Oyster’s Sunset Shows Subscriptions Alone Won’t Address Challenges Of Ad Blocking

Oyster, the “Netflix for books,” made headlines when the company announced it was shutting down. News then broke that Oyster’s co-founders and CEO would be joining the Google Play Books team in what looked like a thinly veiled acqui-hire.

This announcement raises some important questions about what it takes to survive, not just in the e-book business, but as a subscription service overall. Due to the rise of ad-blocking software, attention is raining down on the subscription market. Between 2013 and 2014, the number of Internet users using ad blockers rose from 54 million to 121 million.

However, a recent report by UBS states that ad blocking will not disrupt the market like it has been projected, and will only cost the industry $1 billion rather than the $20 billion that has been reported. Apple recently unleashed ad-blocking hell on Google with its announcement that it was included in iOS 9. But contrary to popular belief, Apple does support native ads through its iAd service. This shows that the company’s real focus is to gain more access to the digital ad and search space rather than ad blocking.

The increased attention on ad blocking has led content creators and platforms to explore alternative monetization models — namely, subscription. As Sam Altman states, when scaling a subscription business, it’s critical to make sure that the unit economics really work, that the market and the margins are big enough and that the initial pace of growth isn’t a false positive.

Subscription businesses that require revenue shares to both content owners and payment platforms, like the App Store, means there are often thinner margins than the normal challenging margins these business face. What often happens with niche businesses is they receive an initial growth spurt by appealing to a limited number of previously underserved enthusiasts. When that enthusiasm tapers off, they are left without a large market that has room to grow.

This is the challenge Oyster ran into: There was not enough of a margin or enough scale to sustain the business beyond its initial growth. In this case, it wasn’t the size of the e-book market that felled the company, but rather the competition. Oyster was going head-to-head with Amazon, and its offering was not differentiated enough to support it. Subscription businesses tend to be more successful when they revolve around difficult-to-access repositories of content, which have a dedicated following and/or high-value content. Scarcity of access is a key driver to subscription-based businesses.

For example, Hulu has succeeded because it has a virtual monopoly on content that consumers have a strong appetite for — TV shows. It’s mainstream, but the content isn’t easily available digitally any other way. HBO is similar. If you want to watch Game of Thrones, you have to pay for a subscription (or use someone else’s). There is no other (legal) way to watch it.

Another great example is baseball. I’m a big Yankees fan, and the only way I can easily listen to the home-team announcers is to pay for my annual subscription through MLB. I gladly do it because I can’t easily get that content elsewhere. However, I don’t pay for the MLB TV package because I get enough Yankees games on ESPN, broadcast TV or the MLB channel that is part of my cable package. Of course, Cubs fans aren’t so lucky.

Hulu, HBO and the MLB have broad mainstream appeal, so the market is big. However, niche businesses can also succeed if their following is passionate enough. Crunchyroll has built a strong subscription business by offering access to anime content in the U.S. Anime has a thriving and competitive ecosystem in Japan, but fans outside of Japan will pay to have access to all their favorite content.

Or consider The Information. In this case, there is plenty of tech news available elsewhere, but The Information has built up a loyal following of subscribers because a) you can’t get access to that content without paying and b) people who do pay appreciate the unique perspective and reporting of Jessica Lessin and her team.

These success stories bring us back to Oyster, which tried to build an all-you-can-eat-business around consuming books digitally. The fact is, there are too many options available to get those same books (Amazon, Kindle, Scribd, a brick-and-mortar bookstore, a library etc.). It’s easy for people to get the same content less expensively or more easily elsewhere.

On the magazine side, companies like Zinio have struggled because there are more than a dozen easily accessible ways to buy or subscribe to a digital magazine, and there’s very little distinction between the services for the largest 200 or so subscription titles.

So what can entrepreneurs learn from these examples? First, make sure your offering has broader appeal than the initial customers that rush in, and don’t be fooled into thinking that an initial interest in paying a subscription is an indicator that there is a large enough group of subscribers to sustain the business.

Second, for content controlled and owned by larger companies, like books and movies, make sure there is enough margin in resale agreements to sustain a business. Low margins can be viable, but only in cases where there is a massive scale like Walmart or Amazon. Otherwise, you risk getting caught in a wasteland of thin margins with no sustainable way to scale your business. Third, make sure your offering is unique and has a core dedicated following.

And remember that while Hulu, Netflix, the MLB and Crunchyroll have created successful subscription businesses, the Internet is littered with those that have failed. Don’t underestimate the value of quality ad-supported content and platforms. Discussion of ad blocking may be en vogue, but the industry will create new formats that will continue to drive revenue for the creators and value for the readers.