Thad McIlroy - The Future of Publishing

The Future of Educational Publishing

1. The formal institutions of education are amongst the largest consumers of published materials. Without them book publishing would be a very different business.

2. Most educational institutions still rely heavily on printed publications as integral to the process of learning. Very heavily! The combined print publishing business for the education industry is worth in the range of $20 billion per year in North America.

3. At the same time, many of these same institutions are in the vanguard of experimenting with and implementing new forms of published material in their practices. Some of these materials still involve print; many are electronic. Furthermore many of these institutions are experimenting with the fascinating possibilities of supplementing printed materials with electronic content. For a short time this content was on CD-ROM. Increasingly it is solely online. (A book I recently purchased from O'Reilly has a notice on the inside back cover "There's no CD-ROM with this book: you just saved $5.00." Instead there's a URL offering all of the required supplemental material online.)

4. The institutions of education are under ever-increasing pressure to change the ways they publish for students, in part because of costs related directly to the "extras" included with textbooks, which their publishers insist justify are essential to the pedagogy and the additional charges. This argument is now largely rejected by both the educational institutions themselves, and by the government and NGO agencies that monitor these practices. The consensus is decidedly not in favor of the publishers.

5. While the pressures on educational publishing are not strictly analogous with the pressures felt by all types of publishers, understanding these issues and their outcomes is illuminating and important.

Page Index

• Overview of Educational Publishing
• The Textbook Industry
• Marketing Textbooks
• The GAO’s Hot Potato
• “Enhanced Offerings Appear to Drive Recent Price Increases”
• The Revision Cycle
• Customized Textbooks
• The Economics of Textbook Publishing
  

Overview of Educational Publishing

The Textbook Industry

The North American textbook industry is in the midst of an unprecedented crisis. The signs are everywhere. Perhaps the only group that appears to offer little credence to the crisis is the industry itself.

The major issue is the high cost of textbooks, mainly those used in higher education, where students must shell-out the cost directly, estimated, on average, at over $900 per year.

The cost of textbooks was never dirt-cheap, but the last several years have seen the price of many texts climb to $150 or more. Suddenly a range of individuals and groups are taking notice.

If the complaints were limited to a few articles in USA Today and Reader’s Digest , there would perhaps be little to worry about. But, unfortunately for college textbook publishers, the “problem” has reached the highest levels of both state governments and the Federal government. Now it’s impossible to ignore.

According to an August 28, 2007 report by Pauline Vu in Stateline.org “This year – when students at four-year public universities spent an average of $942 on books and supplies, the College Board reported – there were 86 bills in 27 states (emphasis mine) that dealt with textbook affordability, according to the National Association of College Stores (NACS).

“Some of the bills proposed direct relief through sales-tax exemptions or credits and deductions, but the seven states that enacted laws – Arkansas, Maryland, Minnesota, Oklahoma, Oregon, Tennessee and Washington – largely targeted the behavior of publishers and college faculty. They follow the lead of Connecticut and Virginia, which in the last two years passed bills to cut textbook costs.”

Marketing Textbooks

A core aspect of the textbook industry is highlighted in a 1996 report by Dr. James Koch, An Economic Analysis of Textbook Pricing and Textbook Markets . As Dr. Koch notes: “The textbook market is remarkable because the primary individuals who choose college textbooks (faculty) are not the people that pay for those textbooks (students). Only a few other organized markets in the United States are similar in this regard. A comparable situation exists in medicine where doctors prescribe drugs for their patients, but do not pay for those drugs.

“Analogous to the market for prescription drugs where prices have risen rapidly, in the market for textbooks the separation of textbook choice and textbook payment profoundly influences pricing. Albeit for primarily good purpose, students end up being coerced to pay for someone else’s choices. This tends to make their textbook purchases less responsive to price increases than their purchases of items such as cheeseburgers and jeans.”

The textbook publishing industry is also very concentrated. As the GAO report referred to below states: “While there are hundreds of college textbook publishers, there has been substantial industry consolidation in recent years, with sales at five of the largest publishers representing over 80 percent of the market in 2004.” (And the concentration continues.)

At the same time, if there were no alternatives available to 1,000-page hardcover books, critics might find their hands tied. But the explosive growth of much lower cost (and arguably more effective) digital learning tools changes the perspective on the problem. The question can now be legitimately posed: is a student better served by a $100 three-year-old book, dense with text, than by a low-cost interactive Web-based curriculum? The question does not suggest a black-and white answer, but by raising the doubt, the pricing of textbooks is made ever the more subject to challenge.

The GAO’s Hot Potato

In July, 2005, the United States Government Accountability Office (GAO) published a 51-page report called College Textbooks: Enhanced Offerings Appear to Drive Recent Price Increases .

In its introduction to the study, the GAO stated that “The federal government strives to make postsecondary education accessible and affordable, primarily by providing financial aid to students and their families. Given that nearly half of undergraduates receive federal financial aid, Congress is interested in the overall cost of attendance, including the cost of textbooks. We were asked to determine (1) what has been the change in textbook prices, (2) what factors have contributed to changes in textbook prices, and (3) what factors explain why a given U.S. textbook may retail outside the United States for a different price.”

The introduction to the report is headlined:

“Enhanced Offerings Appear to Drive Recent Price Increases”

The text continues: “In the last two decades, college textbook prices have increased at twice the rate of inflation but have followed close behind tuition increases. Increasing at an average of 6 percent per year, textbook prices nearly tripled from December 1986 to December 2004, while tuition and fees increased by 240 percent and overall inflation was 72 percent. The cost of textbooks as well as supplies as a percentage of tuition and fees varies for first-time, full-time, degree-seeking students by the type of institution attended—72 percent at 2-year public institutions, 26 percent at 4-year public institutions, and 8 percent for 4-year private institutions.

Annual Percentage Increase in College Textbook Prices, College Tuition and Fees,
and Overall Price Inflation, December 1986 to December 2004

“While many factors affect textbook pricing, the increasing costs associated with developing products designed to accompany textbooks, such as CD-ROMs and other instructional supplements, best explain price increases in recent years. Publishers say they have increased investments in developing supplements in response to demand from instructors. Wholesalers, retailers, and others expressed concern that the proliferation of supplements and more frequent revisions might unnecessarily increase costs to students.

“U.S. college textbook prices may exceed prices in other countries because prices reflect market conditions found in each country, such as the willingness and ability of students to purchase the textbook. While geographical barriers have historically limited the reentry of textbooks intended for international distribution back into the United States, known as reimportation, recent advances in electronic commerce have broken down this barrier. In response to concerns that the international availability of less expensive textbooks might negatively affect textbook sales, publishers have taken steps to limit large-scale textbook reimportation.”

A much more recent report to Congress from Advisory Committee on Student Financial Assistance, Turn The Page: Making College Textbooks More Affordable (May, 2007) points to the heart of the matter: “Even after accounting for total grant aid, textbooks and other learning materials appear to be unaffordable for students from low- and moderate-income families at both two- and four-year public colleges.”

The Revision Cycle

According to the GAO report, “Publishers agreed that the revision cycle for many books has accelerated over time, but most said that it has been stable in recent years. While textbook revision cycles can vary based on several factors, such as the level of the course and the discipline, publishers told us that textbooks are generally revised every 3 to 4 years, compared with cycles of 4 to 5 years that were standard 10 to 20 years ago. Publishers say that the revision cycle is driven by instructors who want the most current material and may seek products from competitors if they are unable to meet the demand. Publishers cited a recent poll of 1,029 college professors commissioned by the Association of American Publishers that found that 80 percent of those polled think it is important that the material in the textbook be as current as possible. However, this may not be universal across disciplines. For example, over 700 mathematics and physics instructors from 150 universities across the country have petitioned one publisher to delay revisions until there have been substantial changes in content or teaching methods that merit revision.”

Customized Textbooks

While still a small part of the overall textbook market, the larger textbook publishers, in particular, are putting a lot of effort into encouraging professors to create custom textbooks for their courses. This is probably the fastest-growing (and significantly profitable) segment of the college textbook market.

As with all issues related to textbooks, there are perhaps as many drawbacks as there are advantages. In its May, 2007 report to Congress, the Advisory Committee on Student Financial Assistance (referred to above), points to the key advantage of custom textbooks: “Eliminating portions of books that will not be used allows publishers to sell custom textbooks for lower prices. Faculty enjoys the ability to select the exact materials needed and students appreciate paying only for what will be used.” However, as the same report points out, “Drawbacks to custom textbooks include the fact that they have little or no buy-back value and that such books can only be created currently from the materials of one publisher, rather than from multiple publishers.”

Being able to draw from only a single publisher’s content is perhaps the largest drawback in custom publishing. While certainly there is a benefit in reducing costs by drawing solely upon the content that will be used in a course, it’s not realistic to imagine that any single publisher offers all of the best content on a given subject. Until publishers find a method to license content to one another, the custom textbook will frequently be hobbled by the quality of its content. Once again the publisher is arguably the greater beneficiary of this practice than the student. (Examples of custom publishing sites are offered in the References portion of this section.)

The Economics of Textbook Publishing

As the illustration above shows, the high cost of textbooks is not to be blamed on publishers’ after-tax income. At 7% of retail, this is surely not exorbitant. Nor are the retailers to blame. With freight costs included, their take is less than 25% on the dollar. Authors are rewarded with 11.6% of the retail cost, again hardly out of line with industry practice.

The real question lies in the publishers’ marketing costs, just over 15% of the total price, and their editorial and manufacturing costs, at 32% of the total.

From a marketing perspective, the textbook publishing industry once again bears a resemblance to the pharmaceutical industry. Exact comparisons are difficult, because the pharmaceutical industry lumps marketing costs in with administration costs – the better with which to obfuscate, my dear – however the two together amount to roughly 35% of sales. Drug manufacturers now have the added cost and benefit of having been permitted to send out their confusing and frightening messaging directly to consumers, adding greatly to their marketing costs. Textbooks publishers are free to do the same, but don’t bother – it would be a most unusual professor who would adopt a text at the suggestion of his or her students.

A 2003 article in the HEC Forum indicates that pharmaceutical companies combined spend roughly “$13,000 per physician per year,” in direct marketing activities. This bears an uncanny relationship to the methods the large textbook publishers use to market their product directly to professors. It is indeed their primary marketing method.

Publishers spend but a fraction of these dollars on marketing, and while 15% of retail may seem high, it’s difficult to imagine how the figure can be significantly reduced is such a competitive marketplace.

All textbook publishers have embarked on the continuing quest to drive down manufacturing costs. As the industry has become increasingly concentrated, the five largest publishers are able to use their clout to get favorable pricing on composition (typesetting), paper and printing. There is probably another 3-4% that can be driven out of manufacturing costs using the latest technologies and the toughest bargaining processes, but this would not greatly impact retail pricing.

Editorial remains mostly untouchable at large textbook publishers. It is the equivalent of R&D in the drug industry. Because editors have primary responsibility for new product development, their business practices have historically remained largely unchallenged. Certainly new technologies could reduce editorial costs to some extent, but these would never bring a $150 textbook down to a $99 retail price.

Not to be forgotten is the many ancillary products that publishers now customarily offer in conjunction with the primary text, everything from printed student and teacher supplements to elaborate electronic (primarily online) adjuncts. The student and teacher supplements are of long-standing and well-established value; the electronic adjuncts far less so. These adjuncts exist arguably because one publisher started offering them, and soon it became standard practice strictly on a completive basis. A survey by MassPIRG, the Massachusetts branch of the national Public Interest Research Group (Rip-Off 101 , 2nd Edition, 2005), reported that half of 287 surveyed professors said they never used the additional material. The cost of developing these materials is substantial, but it will be difficult to force publishers to abandon such offerings.