. It makes your books look free to readers while still paying you. Sure $2 might be lower than you'd get for a sale, but if the $0.00 KU price tag entices a reader who wouldn't otherwise fork out for my book to give it a try, I've basically made $2 for free. Plus, those "free" KU borrows still count toward your sales rank, putting you in front of more eyeballs and raising your potential for more sales/borrows. Nothing sells books like selling books, and the more people you can get your book in front of, the better. Whether that's worth the exclusivity and putting up with getting paid out of a variable pool instead of a fixed rate is up to you.

For me personally, I have one book in Kindle Unlimited (2k to 10k) and one that's not (Nice Dragons). At this point, my KU "sales" on 2k to 10k are about 35% of my normal paid sales, but my overall sales rates are down because, obviously, people are getting my book through Kindle Unlimited instead of buying it. That said, when you add my KU sales and my normal sales together, the numbers are higher than they were before Kindle Unlimited launched. Plus, 2K to 10k is priced at $0.99 with a 30% royalty rate, so I only get about $0.33 per sale. But with KU, if the per-borrow payout stays above $2, that's a lot more than $0.33! Not a bad deal at all

Will things stay this way? What does it all mean? I don't know! But I do think that, from a purely money grubbing perspective, if you're an author who isn't seeing many sales through other venues, or if you normally price your books on the very low end of Kindle pricing, giving KU a try for three months couldn't hurt. If you're an author who does get a lot of sales from other stores, it still might be worth your time to pick one book to try KU anyway just for the sales benefits of having a "free" book while still getting paid for it. Unless you're morally opposed to exclusivity, of course. In that case, no way.

Personally, I find the exclusivity clause the most distasteful part of this whole set up. I hate telling my readers where they have to buy or how they have to read. 2k to 10k is only in Select because I was too new at self publishing to know better when I put it in and now I'm stuck because it's been automatically renewing this whole time. I could probably get it out if I complained, but right now I'm using it as a window into Kindle Unlimited, so I'm content to let it lie and see how things shake out. It's been an interesting experiment if nothing else.

I hope all of this has helped you better see the man behind the KU curtain. Again, now that I've done the math, I think KU is actually a brilliant idea on Amazon's part and is probably going to make them a lot of money. I don't know if it's a good thing for the book industry in general (I especially don't like the precedent of paying authors slices of a variable fund instead of a normal royalty), but that's a whole other kettle of fish. I do think we will see a small drop in sales across the board for non-KU books as potential readers focus their attention on the "free" selection, but I don't think it will be anything major. People are still going to buy the books they want to read.

What I can say for certain, thought, is that right now, for self published authors, Kindle Unlimited is NOT the end of the world. The fund's not going to run out of money, and you're not going to get squeezed down to pennies on the dollar. Amazon isn't going to gut KDP to feed the Kindle Unlimited beast. KU will actually probably make you a nice chunk of change if you're not already making it on other vendors, but that is a decision only you can make.

And thus concludes our adventure in ebook math! The credit for much of this goes to my husband, Travis Bach, for crunching the original numbers that proved to me that KU wasn't evil and for finding all of the sources. He is brilliant! Yay Travis!

As always, thanks for reading, and I'll see you again soon with a far more narrative and less mathy post!


NOTE 7/23/2014: This post has been edited from its original version to correct my mistake in saying KU paid based on normal royalty rates. It does not. It pays out in slices from a monthly fund Amazon sets up just like the Kindle Lending Library borrows do. The text above has been changed to reflect this corrected information. I'm sorry about any mix ups!


Bridget McKenna said...

Rachel, I think having a valuable reference book (and that's how I think of 2K -> 10K will eventually bring you to the best of both worlds. I might borrow 2K if I didn't already own it, but then I'd be far more likely to want to own a copy than most fiction books, since I don't re-read fiction all that often, but quite often refer back to good reference. So hope for readers like me to help you clean up on KU.

Jennavier Gilbert said...

This is the most sane look at KU that I've read so far. Thanks for the number crunching! I needed it.

Kai Herbertz said...

That kindle unlimited thing is an interesting experiment. Hopefully it pans out for everyone involved.

I for one have zero interest in it, as I don't read fast enough (3 minutes per page, meaning that a book takes me ~15 hours to read, as opposed to the 3-5 hours everyone else needs) to warrant it.

Also, I like to buy books and this seems more like renting.

Shana Pare said...

Good job!

Anna Celeste Burke said...

Such a great post about this new project at AMAZON. Who knows what this will mean for authors & readers, but you have to say AMAZON is always up to something! I'm hoping you're close to the mark here. I hope it does spur reading--wouldn't that be grand? I'm with Bridget McKenna who commented already:Some will borrow, then buy, our books when they're at the limit on KU--a '2fer' for authors. I just read 2K to 10K, btw, and found that helpful too! So, thanks for the post and the book. Cheers! Anna Celeste Burke

Anna Celeste Burke said...

Such a great post about this new project at AMAZON. Who knows what this will mean for authors & readers, but you have to say AMAZON is always up to something! I'm hoping you're close to the mark here. I hope it does spur reading--wouldn't that be grand? I'm with Bridget McKenna who commented already:Some will borrow, then buy, our books when they're at the limit on KU--a '2fer' for authors. I just read 2K to 10K, btw, and found that helpful too! So, thanks for the post and the book. Cheers! Anna Celeste Burke

Anonymous said...

Hmmm... A quick look and it's shaping up to be nothing more than the bargain/discount shelf that sits at the front of most book stores.
None of the books I'm interested in sit in that pile.
I DO glance at it out of morbid curiosity to see who's books AREN'T selling. Yea, sorry, it's ghoulish I know... /sigh My bad.

But really, why would they want to take 10 bucks when they can have 50 to 75 a month?
Some don't like their business practices, NOBODY thinks they can't add.

So, no thanks, but knock yourself out if you didn't read this year's books THIS year and/or want to catch up on some of the books going out of print. If that's the case, this might be for you.

If you're a writer I would (as a reader) advise avoiding putting your books on this shelf unless you have given up on individual sales.
This seems like the last stop for books before they vanish into the vast internet ocean.

Now, all that said, I AM NOT A WRITER, just a reader and good story enthusiast. :)

This is NOT business advise, just one guy's humble opinion. :)


BTW, I REALLY enjoyed your latest one, NDFL. :) F5ing your page for more in the series.

Michael W. Riley said...

A footnote. I'm a Kindle owner and reading junkie, with nearly 300 books downloaded in the two years I've had it. That doesn't count the titles I've borrowed, and doesn't include the numerous times I've re-read titles. I've fallen in love with KU because I was spending far too much money buying books. I probably read between 200 and 250 books per year. That said, my point is that when I discover a book that I know I'm going to want to re-read, I'll go back and buy a copy, thereby paying the author twice for the same volume. I like that!! My greatest concern about joining KU was what it might do to author's income, and I've searched for a number of articles describing the pros and cons. My conclusion is that for power readers such as myself, KU is a great deal, and that if more readers follow my inclination to go back and buy copies of select books, it will boost author income, a win-win situation for everyone.

Anonymous said...

I appreciate the sane look at the subject. I'm always amazed at the wide variety of responses, particularly when the most vehement are from uninformed individuals.
As a reader and a Kindle Author, I look at this as positive, overall. Yes, as Kai mentioned, it is more like renting than purchase, but that's the model much of the world is going towards anyway, not just books.
As an author, I love the fact someone can get my books for a lower perceived price, and for books priced under $4, I get paid more than I normally would. Also, like the Prime "free" books, I found some readers would come back later and purchase the book to keep it. Yep, two commissions on the same book, one paid by Amazon program, one by the purchaser.
As a reader, I routinely read 20 or more books a month, at least of which 10 are fiction. When it comes to non-fiction, if I'm on a roll, I can go through 3 or 4 in a day when I have time. And no, I really don't sleep all that much. I have about 300 books on my kindle at present, and ever so often, I wipe it and start over. It gets really sluggish after I get more than about 400 on it. Since I began with the Kindle years ago, I've "purchased" many thousands of Kindle ebooks (quite a few of which were "free" under the KDP programs and author specials.) Very few didn't make it at least 15% or 20% before I gave up on them. About a quarter were read in their entirety. Either way, under the new KU program, the author would be compensated for the download, and I have the opportunity to preview the author before I invest more money on other of their books.
All in all, I think the program has its benefits.
For those that feel Amazon is the evil of the world, just look around and truly examine their actions in comparison to the long term trends in high tech. They are a bit ahead of the rest of the pack, and are certainly making money along the way, but are nor likely the cause of the problems with the dead-tree publishing industry.

Danielle Annett said...

I took the plunge, after reading this post I decided to sign up for KU and saw almost instant benefits. My ranking jumped from 20k-ish to 7k in 24hrs! So glad I went this route! Thanks for the advice and the solid findings behind your reasons to give it a shot.

-Danielle Annett
author of Cursed by Fire

Chrissy Fanslau said...

Very interesting article. Thanks Danielle, too, for sharing.

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