No one has dominated textbook publishing more than Paul Samuelson. The Massachusetts Institute of Technology economist, whose first edition of "Economics" reached students in 1948, was already deceased when his 19th edition landed in 2010. Long before then, though, America's most popular economist parsed the textbook business as deftly as his "Economics" presented Keynesian theory.
"Financially hitting the best-seller jackpot is of course luck like no other," Samuelson said on the occasion of "Economics" being in print for an improbable half-century. "Students do not buy books; they are captive slaves of their instructors. Fiction and nonfiction works usually have their single year of glory. A lucky textbook, however, can go on for a long, long time."
If Samuelson's textbook was lucky, it was luck by design. As University of Virginia economics professor Kenneth G. Elzinga noted in his presidential address at the 61st annual meeting of the Southern Economic Association, a speech so incisive the Southern Economic Journal saw fit to publish it in April 1992, Samuelson succeeded because he introduced new principles (Keynesian) and a new emphasis (macroeconomics) to students.
But he got lucky, if that's the word for it, because he foisted a new prototype on publishers. "At the time," Elzinga said in his speech, "a short-term, regular cycle of revisions was almost unknown among textbooks."
Then Samuelson came along and plied his publisher, McGraw-Hill Cos., with triennial updates. Although his motivations were pure -- he wanted to incorporate fresh developments into economics curriculum -- the practice was also extremely profitable. "By the mid-1970s, the three-year cycle had a second rationale," Elzinga explained. "It lessened competition from the used-book market, a feature not overlooked by publisher and author alike."
And so it began: With that one last embellishment, with the Samuelson cycle laying waste to entire inventories of available and resalable product, textbook publishing entered its golden age.
Not for nothing has little happened since Samuelson reshaped the textbook business. Being able to remove recyclable product ensured a commitment to the status quo. Being able to jack up prices as well -- at a pace matched only by Big Pharma -- made that commitment even stronger. The unmitigated price hikes for textbooks, which long ago rendered them the largest student expense after tuition and room and board, are the byproduct of a little-understood imbalance between supply and demand. As the University of Michigan Library put it in "The Investigation into the Rising Cost of Textbooks," a report released by its Scholarly Publishing Office in April 2009, "The textbook market is remarkable in that the primary individuals who choose college textbooks, faculty, are not the people that pay for those textbooks, namely students."
As such, the report continues, the market parallels the one for prescription drugs, "where prices have also risen rapidly, and where doctors prescribe expensive drugs while it is the patients who actually pay for them."
Why, then, would textbook publishers ever embrace change? Why would they spoil a setup that allows them to exploit a supply-demand imbalance that economists call a moral hazard: an asymmetric situation where, in the case at hand, faculties that dictate what their students must buy are insulated from what those students must pay?
The numbers do, in fact, document the most intransigent industry in all of media. On Oct. 13, during a bank-sponsored conference, industry player Cengage Learning Inc. presented data that credits print-only products with 85%, or $7.3 billion, of the domestic market for course materials used by higher education. What Cengage calls valued-added digital solutions, meaning a print textbook combined with some sort of digital product, remain a distant second, with 11%, or $900 million, of the market. And textbooks converted to PDF format, otherwise known as e-texts, are much further back, with only 3%, or $200 million, of the market.
Given the demographic group behind the numbers -- laptop-toting, smartphone-wielding college kids, most of whom weren't even born when analog reigned -- the lack of digital adoption indicated by Cengage's market breakdown defies reason. Yet by no stretch should it be construed to mean that textbook publishers are home free, that they can defer forever the media disruption that has shaken their counterparts at magazine, newspaper and music companies. Indeed, an often-cited white paper released in March by educational consultancy Xplana contends a revolution in the medium is already under way.
"The tipping point for digital textbooks is defined as that point on the industry/product continuum at which current financial variables and market factors make the eventual dominance of digital over print an inevitable outcome within 5-to-7 years," the white paper begins. "It is our argument in this report that the higher education textbook industry in the U.S. is now at that tipping point."
Xplana's prediction of digital dominance acknowledges the industry's moral hazards by observing "the traditional textbook adoption process removes the student as an actual decision-maker." But the consultancy also recognizes that developments ranging from the iPad to Inkling Systems Inc. (a startup devoted to making the iPad the textbook of the future) are tilting the balance of power. Faculties still pick the titles, to be sure, but students are increasingly free to select the formats in which those titles are purchased and displayed. And it's the view of Xplana and others that this freedom -- student options to buy or to rent textbooks, in new or used versions, in print, digital or hybrid formats -- will put the entire industry in play.
The anticipated upheaval in a domestic market that Cengage defines as narrowly worth $7 billion (course materials used by higher education) and broadly worth $461 billion (all products and services outsourced by higher education) has an understandable capacity to excite. High-tech behemoths such as Amazon.com Inc., Apple Inc. and Google Inc. continue to cast about for ways to participate in textbook publishing's paradigm shift. Even News Corp., despite being side-tracked by a phone-hacking scandal, has former New York City schools Chancellor Joel Klein seeking a beachhead in what the announcement of his executive vice president appointment calls "the emerging educational marketplace." Then, too, there's a slew of startups on the order of iPad-dedicated Inkling, whose founder and CEO Matt MacInnis spent eight years at Apple, most recently atop its international-education market development group.
All these and others will compete and collaborate with the textbook-publishing firmament, which consists of publicly traded entities London-based Pearson plc, New York-based McGraw-Hill and Hoboken, N.J.-based John Wiley & Sons Inc., as well as London-based and privately held Macmillan Publishers Ltd. and Stamford, Conn.-based and private equity-owned Cengage, which after being spun out of Canadian publishing giant Thomson Corp. and renamed in 2007 acquired Houghton Mifflin Harcourt Publishing Co.'s college division in 2008. That McGraw-Hill recently committed itself to separating its education unit from its markets unit, with company chairman, president and CEO Terry McGraw III abandoning the former to lead the latter, signals major change in the firmament itself.
The outcome will be a dizzying array of enemies and alliances (McGraw-Hill and Pearson are already investors in two-year-old Inkling, for example) of a complexity not seen since keiretsu characterized business in postwar Japan. Still, before the dust settles and in some cases before it even rises, the business needs an accurate read on textbook rentals. It needs to figure out where this relatively recent market entrant, whose Internet-enabled product category is neither new books nor used books but something in between, fits into the scheme of things. And it specifically needs to know what game changers such as Chegg Inc., the No. 1 online textbook rental company, are doing to industry dynamics.
"We're the student advocate," says Dan Rosensweig, president and CEO of Chegg. "We're just trying to build an environment where students who are trying to get smarter can save time and money and get everything they want. We're also agnostic, so it doesn't matter to us if they rent or they buy, if the product's in print or an e-book."
Although Rosensweig's synopsis sounds altruistic, it has demonstrated itself to be one kick-ass business model. In a mere eight years, Chegg has gained such prominence as a textbook renter that a research analyst who asks for anonymity likens the Santa Clara, Calif.-based company to an arms merchant. "They're already big enough and credible enough that everybody in the business has to deal with them," he says. "They're usurping a lot of marketplace economics, too."
Not bad for a startup that named itself, in a short-handed way, after the frustration college graduates often feel on seeking employment: the "chicken and egg" predicament of needing experience to obtain a job while simultaneously needing a job to obtain the experience. More impressive still is that Chegg, as currently configured, didn't really take flight until 2007. That's when the company traded in a panoramic-focused Craigslist model, as repurposed for college websites, for a tightly focused Netflix Inc. model, as repurposed for college textbooks. The former sought revenue from advertising; the latter immersed the company in all facets of e-commerce.
Chegg today acquires the textbooks it mails to its online customers from virtually every quarter: wholesalers, used-book dealers, online sellers like Amazon and directly from the Big Five publishers. Early on, though, it would fulfill an incoming order by surfing the Internet for a cheap copy of the book to be rented, then buy it for itself by putting the charge on a co-founder's American Express card. Lore has it that business took off so quickly under the new Netflix model that American Express, sensing the traffic spike had to be fraudulent, threatened to suspend the co-founder's account.
Rosensweig wasn't there for the Netflix-model transition -- he joined in February 2010, coming from the top of Activision Blizzard Inc. after serving Yahoo! Inc. early last decade as COO -- but he's not surprised by its success. "It's obvious we tapped into a lot of pent-up demand by students and their families in need of help getting educational materials easily, cheaply and without friction," he says of Chegg's push not only into textbook renting but later into areas of merchandising that college bookstores, before streamlining their services in response to draconian cutbacks, used to provide. "Nobody out there was doing that." Then, after noting Chegg has built relationships with close to 25% of U.S. students in higher education, Rosensweig claims he hasn't a clue as to how big his company can get.
Privately held Chegg doesn't divulge financials, but press accounts report its revenue of $25 million in 2009 jumped to $130 million in 2010. Moreover, based on the 20% market share that Cengage currently attributes to the rental market, Chegg and rent rivals such as BookRenter.com Inc. stand to divvy up a projected $2 billion in 2011. There's plenty of headroom, too. On Sept. 23, during an investor call, Cengage predicted textbook rentals would reach a market saturation point of 25% in the summer of 2012. That alone suggests textbook renters stand to reap a collective $500 million in additional revenue next year.
Some analysts, however, wonder if the saturation point predicted by Cengage isn't arbitrary. Even if they agree with Cengage CEO Ron Dunn that only half of the company's title list is suitable for rental, as he said during the investor call, and even if they appreciate that the rental market must replenish its own inventory with new books, they don't all agree that rental's share must stop at 25%. Dunn himself may have confused the issue when, during the same investor call, he professed ignorance about the degree to which Cengage is feeding the rental channel.
"When we sell a book to a distributor, and they sell it on to someone else, they can actually do anything with that book they wish," he said, citing the same first-sale doctrine that allows Netflix, say, to rent as many DVDs it legally obtains without permission from the seller. "Some of them they sell, some of them they rent. So we really don't know what the split is between those."
That split is not without consequences, however. A textbook that goes to the rental side takes the primary customer relationship with it. And in a digital world, Rosensweig says, "the best thing is a direct relationship with the customer." Chegg, for instance, is there not only when customers want to rent a textbook but when they want to return it or sell it or stock up on rentals for the next semester. It's also there to answer questions, make recommendations, provide course reviews and offer different prices for different formats. The relationship is such that Chegg's customers admit that, without the option of renting, 19% of the textbooks they order would not have been obtained any other way.
Although each major textbook publisher might covet the same primary customer relationship, the fact that there are five of them already has them at a disadvantage. It's analogous to directing online buyers of music to the individual sites of the four major labels rather than to a single site like iTunes. "You logically need a good front-end delivery system," Rosensweig says of a market still undergoing consolidation. "And that's what we are. We work with publishers to help students understand all the content that's available around their subjects -- not just what's required but everything else useful to their studies."
That Chegg works with publishers reduces the traditional textbook distribution chain of publisher-wholesaler-bookstore-student by one margin-demanding middleman. Renting rather than buying takes even more out of the student's cost, as evidenced by the price points for the current edition of the textbook that finally supplanted Samuelson's tome, which is also entitled "Economics" but is written by Sean Masaki Flynn, Campbell R. McConnell and Stanley L. Brue. The price new from Barnes & Noble is $173.25; on Amazon Kindle, $135.27; and rented through Dec. 23 from Chegg, $90.49. So while it took Internet efficiencies for the textbook rental market to arrive, Chegg's nearly 50% discount suggests only a purely digitized alternative is capable of making it go away.
The opening entry on the corporate blog of San Francisco-based Inkling has the headline: "The Death of Textbooks, the Dawn of Learning." Few doubt that, ultimately, it will prove half right. For now, though, Inkling and its ilk are positioning themselves as publishing's best friend. They're taking traditional textbooks and not just transforming them into e-texts but adding the bells and whistles necessary to make them engaging, interactive and affordable when purchased by the chapter. When they reveal themselves to textbook publishing's Big Five as a Trojan horse is anybody's guess, but it shouldn't come as a surprise.
The research analyst who requests anonymity envisions textbook publishing's belated disruption to work itself out within the decade. A lot depends, he says, on how ambitious and aggressive the next crop of professors proves itself to be. After all, they don't just assign content to students. They also create it. And while a publishing oligarchy currently stands between them and the students who purchase textbooks, behemoths such as Amazon, Apple and Google, in addition to startups like Inkling, will some day be in position to facilitate an end run. They'll create that purely digitized alternative capable of making even the textbook rental market go away.
It is an intriguing concept whose execution is inevitable. Yet it raises questions for everyone in and around textbook publishing -- not least of which is how much would Samuelson then have made?