RonAmok!

The adventures of an analog engineer and digital storyteller who studies emerging networks and their impact on the great game of business.
Dec 26, 2012

royaltyIn December 2011, Amazon opened the Kindle Owner’s Lending Library (KOLL), an innovative program that allows Amazon Prime members to borrow up to one book per month from a list of those enrolled in Amazon’s Kindle Direct Publishing Select (KDP Select) program. The lending library is unique because even though borrowers pay nothing for access to a book, authors are still paid by Amazon every time their book is borrowed. In addition, rather than setting a per-borrow price, Amazon left that decision to marketplace demand by promising to fund the program with at least $6 million during the course of the first year. Since the program began, final payment per borrow has been calculated by dividing each monthly allocation by the number of books borrowed in that month.

On KOLL’s first birthday, Amazon appears pleased with the results:

  • Amazon Prime members have borrowed over 3.5 million books
  • Authors have been paid $7.3 million (21% above Amazon’s annual commitment), which translates into an average of $2.04 per borrow.

Taking a closer look at allocations over the past year reveals that Amazon may be modulating the monthly amount in an attempt to keep author royalties above $2.00. After opening the program with $500,000 in December 2011, Prime members borrowed 295,000 books, which translated into $1.69 royalty per borrow. The company then increased its January 2012 allocation to $700,000, but the authors only received $1.60 for each borrow due to a 50% jump in borrows, as Christmas Kindles needed to be filled with content. For the next nine months, however, Amazon has held its monthly allocation steady at $600,000, resulting in 2.4 million books borrowed and an average royalty payment of $2.19 during that period.

total_books

In November 2012, the company demonstrated confidence in the business model by expanding KOLL’s reach beyond the United States to include Europe. Anticipating a jump in sales, Amazon increased its monthly allocation for the first time in 9 months, growing it from $600,000 to $700,000. If my assumption is correct, and $2.00 is indeed the magic royalty number, the company came pretty close to predicting European demand as 368,421 books were borrowed bringing the average royalty per borrow to $1.90.

Finally, Amazon appears to be anticipating another borrowing surge with the announcement that it is committing an additional $1.5 million to the fund over the holidays. The company has decided to add the first of that $700,000 to its December baseline of $700,000–bringing the monthly total to $1.4 million. If Amazon is trying to hit a royalty goal of $2.00 per loan, the company is expecting Prime members to borrow 700,000 books in December 2012, which would highest monthly figure to date (January 437,000) by more than 60%.

It looks as if Amazon’s experimental business model is paying off for both authors and the company. What do you think?

Filed under: Mini Case Studies