Monday, August 13, 2007

Textbook Pricing: Any New Ideas?

In an op-ed piece for the New York Times this weekend Michael Granof proposes a subscription based financial model while debasing the recent Congressional "Advisory Committee on Student Financial Assistance."
Unfortunately though, the committee has proposed a remedy that would only worsen the problem. The committee’s report, released in May, mainly proposes strengthening the market for used textbooks — by encouraging college bookstores to guarantee that they will buy back textbooks, establishing online book swaps
among students and urging faculty to avoid switching textbooks from one semester to the next. The fatal flaw in that proposal (and similar ones made by many State Legislatures) is that used books are the cause of, not the cure for, high textbook prices.
His model is similar to the software license model and it is a model I have suggested is inevitable in educational publishing. Interestingly, all the major educational publishers are completely familiar and at ease with subscription models because they are used universally for their information products and in certain market segments.

The financial constraints are such that implementing a subscription model for educational texts is almost impossible to imagine unless, as the adage goes, 'they make it up in volume.' Just do the math: a $150 text book is now a five year subscription for $15 per year. So annual revenues are 1/10 of what they would be if the publisher is able to sell copies at 'full price.' As the publisher is able to progressively eliminate all second hand texts and the fee is made a requirement of each student in each class then perhaps by year five their income statements resemble those before the change. This is how Mr. Granof puts it:
Here’s how it would work: A teacher would pick a textbook, and the college would pay a negotiated fee to the publisher based on the number of students enrolled in the class. If there were 50 students in the class, for example, the fee might be $15 per student, or $750 for the semester. If the text were used for 10 semesters, the publisher would ultimately receive a total of $150 ($15 x 10) for each student enrolled in the course, or as much as $7,500.
My numbers may be slightly out of date (please challenge if so) but currently only about 25% of enrolled students buy a new textbook each semester. Something like 25% buy used and the rest get away with none. So if only 25% of the 50 students above by a $150 textbook that is $1,850 per class versus the one year $750 calculated above. So with the high price point but low penetration the publisher has no incentive to change to a subscription model. The potential benefit for publishers here could only be to their advantage if the sales penetration declines over time (perhaps first year they sell in 50% but as more copies are in circulation penetration of new titles drops significantly). But it does seem unlikely that the model would produce revenues at a similar level as currently enjoyed.

I may be missing something, but Mr Granof is also missing the intermediaries that are also making money both out of sales of new titles (wholesalers, bookstore) and sales of used titles. The used book market is a very large and profitable industry for the likes of Barnes & Noble and Follett. Both these companies manage college bookstores and run wholesale systems that buy used books at college stores, warehouse them and distribute them as needed. The sophisticated businesses generate significant profits and they would not be keen on a change in business model. So for now, there are too many disincentives for a change to happen. A more likely driver for business model change will be a change in the educational product itself and the way it is delivered. As there is a more discernable (and material) difference between the print and online product then the publishers may also experiment more with different price models.

1 comment:

Robert said...

Oh, one could write a book about this issue, and, someone has. Check out Books in the Digital Age: The Transformation of Academic and Higher Education Publishing in Britain and the United States by John B. Thompson, ISBN 0745634788