From the issue dated November 26, 2004

A New Model for Textbook Pricing


I am the author of Government and Not-for-Profit Accounting: Concepts and Practices, a textbook that retails for $122.95, about 17 cents per page. By contrast, John Grisham's latest best-selling trade book, The Last Juror, sells on Amazon for $19.01, only 5 cents per page. Although I might like to think that my book is many times more entertaining and enlightening than the legal thriller, my students and their parents will continue to cite the price differential as further evidence that textbook publishers and college bookstores are ripping them off.

Protest has reached the nation's capital as well as the legislatures of several states. Sen. Charles E. Schumer, of New York, has proposed permitting college students and their parents to deduct from their taxable income up to $1,000 of college textbook costs. That would be in addition to other education-related deductions and tax credits. "After they pay the tuition, parents and students are getting slapped with shocking costs for textbooks in class after class, at school after school," Schumer said in a news release. Schumer also urged the Department of Education to find ways to lower textbook prices. Among his suggestions was guarding "against professors who take advantage of students by assigning books they wrote," and updating textbooks with supplements rather than by publishing new editions.

Rep. David Wu, of Oregon, introduced a bill that would require the General Accounting Office to investigate the high prices of college textbooks.

California Assemblywoman Carol Liu championed a bill fashioned by the California Public Interest Research Group. It charges in its preamble that textbook publishers add "bells and whistles" that 65 percent of faculty members don't use. The bill urges publishers to take a number of steps to hold down costs, including unbundling ancillary materials such as CD-ROM's and workbooks, disclosing how new editions differ from old, and encouraging faculty members to adopt the cheapest textbook that is pedagogically sound.

Legislatures in Illinois, Michigan, New Jersey, and Washington are considering measures that would exempt textbooks from sales taxes. In Georgia, legislation has been proposed that would limit the bookstores of state colleges and universities from selling textbooks at markups of more than 15 percent. That proposal is particularly misguided because college bookstores can hardly be accused of profiteering. The markup on new books is generally 25 percent. Some stores, like that at my own university, offer a 10-percent patronage rebate to students who submit sales receipts at year's end. Hence the net margin is only 15 percent. By contrast, the markup on clothing and souvenirs at campus stores typically runs between 35 percent and 50 percent. In fact, the number of independent campus bookstores, especially on larger campuses, is shrinking. Many campus stores are owned or managed by large chains, such as Barnes & Noble, Follett, and the Nebraska Book Company. Indeed, even the venerable Harvard Coop is managed by Barnes & Noble.According to the National Association of College Stores, between 1992 and 2004 the number of college stores operated under contract by major chains increased by almost 90 percent, from 743 to 1,409.

Students and their parents and legislators have a legitimate complaint. Textbooks are overpriced. But the causes aren't price gouging by bookstores, unscrupulous professors who force students to buy the texts they wrote, unnecessary and too-frequent revisions, or bundled supplementary materials. Those are all symptoms, not the disease.

Textbooks are overpriced because they are still marketed the old-fashioned way, as if they were the same as trade books. They are not. Other than physical form, the two share little common economic ground. Moreover, the cure is neither tax breaks, nor government-mandated price controls, nor limitations on publishers, but rather a new way of selling textbooks, one that distinguishes between physical form and intellectual content.

Textbooks differ from trade books in at least two significant ways. First, whereas the purchasers of The Last Juror actually make the decision to buy, the customers for Government and Not-for-Profit Accounting are required to do so by their instructors. To be sure, some instructors take price into account when adopting a textbook. But most, I suspect, have no idea what their assigned course materials cost. Therefore, the traditional obstacles to price increases -- customer knowledge and resistance -- are largely nonexistent.

Second, unlike the students who are required to purchase Government and Not-for-Profit Accounting, most owners of The Last Juror will keep their copies; only a small (though increasing) percentage of trade-book owners will sell them to second-hand book dealers. For textbooks, on the other hand, there is an extraordinarily well-organized and active used-book market -- a market that, oddly enough, contributes to price inflation.

When a textbook is first published, almost all students will purchase a new copy, paying full retail price. At the end of the semester, they will sell their books back to their college bookstore for 50 percent of retail. The bookstore will, in turn, resell the book for 75 percent of the original price. The same copy of the text will be bought and sold at those prices until the publisher issues a new edition and the last buyer is stuck with it.

As a consequence of this used-book market, a textbook publisher sells most copies of a book the first semester after it is published. Thereafter, as any textbook author knows, sales drop precipitously. Although several students may use the same book, the publisher and the author get the benefit of only a single sale.

Unlike in years past, when students would periodically conduct a book exchange in the basement of their dormitory, the used-book market is now well organized and dominated by a few national chains. Even if a book will not be used again in a particular university, those chains will buy back the used copies and wholesale them to bookstores at schools where it is still being assigned. In fact, the market is now so efficient that if my textbook is published in December, then by the start of classes in January some students will show up with used books. Those books were most likely sent as examination copies to instructors, who sold them to a member of the ubiquitous army of traveling used-book merchants, who in turn sold them to the national chains.

To counter the used-book market, publishers find it fiscally essential to come out with new editions of textbooks every three or four years. In some fields, like calculus, however, the frequency of new editions is seldom justified by either new developments in the subject or improvements in pedagogy. Obviously, the publication of a new edition results in a huge waste of time and money on the part of authors and publishers. Students ultimately bear the costs of such profligacy in excessively high prices.

It's time for both publishers and universities to acknowledge that the textbook market -- which, if you include course packs, is a $6.77-billion industry, according to the National Association of College Stores -- has changed greatly, and to revamp textbooks' sale and distribution. In substance, a textbook is more comparable to a software program than to a traditional trade book. A textbook is, in fact, two separate products. The first is its intellectual content and includes not merely the words of the author but also the work of the editors, artists, proofreaders, and reviewers. The second is its physical form -- the paper, cover, and ink. The intellectual content is worth more than the physical form and is the more costly to produce. Accordingly, the author and publisher should earn their rewards not just from the initial sale of the entire package, but from the continuing use of the content.

For each student enrolled in a course for which a publisher's textbook is adopted, universities should pay the publisher a license fee. Presumably, the university would pass the fee on to the students, just as today they charge students laboratory or software fees. The publisher would still produce hard copies of its texts. Students would continue to purchase those books from their university bookstores, but now the price of the books would incorporate only the actual manufacturing costs, plus the publishers' and retailers' normal markups. It would exclude the value of the intellectual content. Similarly, students could continue to buy and sell used copies of the book, but in light of the reduced price they would have less incentive to do so.

There are numerous advantages to this license-based approach. First, both publishers and authors would have a steady stream of income as long as the textbook is being used. Therefore they would have little motivation to revise the textbook continually merely to capture first-year sales. Hence, the "useful life" of a text would be extended and, insofar as many of the costs of editing and producing a revised edition of a textbook are similar to those of producing a totally new textbook, overall costs should be reduced substantially.

Consider, for example, a textbook that retails for $100. The publisher's price to the bookstores under the current regime would be approximately $80. Assume that manufacturing and distribution costs were $39. The $41 difference between the two amounts cover marketing and administrative costs, author's royalties, and publisher's profit.

Under the proposed system, the publisher might sell the text to the bookstore for only $47 -- a markup of approximately 20 percent over the manufacturing and distribution costs. In addition, however, it would receive a license fee of $9 per student-user -- an amount established to ensure that the publisher is no worse off than under the current system.

Rather than issuing a new edition of the text every four years, the publisher might go on an eight-year cycle. Students might continue to buy used books rather than new, but the books could remain on the market for eight years, rather than four. Even taking into account the license fees (which one can safely assume would be passed on to the students in one form or another), the collective savings for students who used the book could be considerable, as large as 33 percent.

The savings would accrue for three main reasons. First, the costs of producing one entire edition would have been eliminated. Second, the text could be recycled through the used-book market several more times, thereby reducing the number of new books that would be printed, along with their attendant costs. Third, because the prices of the books, both new and used, would have been reduced, so too would the bookstore margin. Actual savings, of course, would be affected by a variety of factors, such as the cost structure for the publisher over all as well as for specific titles, the number of units sold, the percentage of students who bought new instead of used books, the number of times a used book could be bought and sold, and so on.

Further, owing to the lower new-book prices, many students might opt for new rather than used books. Hence, the publisher could expect to sell more new books than currently. Other factors being equal, the greater a publisher's gross profit from the sale of new books, the less it could charge as a license fee while still maintaining current profits.

A second advantage of the license-based approach would be that, because universities would be paying the fees to the publisher, even if they passed them on to their students, they would have both the incentive and the buying power to drive a hard bargain on licensing. That too should hold costs down. Their incentive would be the pressure to hold down the overall costs incurred by their students. Their buying power would come from acquiring rights for a large number of users -- they could threaten to use the texts of competitors if the price was not right.

A third advantage of the license-based scheme would be that it would result in greater equity. As it is now, the first users of a textbook pay a net 50 percent of the retail price, provided they resell their copies at the end of the semester. Subsequent users pay a net 25 percent of retail, again provided they resell their copies, until we get to the last users, the ones stuck with the books, who pay the most -- a net 75 percent of the new-book price. Under the license arrangement, all users will pay the same fee for the intellectual property; the only differences will be on the price of the physical book.

Finally, the new system might breathe new life into the distribution of texts in electronic formats. Electronic books (whether on a disk or downloaded from the Web), coupled with the license feature, provide the greatest opportunity to reduce textbook prices. They eliminate most of the manufacturing and distribution costs.

Inasmuch as publishers would be receiving per-capita license fees based on numbers of students registered for a course, they should be willing to give students a choice of purchasing an electronic or hard-copy edition of a text. Losses in profits from the sale of an electronic rather than a hard-copy version could be compensated for, in large part, by the license revenue. Furthermore, the publishers would not have to be especially concerned with students who illegally share electronic versions since the publishers' main source of revenue would be from the licensing of the intellectual content, not the sale of the physical product.

Electronic books require students to read and study their texts on a computer screen. Trade e-books have been around since the start of the dot-com boom and have crashed with no less of a thud. Ever since the first e-books were introduced, seers have forecast the demise of hard-copy textbooks. That has not happened yet, and there is little evidence that it will in the near future. But new technologies and sales structures could yet stir up that sector.

Worth Publishers and Aplia are jointly venturing into that territory with an economics text by the Princeton economists Paul Krugman and Robin Wells, in both conventional and Web-access format. The online version will be about half the price of a typical hard-copy book. It will be integrated with all sorts of supplements, such as problem sets, news items, and real-time simulations. Students who want to stick with the old-fashioned hard-copy textbook will be able to purchase a version that comes bundled with a subscription to the online supplements.

It will be interesting to see how the Krugman-Wells book does in its various formats. To the extent that students accept electronic books, such ventures have the potential to significantly reduce textbook prices. If, however, like trade-book users, students insist on versions that can be read at the beach or by the pool, then these initiatives won't lower costs. Also, without the guaranteed revenue from license fees, publishers would have to be concerned with illicit file or password sharing. Publishers would be clever enough to build in security features to discourage pirating. But in a computer-technology contest between publishing companies and 18- to 22-year-old technowhizzes, there is little doubt who would come out on top.

With any textbook-sale restructuring, universities would bear some additional administrative burdens and costs. For the most part, however, these should be no heavier than those involving site licensing of computer software.

Both the music and software industries have long recognized the distinction between intellectual content and the physical means of distributing it. And in the last couple of years, a number of campuses have signed agreements with Napster and Cflix that allow students to access or download music and movies for free or at a modest cost. It's time for universities and publishers to give equal attention to textbooks, which could become considerably less expensive and more convenient. Legislation won't achieve that, but imagination might.

Michael H. Granof is a professor of accounting at the University of Texas at Austin's McCombs School of Business, and chairman of the board of the University Cooperative Society, the university's bookstore.
Section: The Chronicle Review
Volume 51, Issue 14, Page B16

Copyright 2005 by The Chronicle of Higher Education