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My numbers may be slightly out of date (please challenge if so) but currently only about 25% of enrolled students buy a new textbook each semester.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.

WH Smiths Interested in Borders

The Manchester Evening News is reporting that WH Smiths may be considering a bid for the UK operations of Borders which were placed on the block as part of the company's restructuring.

However, a bid from WH Smith could face a number of hurdles, including competition issues, with objections from the books industry and smaller retailers if a bid for Borders in the UK was successful. Borders employs around 2,000 people in the UK and operates 71 stores - consisting of 41 Borders stores, 27 Books etc stores and three Borders express sites.It is thought the sale could generate bids of around £50 million. WH Smith is estimated to hold a 16 per cent share of the British books market, while Borders' share is thought to stand at around seven per cent.

Smith's has also faced a tough retail environment over the past several years but under the direction of CEO Kate Swann the company has rebuilt their store merchandise and redesigned their stores to positive effect.

High Voltage: Australian Publishers Upset by A&R Policy

Angus & Robertson is one of the two largest booksellers in Australia. The company has a long tradition of retailing across the country and operates a combination of corporate owned and franchise stores. Until recently, the company was owned by WH Smiths who sold the company to a private equity group, Pacific Equity Partners. A&R, together with Dymocks the other major book retailer, has been mentioned as likely buyers of the Borders operations in Australia and New Zealand. PEP wants to build a larger retailer and take the company public within the next two years.

There is no current news about the Borders sale situation but A&R has stirred up some controversy in outlining their new vendor management policy. By the way, can you imagine anything (other than If I Did It) that the publishing industry could do that would land it on the national news over here? Reported in this story is A&R's new policy to have publisher's pay for shelf space if their unit sales aren't at a sufficient level to be self-sustaining.

Australian publishers are reeling, after being told one of the country's biggest bookstore chains won't stock their books, unless they pay up thousands of dollars within weeks.The publishers are calling it blackmail. The company, the old established Angus and Robertson, says it can't afford to stock books that don't generate enough profits.

According to Mary McCaskill, President of the Australian Publisher's Association, publishers there are reeling at this 'unprecedented' step by A&R. She suggests this is a classic supermarket tactic where suppliers pay up front for shelf space.

Michael Rakusin of Tower Books comments:

[The letter] arrived on my table on Friday afternoon, and it said, very simply, 'The amount of profit we make out of Tower Books has not been sufficient to justify keeping your books on our shelves. Here is an invoice for just slightly shy of $20,000. Please pay it by the 17th of August. If you don't pay it, we will have no choice but to de-register you as an authorised supplier.' In other words, we won't buy your books anymore.

Further arguments in opposition to the new A&R policy were the old chestnuts suggesting that A&R is anti-indigenous publishing, against the small guy and other pointless arguments. The company itself is not quoted in this report. Here and here are two blog articles about the same story.

In my old home town newspaper The Age (tomorrow) they quoted from the actual letter mailed to some 40% of A&R vendors:

A&R said more than 40 per cent of its suppliers fell "below our requirements in terms of profit earned" and A&R would be "rationalising our supplier numbers and setting a minimum earnings ratio of income to trade purchases". The letter demanded payment of a sum that "represents the gap for your business, and moves it from an unacceptable level of profitability, to above our minimum threshold". If the recipient failed to pay, it would be removed from A&R's supplier list.

Suggestions that award winning books from small publishers such as Carpenteria will be hard to find in A&R stores are inaccurate and belie the fact that A&R is saying that almost half their stock is loss making. Why doesn't this penetrate? Why is A&R obliged to carry this risk? Furthermore, doesn't the continuation of this loss making activity put the money making 60% at risk? I was once told by a director at a large UK retailer who told me that 40% of their vendors received less than three invoices per year with less than five titles per invoice. (Many with only one title and one invoice per year). It cost them £10 to process each invoice which far exceeded the margin on the sale of each book. Nutty.

UPDATE:

From BeattieBookBlog a long response from A&R General Manager Dave Fenlon that includes the following:

As a commercial business, we have the right to make decisions about which suppliers we do business with. In our negotiations with suppliers, we are the customer. Unfortunately we cannot work with every publisher in Australia, particularly if the relationship is not commercially viable for us.To give you some context, we currently have 1,200 suppliers to our business and have sent letters to 47 of those whom we hope to hold discussions with over the coming weeks. The payments we have requested from those suppliers represent a gap payment for profits that were lost or costs that were incurred as a result of our commercial relationship with those particular suppliers.We are trying to operate a successful bookstore chain and if we cannot strike a balance that allows us to maintain our retail operations, the impacts on the industry will be far greater if we are forced to close stores or drastically cut down titles.Again, let me assure you that this is not about penalising authors. It is about establishing commercial arrangements with our suppliers that are viable for both parties and that allow us to offer the best value to our customers.

Gervais On Art: New York Skyline with the Opening For Heros

This Ricky Gervais video is noted by Virginia Heffernan (happy birthday?) on the New York Times site today. It was shot for GQ and Details magazine. As she says, his stuff is set on a knife edge between hilarity and squeamishness (my word).

http://screens.blogs.nytimes.com/2007/08/08/ricky-gervais-the-has-been-who-still-is/

Harpercollins Reports Higher Revenues

Newscorp reported financial results for their fiscal 2007 (ending June 30th) and while understandably much of the conversation on their conference call related to Dow Jones there was not one reference to Harpercollins. (Transcript). At this stage it would be premature to read anything into this for a few reasons. Firstly, Harpercollins has done consistently well over the past several years. Revenues and profits are down recently but they are off the back of a few very strong years and in particular several strong titles. Secondly, there is a divestiture log-jam at NewsCorp as they look to sell Gemstar, some small TV stations and some of the community titles that came with Dow Jones.

Harpercollins reported revenues for the quarter of $295 million, a $39 million improvement over 2006. Full year revenues of $1,347 million were $35 million better than the prior year.

Operating Income results at Harpercollins were as follows from the press release:

HarperCollins reported fourth quarter operating income of $21 million, an improvement of $27 million versus the fourth quarter of fiscal 2006. Full year operating income of $159 million declined $8 million from prior year results that included strong sales of The Chronicles of Narnia by C.S. Lewis. Current quarter results were led by sales of The Dangerous Book for Boys by Conn and Hal Iggulden and The Reagan Diaries by Ronald Reagan. In addition to these titles, full year results included strong sales of Marley and Me by John Grogan, The Measure of a Man by Sidney Poitier and Michael Crichton's Next. During the fourth quarter, HarperCollins had 53 books on The New York Times bestseller list, including 8 titles that reached the number one spot, and for the full year HarperCollins had 128 books on The New York Times bestseller list, including 16 titles that reached the number one position.

Operating margin of 11.8% in 2007 declined almost 1 percentage point versus 2o06. No detail was given on the margin erosion.

PDF of the earnings report is here.

Librarything and MediaLabs

Librarything (which I have mentioned a few times) has teamed up with MediaLab the developers of the AquaBrowser faceted search tool. Via EoinPurcell.

Tim Spalding over at LibraryThing speaks highly of the Aquabrowser people and the new product:

AquaBrowser which makes one of the few really interesting online library catalogs, has teamed up with us to offer LibraryThing tags and recommendations within AquaBrowser. The product is called My Discoveries. Basically, it gives AquaBrowser a series of desirable social features, like tagging, list-making, ratings and reviews—and not in some half-assed way either. LibraryThing comes in as a way to kick off the tag data (a 21-million-tags kick) and to add recommendations to it. My Discovery customers who choose to go with LibraryThing data will be able to see both LibraryThing's as well as their own patron's efforts.

This is an interesting application using data gathered in a social network (that is for free) to create additional value in an application that is fee based. Nothing wrong with that. Since MediaLabs is owned by Bowker (and AquaBrowser was implemented in BooksinPrint under my watch) when will Librarything data be incorporated into BIP?

Amazon and Self-Publishing

Shelf Awareness had the following interesting blurb about an new Amazon.com initiative:

CreateSpace, which Amazon.com bought in 2005, has launched an online Books on Demand service and will not charge setup fees for those books--and at the same time is ending setup fees for its DVD and CD on demand services. CreateSpace on demand books will be displayed on Amazon as "in stock" and will be shipped within 24 hours. They are eligible for various Amazon programs, including Amazon Prime. Books are printed with full-color paperback covers and text may be printed in black-and-white or color and in multiple trim sizes. Authors may order copies at "competitive wholesale prices."In a statement, Amazon's senior v-p, North American retail, Jeff Wilke said, "The new CreateSpace Books on Demand service removes substantial economic barriers and makes it really easy for authors who want to self-publish their books and distribute them on Amazon.com."

It will be interesting to see what impact this initiative is going to have on the iUniverse, Exlibris, Author House and Lulu's of the self-publishing world. Of course, many self-publishers (and some may say authors generally) have grandiose notions about their sales chances and the direct connection to the biggest on-line book emporium may be a huge attraction. There is of course the virtual certainty that these books won't do any better than if published by Publish American: Will that become a customer service problem for Amazon.com?