When I started practicing dentistry almost 30 years ago, I became involved in a reimbursement plan called “Capitation.” It was “insurance” where families or individuals paid a set fee every month, then the company took a percentage of that fee and passed the rest on to me. Their advertising to patients stated that they ‘covered’ 100% of every dental procedure known to man.

When I first started with them, I was actually getting checks for a little more than what I would have billed for services on capitation patients that month. But very soon that corrected itself and I was getting less than what I would have billed, by about 20%. Then another provider quit and I got a large influx of new patients. I started making more money, but very soon I was doing way more work than I was getting paid for. It got to the point where I was getting only 40-50% of the work I was doing.

So I quit.

The future of bookselling, says Joe Konrath among others, is in subscription services.  No one says that books will not still be purchased, but what Joe says, if I’m understanding him correctly, is that for many readers, especially avid readers, there will be a significant economic incentive to borrow books via a service like Scribd or Amazon’s Kindle Unlimited rather than purchasing the titles.

I can certainly see how he comes up with that view.  It’s exactly what happened with my capitation participation.  As the subscribers to the plan figured out that they could get an unlimited amount of dentistry done for one set monthly fee, and perhaps just as importantly, that there was a new young dentist out there who would do the dentistry they needed (and do a good job of it), they flocked in to use their “insurance.”  Very few of them understood what they were paying for.  As far as they knew, they were paying an insurance premium and I was getting paid by the insurance company for work done as I did it.  (That IS the situation with fee-for-service insurance, which is capped at one to two thousand dollars per year but pays me for the services I perform on patients.)  Capitation was a great plan for the patients – as long as there was a provider willing to do dentistry for the amount of money he was receiving.

So, there are three distinct entities involved in systems like this.  One is the reader.  She is analogous to the patient in my capitation situation.  She wants stories to read, and a subscription service would seem to give them to her.  How many stories she reads in a month?  It’s limited only by her speed of reading and the time she has available for reading.

The second is the author.  She would be analogous to the provider, who, in my case, is the dentist.  She produces stories for the reader to read.  How many stories can the author provide?  Well, again, it depends on the speed of the author (ie, how fast she can write) and the amount of time she has to actually write stories.  It’s limited by both of those two things, just as in a dental practice.  In my case, I was limited by the number of appointments I had available for everyone, not just the capitation patients.  I was also limited by how long I took to perform a specific procedure.  Root canals took longer than fillings and cleanings.  Dentures took more appointments.  I was also limited by my own costs.  I suppose an author is limited by the costs of editing, proofreading, cover, formatting, etc etc.  In other words, in both situations there would seem to be a floor as to reimbursement.  Reimbursement needs to cover the costs of doing business.

The third is the “Company.”  In my case the company was one that provided capitation-style “insurance” to various employers so they could provide reasonably priced dental plans to their employees.  In an author’s case, the companies are Scribd and Oyster and Amazon.  The company has to balance the amount of money coming in with the amount of money going out in such a way that it covers its cost of administering the plan (in the dental example) or delivering, storing and providing some promotion for the ebooks in the lending service (Scribd, Oyster and Amazon).  Oh, and it needs to make a little profit.  (Costs would include the salaries of everyone involved in the process of acting as the middleman.)

In the case of Scribd, it seems that they were paying authors for borrows as if the books were purchased.  Voracious readers were reading a LOT, apparently, and Scribd was responsible for paying the authors as if those readers were purchasing every book.  (Almost sounds like a fee-for-service dental plan.)  Authors were paid per unit read, full price for the book.  Readers were paying a flat fee (something like $8.99 a month?) to access as many books as they wanted to.

In Amazon’s Kindle Unlimited, Amazon collects a flat fee ($9.99 a month) from subscribers, and allows them to borrow ten books simultaneously.  It then takes their subscription fees and puts them into a pool (minus whatever costs they feel they need to withhold to cover their operating costs and whatever profit they want to make), and from that pool it reimburses the authors whose books were borrowed.  (I think I understand this correctly.)  Amazon was paying authors if a reader read 10% of their book, which was great for short stories (my own shorts were in there, but I think I only had one or two Kindle borrows), not quite as good for authors of novels and such.  Now they have switched it so that writers will be paid by the actual pages read of their works.  I take this to mean that if someone writes a ten page short story and a reader finishes it, that writer is paid the same as an author who writes a 300 page novel and a reader only reads the first ten pages of it.  (Seems relatively fair on the face of it.)

So, if everything is golden, why did Scribd remove a bunch of romance novels from their service?  Apparently they did this because romance readers are reading them right into the poor house.  They’re reimbursing every author full price for the books borrowed.  If a reader is paying $8.99 for a month’s subscription, it’s easy math to see that they can read three books priced at $2.99 before the company starts taking it on the chin.  Not just no profit, but real financial losses.

I think this is illustrative of the pitfalls of this sort of model.  Because when you look at Scribd’s options, you see that there aren’t too many.  First, they could raise subscription fees.  Mark Coker suggested that perhaps there should be a tiered plan, with a basic level that allows a certain number of borrows per month, and maybe an unlimited plan for more money that allows as many borrows as the reader can read.  Any increase in costs up front to the reader will likely lead to less subscribers.  For some it would be a good deal at a much higher fee, but for others it would perhaps tip the scales in the other direction.

Second, they could pay authors less.  This is sort of what Amazon’s KU does.  There is a fixed pool of money, funded (I assume) in large part by subscription fees.  The pool is divided by the total number of pages read by subscribers, and the authors are paid by pages read.  In general, this model will reimburse authors by some amount that is probably less than the amount they would receive had all the borrowed books been purchased by readers.  I can’t say this with 100% certainty, but the math seems to make sense, especially if we’re talking about books that are reimbursed at 70%.  (At 35%, the math tips in the other direction.  All of my books are currently priced at $0.99, so I don’t make much per purchase.)  But they run the risk of having authors pull their books out of the program if they aren’t making enough money for their efforts.

Third, the company could simply take losses and hope that the subscription dollars grow as more people subscribe, and hope that not all of them are voracious readers who consume many more books than they are realistically paying for.  They run the risk of losing money and putting themselves right out of business, unless they’re a company like Amazon.

In my capitation case, the company who administered the plan had very little, if any, risk.  Their biggest concern was in getting a provider who would adequately care for their subscribers.  I know that one of the problems when I was doing it was that when I got that influx of patients due to another provider dropping out of the system, I found that they all needed a bunch of dental work.  The other dentist wasn’t doing much of anything.  Cleanings, a few fillings, and not much more.  He was coasting – sitting back, collecting checks and not doing the work because he wasn’t treatment planning it.  Many of them needed crowns and partial dentures, and I was doing them, one after another.  I had to ration out the care, because I simply couldn’t afford to do it all in one month.  I wasn’t being paid for it.  Also, I had to ration out chair time.  I couldn’t allow more than a certain number of patients with that plan per week, because I had other, paying patients who I needed to work on in order to keep the business running at that time.  The theory was that once I got a patient or a family completed, they would not need much work in the future, and I could collect their capitation fee without providing much value in the way of services.  In practice, many of the patients dropped the coverage once they got their crowns and partials, and there was no way to force them to continue to pay for it.

Some of this has implications for subscription services, some of it is unique to dentistry.  The thing with ebooks is that there are tons of providers (authors) and hundreds of thousands, if not millions, of books out there.  It isn’t a single author being forced to write stories for the masses for virtually nothing.  But in another sense, that just means that the pot (the subscriber fees) has to be divided in a lot more parts before being distributed to the providers.

There is a delicate balance here that is going to be very difficult for a company to negotiate successfully.  Amazon is experimenting with the way they reimburse authors, and they have the size and the ability to spend money in an attempt to figure out a way to do this right, to find that perfect balancing spot.

There’s more to be said on this issue, but this has gone on long enough today.  If anyone reads this and has any thoughts, please jot them down in the comments!  Thanks!

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