NY Times says textbook publishers are like drug companies: (Prozac with your Proust?)

Another article in the continuing odyssey of the nefarious publishing industry appears in today’s New York Times. It contains the usual litany of egregious behavior by the textbook oligarchy: double-digit price increases, crippled digital versions padded with empty caloric content, under-the table-kickbacks to faculty members, etc. But it also charges that the publishers are similar to drug companies in that they both benefit from the so-called “moral hazard” problem, as explained by Cal Tech economist and open source microeconomics textbook author R. Preston McAfee:

that is, the doctor who prescribes medication and the professor who requires a textbook don’t have to bear the cost and thus usually don’t think twice about it. “The person who pays for the book, the parent or the student, doesn’t choose it,” he said. “There is this sort of creep. It’s always O.K. to add $5.”

Hmm… Maybe MacMillan could throw in a free prescription for a semester’s supply of Paxil. Having been back on campus for a few weeks now and having to deal with higher tuition and outrageous textbook prices, the class of 2012 is coming to the painful realization that they can barely afford their case of Heineken, their daily Starbucks double iced frappacino, and their music downloads (oh, I forgot – they get that last one for free.)

Professor McAfee adds one more comment:

“This market is not working very well — except for the shareholders in the textbook publishers,” he said. “We have lots of knowledge, but we are not getting it out.”

This is a true but incomplete statement, at least as quoted in the article. It is accurate to point to the increasing returns to shareholders, although it is becoming increasingly difficult to track this data as the trend towards consolidation and private equity in the publishing field removes the need for public disclosure:

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.

There is little doubt that the M&A activity has resulted in the remaining publishers adding staggering amounts of debt to their balance sheets. A consequence of this new economic reality is a shift in attention from textbooks to those other books that the company produces: the ones that deal with assets, liabilities and net income. Accountants tend to focus on different assets than editorial directors do.

But another party is apparently complicit in this cozy arrangement of uncontrolled textbook price increases, according to a 2006 study by Dr. James Koch called

An Economic Analysis of Textbook Pricing and Textbook Markets.

Yet another distinctive characteristic of textbook markets is that nearly
every institution of higher education has a financial stake in higher
textbook prices.  With a few exceptions, noted below, institutions of
higher education either own and operate their own bookstores, or they
contract that responsibility to an external vendor such as Follett or Barnes
and Noble, in which case they usually receive a lump-sum payment plus a
percentage of dollar value of sales at contracted on-campus stores.

What this market structure leads to is ever increasing pressure on the producers to raise prices, which works well for as long as there are few supply alternatives for the consumers (students). As thought leaders such as Preston McAfee, enabled by disruptive innovators like Lulu and Flatworld Knowledge, (which I have blogged about frequently this year) begin to offer a viable alternative to the two extremes currently faced by most students – price gouging or illegal file sharing sites – the publishing cartel may soon find itself cozying up to the drug makers, if only to get their own supply of Prozac.

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PIRG claims e-textbooks are due for “Course Correction”

In a stinging critique of its recent foray into the field of digital textbooks, the publishing industry was taken to task in a report released this week  by the Student Public Interest Research Group. The study, entitled, “Course Correction: How Digital Textbooks Are Off Track, and How to Set Them Straight”, outlines the findings of a survey conducted on two different college campuses last spring, and presents the following findings:

1. Digital textbooks must meet three criteria – affordable, printable and accessible:

In order to be a solution to high costs, digital textbooks must cost less than traditional books. That means digital textbooks must be priced lower than the net cost of buying a textbook – the purchase price minus the amount the student can expect to receive for selling it back to the bookstore.

2. Digital textbooks done wrong: e-textbooks fail to meet the criteria:

The first type of digital text we reviewed was e-textbooks, the digital book format offered by the major publishers through CourseSmart.  We found that they fall short on each of the three criteria we found digital textbooks must meet.

E-textbooks are too expensive
* The e-textbooks we surveyed cost on average exactly the same as a new hard copy of the same title bought and sold back to the bookstore.
* The e-textbooks we surveyed cost on average 39% more than a used hard copy of the same title bought and sold back online.

Printing is costly and difficult
* Printing was limited to 10 pages per session for each of the e-textbooks we surveyed.
* Buying and printing half of an e-textbook was three times the cost of buying a used hard copy and selling it back to the bookstore, for the books we surveyed.

E-textbooks are difficult to access
* Students have to choose between using the book online or using it offline – they cannot do both.
* Most (75%) of the e-textbooks we surveyed expired after 180 days, so students do not have the option to access their books in the future.

3. Digital textbooks done right: open textbooks meet all of the criteria

Open textbooks are textbooks distributed free digitally under an open license.  The key feature of an open license is that it permits users to make copies of the textbook and translate it into different formats.  So, open textbooks start as digital textbooks but can be printed in a variety of formats. We found that open textbooks accomplish what e-textbooks do not: low prices, printing options and accessibility.

Open textbooks are affordable. Open textbooks are free digitally, and students can purchase other formats at a low cost.

Open textbooks are easy and inexpensive to print. Students can print digital textbooks anytime, anywhere and in a variety of formats.  They can print individual pages at home, order a print-on-demand bound copy, or anything in between.

Open textbooks are accessible. Students can access open textbooks anytime, from any computer, without the book expiring.

The authors of the study urge faculty and institutions to do everything they can to encourage adoption of open textbooks:

For faculty, this means giving preference to open textbooks whenever pedagogically appropriate.  For institutions, this means providing incentives to faculty authors and pooling resources to develop a viable infrastructure to support open textbooks.

This report seems to be getting noticed, as it’s been quoted by most of the major tech and publishing blogs. If nothing else, it will most likely lead to a spike in hits on a couple of sites: Coursesmart (which PIRG ranks slightly below the IRS in its contribution to society), and on Flatworld Knowledge, which receives high praise for its approach to open textbooks. (Another site Connexions, offers open source educational content as well.) There will also quite possibly be a lot more traffic to file sharing sites like Textbook Torrents, which didn’t let pesky conventions such as copyright laws interfere with its users’ access to every textbook that has been scanned and uploaded by disgruntled students. (Although the site is currently not accepting any more registrations, which suggests that their legal bills may be exceeding their server costs.)

As the report indicates, the textbook publishing industry is overdue for change. But for some insight into some factors that might keep the business from changing as quickly as the technology is, it’s worth reading a column posted by a writer with impressive credentials, as an author, college professor, and a publishing executive. His post is called Why the Kindle Won’t Have a Dramatic Impact on College Course Materials for at least Five Years and although it focuses largely on the barriers to the adoption of the Kindle in the college market, it provides a cogent and laconic account of the economics of the textbook publishing industry. Among his observations:

  • 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.
  • 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.

One could surmise that the same might be said for ebooks in general, not only Kindle versions. Until the design and workflow process undergoes a radical transformation, thus reducing the cost curve by an order of magnitude, traditional publishers will not be in a position to offer their content in an open (free or nearly so) model. This is a clear symptom of an industry about to undergo a stage of disintermediation, which is usually accompanied by major sell-offs of assets, restructuring and layoffs of thousands of managers and editors. It may take a decade or so, but eventually the textbook industry may consist of hundreds of small, specialized content producers, and a handful of POD providers. Instead of going to Barnes & Noble to buy their textbooks, the freshmen of 2015 may be stopping by Kinko’s.