From the issue dated November 26, 2004
From the issue dated November 26, 2004
http://chronicle.com/weekly/v51/i14/14b01601.htm
A New Model for Textbook Pricing
By MICHAEL H. GRANOF
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.
http://chronicle.com
Section: The Chronicle Review
Volume 51, Issue 14, Page B16
Copyright 2005 by The Chronicle of Higher Education