(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:

1. Content development costs and profit margins
2. Royalty rates
3. Sales models
4. 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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• 40 Percentage of video gamers that are female
• 18 Average number of hours spent per week by gamers playing video games
• 23.7 Percentage of console failure within he first 2 years of ownership (XBox)
• 2.7 Percentage of console failure within he first 2 years of ownership (Wii)
• 7.5 Number of hours kids 9-18 spend per day with media devices
• 32 Percentage of households now reached by Internet radio
• 33 Percentage of adult Web users who post regularly to sites like Facebook and Twitter
• 1,830,000,000 Number of browser-equipped cellphone in use by 2013
• 1,780,000,000 Number of old-fashioned computers in use by 2013
• 4 Percentage of all smartphone owners now using a phone running some version of the Android OS, an increase of 200% since September, 2009
• 1,400,000 Number of Apple tablet devices to be sold in 2010 as projected by Gene Munster of Piper Jaffray
• 99.4 Percentage of the $4.2 billion paid mobile app market owned by Apple
• 57 Percentage of users who go to digital sources for news
• 400 Percentage increase in e-textbook sales by the nation’s leading e-textbook provider, CourseSmart

Sources

1. Kotaku
2. Gartner
3. ChangeWave Research
4. BusinessInsider
5. Outsell
6. L.E.K.
7. CourseSmart
8. Kaiser Family Foundation

Source: Rob Reynolds

(Editor’s Note — Oh Yeah? Says Who? reflects the author’s internal dialogue and debate related to the planning, designing, creating, and distributing of online curriculum. The topics addressed in this category range from pedagogy and technology to business models and resourcing.)

An argument with myself…

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Source: Rob Reynolds

(This article was published previously at Six Slides.com)

The current economic crisis is proving to be a game-changer in many industries. Car makers are re-evaluating their new car models and their expectations for sales. Financial institutions, beyond hoping for mere survival, are being forced to change their assumptions about profitability and regulation. Around the world people are evaluating the old way of doing things in business and trying to find the right paths for thriving in a world with new and different rules.

Textbook publishing, particularly in Higher Education, is certainly not immune from the changes heralded by changes in the global economy. By way of brief example, consider what my wife and I heard his past week.

A friend of ours — an associate professor at a large public university — has been assigned to a faculty committee charged with setting per-course spending limits for textbooks. The committee’s mandate, it seems, originates primarily from increased student pressure over the cost of course materials. This pressure isn’t new, mind you, but it has heightened severely due to the financial difficulties faced by so many families.

One of the things that shocked our friend most — she teaches upper-division courses with relatively low textbook costs — was the actual prices students pay for new course materials in many of their classes. She was shocked that students can pay as much as $200-$400 for new course materials for some required classes.

The first thing that I want to point out is that our friend’s reaction is actually validation of what textbook publishers have been claiming for years — university faculty are quite complicit in the price of new course materials.

While students actually buy the materials, it is the faculty who select the materials to be purchased. And, the reality is that price has not been much of a determining factor for selection by many faculty members in the past. My experience has been that most faculty members have been largely unaware of the actual price being charged for course materials.

I am not suggesting, however, that faculty are ultimately responsible for the price of course materials. Rather, I am merely pointing out that instructors have been participants — along with textbook publishers, bookstores, and institutions — in the escalation of the costs.

The good news is that the academy in general seems to be waking up and institutions along with their faculty members are taking increasing responsibility for providing solutions to a problem that has gone largely unchecked.

I bring all of this up because our friend’s experience is not unique. A number of universities in the Unites States are hoping ti set price limits on course materials. This, of course, is in addition to legislation in many states that attempts to enforce processes that will help keep the cost of course materials down.

The result, of course, is increased “squeeze” on the textbook industry. The harsh fact is that fewer new print textbooks will be sold in the future and that prices of books will level off and, in many cases, decrease. In this scenario of lower unit sales and prices, increased revenues cannot be maintained simply by raising prices. In addition, channels of production and distribution are changing rapidly and textbook companies are under pressure to remain competitive in a changed market landscape. Finally, textbook publishers may not want to believe it but the customers themselves are changing. Actually they have already changed.

The economy will not change overnight but textbook publishers will need to respond decisively to the new market challenges in order to remain viable. Here are some systemic changes I believe are necessary if they want to survive the next decade and maintain some level of fiscal health.

• Move to a turnkey digital environment that places priority of digital rather than analog — Like newspaper and other publishing entities, textbook publishers have struggled with the simultaneous existence of highly-individual print products and templatized digital products and production. To date, companies have championed the print process with which they are familiar (analog), and simply added digital extensions to that process. This has provided them with digital products but not true digital processes. As a result, internal costs are too high and cannot be lowered without significant changes.
• Adopt common, open, and customizable product templates — Ask any textbook publisher and he or she will tell you that the value of his/her company is in its brand and content. And yet, extraordinary costs are driven by individual product (i.e. book) differentiation through unique layouts and cover designs. Like the newspaper conglomerates, textbook publishers must find greater efficiencies through less product individualization and smart templatization.
• Adopt open models of distribution — Another problem facing the textbook industry is that each company is trying to own or control their content as well as the means of production and distribution. This philosophy leads to a continuous churn and re-inventing of the wheel. In order to be successful, textbook companies need to focus more on partnership and existing models of distribution. Trying to control the channels has not worked for any company in the overall media industry and will not be a long-term solution for textbook publishers that thrive.
• Become dynamic instead of static in terms of product vision — Current textbook publisher models are built around the creation of content for print products. These models are generally two to three-year cycles and view content as static and fairly immutable. Moving forward, textbook companies will need to re-invent their processes and concepts of product with a focus on learning materials as dynamic constructs that can be revised and updated as needed and customized instantaneously based on consumer demand and community focus.
• Build real communities with customers — The current approach by textbook publishers is to drive textbook sales by focusing on committee adoptions at larger schools by selling and marketing aggressively and by signing up authors form those schools. In a nutshell, it’s about influencing individuals and it is an expensive process. Moving forward, textbook publishers would be well advised to start building real community partnerships with educational institutions across the board. To be clear, I’m not talking about lip service to partnership for the sake of closing a large adoption — I’m suggesting that textbook publishers form new kinds of partnerships with their users and communities that provide needed services and information, much like successful Web companies (including some newspaper and magazines) are starting to do.

The biggest challenge to effecting changes like the ones listed above is that tit would require textbook publishers to overhaul their accounting systems, sales organizations, and general company structures. Carol Bartz at Yahoo can probably tell us a thing or two about how difficult real company change can be. It certainly ain’t easy.

In the end, however, textbook publishers aren’t any different than other companies whose survival is challenged by the economic shift. The old way was destined to be replaced eventually. It just hapened sooner than folks thought it would. Now is definitely the time for change if companies want to be viable within ten ten years.

Source: Rob Reynolds

(This article was originally posted at Six Slides.com)

The WSJ ran an article Friday, detailing plans of a Hearst project to develop an electronic reader for newspapers and magazines. This news points to the evolving tension between form factor and content, and between free and premium e-content in the newspaper industry. More important, the Hearst project provides and outline for decision-making processes that are facing other publishers.

The Hearst announcement indicates an important trend as they represent one of the major owners and influencers of important newspapers and magazines. Their e-reader will be a handheld device that is designed specifically for their newspaper and magazine e-content. In contrast to Amazon’s Kindle or Sony’s Reader Digital Book, Hearst’s e-reader will have a larger form factor designed specifically for newspaper and magazine formats.

For Hearst, of course, the e-reader represents more than a fanciful foray into the digital product marketplace. Rather, it is s bold — if too late — attempt at reversing the fortunes of an industry whose processes and vision did not evolve with the times.

Like other newspaper owners who see their revenues dwindling, Hearst is hoping to find success with premium online content. The company wants to find the magic market coordinates where users will pay for some of its online content while continuing to offer the rest for free via the ad-supported model. The premium content model has been elusive for newspaper publishers thus far and Hearst must be hoping that the e-reader will give it an advantage.

The general problem in the newspaper industry is that subscription revenues have dropped precipitously while ad revenue has not increased enough to offset that loss. Making matters worse is that fact that the publishers have been forced to support both print and online news with 24/7 update expectations from their users.

Steven Swartz, the president of Hearst newspapers, puts it this way. “Our cost base is significantly out of line with the revenue available in our business today,” He goes on to add, “It is equally inescapable that during good times, our industry developed business practices that were, at best, inefficient.”

Of course, there is more at play here than a simple case of getting costs under control and finding a technological magic bullet. The newspaper industry is also beleaguered by some deep philosophical issues. Chief among these is its conundrum that the marketplace is demanding more community presence and a greater voice in the news process while the industry itself is founded on value through expertise. This is summed up quite succinctly in a headline from last Friday — “Facebook gets it. Bummer newspapers didn’t.”

I do believe, however, that the decision-making process Hearst seems to be going through is the right one — even if too late — and that other publishing entities can learn from it. The road from analog to digital in the content business has a common set of forking paths at which each company or organization must make decisions.

• Scarcity vs. abundance — When I was a kid I only had easy access to my local paper. Today, I have easy access to papers and other types of news sources all over the world. There is an abundance of information which means consumers can afford to be more demanding and more discerning with regards to what they are willing to pay for. In a world of information abundance, how do publishers manage the concept of value? Premium vs. public content — This is a case of the chicken and the egg for most publishers. If a company loses its reader base then its content has no value, regardless of how “premium” it may seen to be. On the other hand, if a company has no unique content or premium value, there is no differentiation from competitors. How much free content must companies provide in order to keep their readerships? What do they have by way of premium content that is valuable enough to get people to pay for it?
• Experts vs. community — Historically, publishing has been about the few providing an information or entertainment service to the many. Experts ply their craft for a wage so that the rest of us can have high-quality content. What happens, however, when the marketplace announces that it puts less value on expertise and increased value on community participation? What happens when the readership demands a place of the decision-making table?
• Singular, proprietary formats vs. common (open) templates — Hearst owns sixteen major newspapers and came to the realization that, while the differences between the newspapers weren’t that great, they had not been able to harness any efficiencies around that sameness. Is it possible to have a common design that lends itself to production efficiencies without lowering the perceived identities or value of the products?
• Closed delivery models vs. open distribution — At this juncture, Hearst is betting on the idea that a single form factor will help them find production efficiencies and drive the value of their premium content. This is contrasted with another prevailing philosophy that says the value of content is its availability anytime, anywhere, and in any form factor. A digital newspaper reader is cool but I don’t have to have one. I need my smartphone and notebook/netbook, however, and would rather not carry another device.

Certainly, here are other decisions that need to be made, and a number of lurking issues around cost to the marketplace and the fair treatment of content authors. Overall, however, the Hearst example provides a nice list of questions that must be answered for publisher to have any hope of managing successful transitions into the digital present/future.

Source: Rob Reynolds

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