(This article was published previously on sixslides.com, and is the first in a series of articles on the subject posted there. My sixslides site also features daily research clippings and commentary, weekly video posts, and stories and commentary in our unique Six Slides format.)
Introduction
There has been significant buzz over the last few days about Amazon’s announced plans to create a special version of its Kindle e-book reader of the college market. This article is the first in a series that explains why a Kindle reader for the college market will not have a significant impact on the price of textbooks or course materials for at least five years. The author is a former teacher and administrator at a large public university, a former author and employee for multiple major textbook publishing companies, a parent to two college students, and the lead product designer for a proprietary online e-book platform built and sold by an educational software company.
This first installment in the series addresses textbook publishers and their business models, and discusses why that model will be a hindrance to the rapid integration of the Kindle reader into the college textbook market. There are four primary features of the current textbook business model that will deter this integration:
- Content development costs and profit margins
- Royalty rates
- Sales models
- Product feature demands
The article concludes with a brief assessment of variables that must change in order to change the proposed prediction timeline.
Understanding the College Textbook Business — How Sausage Gets Made
With the many articles written about textbook prices of late, there have appeared a number of general statements about the textbook publishing industry. These include claims that publishers profit at the expense of their authors, that publishers create unnecessary new editions of existing textbooks in order to drive the sale of new textbooks, and that publishers inflate artificially the prices of their textbooks simply to add to their profit.
There is no doubt that major textbook publishers are big business. The college textbook market represents between $5 billion and $6 billion and the the last 18 months have seen the sale of two major publishers (Houghton Mifflin College and Thomson Learning) for $750 million and $7.75 billion respectively. The overall consolidation of the college textbook market has left four primary players (listed in order of size and market share): Pearson, Cengage Learning, McGraw-Hill, and Wiley. While each of these companies has different strategies and discipline emphases, their business models are largely identical. An understanding of their business model is critical to appreciating why they will not be quick to adopt the Kindle reader is a primary distributor for their content.
First, it’s important to understand how these companies operate and how they make money. If you take a look at any of the major college textbook publisher Web sites, you’ll see that they have hundreds (even thousands) of textbooks in their catalog. These books range from small niche titles for low-enrollment upper division courses to major tomes targeting high-enrollment General Education courses. The lower selling textbooks are often referred to as “B” or “C” titles while the high-volume sellers are often called “AAA” titles. As you probably suspected, textbook publishers make more money on AAA titles because they sell more of them. Of course, they also have a much higher investment in each one as well. This amount of investment for C title may be $20,000-$40,000 while the investment for a bestselling AAA title can range between $400,000 and $1,000,000.
The average life-of-edition (LOE) for a college textbook is three years. When publishers talk about the profitability of a textbook they measure it in terms of its profitability over its LOE. The first year of a print textbook’s edition life will necessarily represent its highest sales and revenue potential since subsequent years will see the sale of new textbooks eroded by the presence of used textbooks (from which the publishers receive no revenue). As an example, a AAA title in Spanish might have first-year sales of 30,000, second-year sales of 12,000, and third year sales of 3,000. Textbook publishers often try to develop special second or third year selling strategies for popular AAA titles by introducing new ancillaries that are be sold in bundles with new textbook copies.
A key point about textbooks and editions is that there is only one time when a publisher can guarantee the sale of only new books — in the first year of a new edition. Subsequent editions will have new textbooks without a used book market for that edition, but they will lose sales to used books from previous editions. This is why textbook publishers must constantly sign authors to create new textbooks. In fact, this is one of the most important jobs of an acquisitions editor or publisher. New textbook projects mean new first editions and higher profitability. They also serve as insurance against aging titles in a portfolio.
In a gross simplification, discipline publishers or editors are like franchise owners who “borrow” money from the central organization to cover the development, operating, and sales costs related to a book. The central organization approves these “loans” on a per-book basis and based on common profitability models that have developed over the last three decades. As a rule of thumb, the sales of a textbook should ideally be eight to ten times the development and sales costs over the LOE (this is called the sales-to-plate or sales-to-plant ratio). As an example, a popular title with development costs of $500,000 should generate $5,000,000 over its three-year LOE. This profit formula takes into consideration manufacturing costs, operational overhead and, most important, author royalties. Author royalties on a college textbook typically range anywhere from 8%-20%.
At regular budget meetings, publishers and editors make the case for each textbook they want to produce by providing projected costs and sales figures. In order to provide incentive for the best cost management and sales performance, these projections form a good portion of the bonus plan for these same employees.
Within this context, e-books are budgeted as a small percentage of the overall budget. From the textbook publisher’s perspective the development costs are identical whether the content is being flowed into a print textbook or an e-book. This is because textbook publishers make most of their revenue of print textbooks and, consequently, most of the content development strategy is formulated around those print textbooks. E-books are simply “add-ons” or extra products that can be viewed as a by product of the core print development process.
Understanding the College Textbook Business — How Sausage Gets Sold
Textbook publishers, it must be remembered, are not actually large, homogeneous or single-cell organizations. Rather, they are a series of franchises and operating units held together by central manufacturing processes and pricing, and revenue goals. In the textbook publishing world, editorial teams sign authors and create products. Through multiple justifications after the signing, they are finally able to secure the actual budget for a project and put it into production.
Once a textbook is nearing readiness for sale, the editors and publishers must then convince the sales staff that they can make money selling the book. A typical sales representative will have multiple AAA titles for each discipline and will be covering several large disciplines. Their catalogs are big and their book bags heavy. They make the most money on large adoptions of first-edition AAA titles and are necessarily motivated to spend more of their time selling those. These sales representatives work with individual faculty members and departmental committees to make sales.
I should also point out that college textbook publishers are also increasing their efforts to sell at the institutional level. Institutional sales differ from traditional textbook sales with regards to size, multi-year commitments, and the degree of customization required. In both instances all sales efforts are directed at either instructors or administrators. These are the actual decision makers with regards to the textbook adoption.
Of course, the actual “sale” –getting the commitment from an instructor, department, or institution — is only the starting point for the textbook publisher in the revenue cycle. Securing the adoption has likely encumbered a commitment for onsite training and/or a level of customization. Additionally, unless the textbook is a first edition in its first year, the sales representative must also negotiate with the campus bookstore to lock in a commitment to a specific number or percentage of new textbooks. Finally, textbooks are placed on bookstore shelves or sold via online sites and publishers can start tracking their success.
Within this sales process, e-books can play a couple of roles. For the most part, e-books are primarily pitched as “low-cost” alternatives that allow college textbook publishers to provide a counter to the rising cost of print textbooks. In some instances, e-books also exist as enhanced, multimedia versions of the textbook although these cost more than the basic e-book. Finally, e-books are often included in different electronic ancillary components such as online homework management systems or online courses.
Today, e-books still represent a small percentage of textbook revenue for college textbook publishers. They are seen as incentives that help close adoptions, provide good PR with regards to news about high textbook prices, and are a cheap addition to the publishing package for a traditional textbook.
Understanding the College Textbook Business — Why the Kindle Doesn’t Fit
Within the textbook publishing processes described above, there are key factors that preclude too much excitement about the Kindle becoming the primary e-book platform for college textbooks.
First, within the current content development workflow for textbook publishers, the plant investment remains the same regardless of whether the product is a print textbook or an e-book. And, since publishers sell far more print textbooks than e-books, there is no incentive to change production workflows to favor the creation of minimized or lower-cost e-books from which print textbooks could be created. This means that publishing e-books, without significant changes to current design and production workflow, does not reduce the publishers’ costs significantly. This is important because it means all current e-book solutions for textbook publishers take into consideration the print book production process and derives cost efficiencies from that process. There are neither sales incentive or cost efficiencies in the current workflow that would cause publishers to get excited about the Kindle.
Furthermore, there is the rather important issue of royalties. Amazon currently commands a 60% royalty share of content sales related to its product. That is a fine solution for trade book publishers (fiction and non-fiction) targeting business travelers and who see the Kindle as providing incremental sales. But textbook publishers expect (and need) much higher margins for their products and have major concerns about pirating sales from their print solutions. With development costs remaining the same, textbook publishers would make much less in a world where e-books were too popular. They would make even less by using Amazon’s product as their already-decreased profit margin would be sliced further by Amazon’s take.
Also, major textbook publishers have already invested in technology solutions and companies that support their current business model and that help them achieve other business goals such as sampling textbooks to instructors. Each of the major college textbook publishers supports multiple online technologies to meet their production and product needs, and they have also formed a business partnership to provide a unified technology response to the demand for low-cost textbooks. The Kindle would represent yet another production workflow as well as another sales channel to confuse their representatives.
Another consideration is that e-books for textbook publishers also represent important contextualized learning tools that support their homework management products (LMS solutions). This use of e-books favors online e-books that can be integrated seamlessly into a BlackBoard, Angel, Moodle etc. LMS platform. The Kindle could certainly be used for this but that would require a significant change in the current workflows and processes for textbook publishers.
Finally, and most important, while the Kindle will be extremely attractive to students, they are not currently significant decision makers in the textbook adoption process. College textbook publishers sell their product to instructors and institutional representatives. What is important to those decision makers, historically speaking, is not representative of the students’ preferences or desires. So, unless the Kindle can be presented as valuable to the instructor (saves him/her time, helps with assessment, etc.), there is little incentive for the textbook publisher to move aggressively to partner with Amazon.
What Will It Take?
This is not to say, however, that the Kindle won’t become a major player in the college textbook market in the future. My purpose in this article has been simply to point out that there are a number of “acceptance” obstacles from the perspective of textbook publishers. Those obstacles, as with any business scenario, could be overcome and the landscape could change sooner than I currently predict (minimum of five years), however, with any or all of the following changes.
Conclusion
Personally, I have used the Kindle reader and I like it. What makes it attractive to me s a business traveler or even a student (size, convenience, wireless capability), does not necessarily make it attractive to college textbook publishers. The 60% royalty share is likely deal-breaker, and the potential to pirate print textbook sales is negative as well. Of course, the one thing that could change the playing field unexpectedly and dramatically is if the Kindle actually becomes as popular for e-books as the iPod did for music. I don’t think that will happen (for reasons which I will discuss n an upcoming article), however, so I think we’re looking at least five years into the future before this product has a dramatic impact on the shape or cost of college course materials.
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