Changing educational publishing industry fraught with ‘disruptors’

5 Forces Affecting the Educational Publishing Industry

5 Forces Affecting the Educational Publishing Industry based on Michael Porter’s 5 Forces model.

In today’s fast-evolving e-publishing market, both publishers and authors must continually evaluate and reposition to retain relevance in the academic markets, said author, educator and digital book pioneer June Jamrich Parsons. “The traditional textbook publishing business model has been besieged by disruptors, such as MOOCs, used book dealers, consumer advocates, and content pirates,” she said.

In her 2016 TAA Conference session, “Digital Book Report 2016”, Parsons, co-author of the 2012 TAA McGuffey Award-winning textbook New Perspectives on Computer Concepts, outlined some of these trends and how they affect authors, instructors, and students.

“Our [authors] income and opportunities for writing are really tied to the status of the publishing industry,” she said. “When that industry does well, we have a lot of opportunities and our income does well. When the publishing industry is not doing so well, our opportunities become more limited.”

Parsons used Michael Porter’s 5 Forces model to illustrate what is currently going on within the textbook publishing industry. Her illustration centers on the industry rivalry between competing textbook publishers and the factors affecting the publishing industry, which include:

1) Bargaining Power of Suppliers (authors)
2) Threat of Substitutes (rentals, used books, OER, digital)
3) Threat of New Entrants (edtech developers, nonprofits, schools, state and federal)
4) Bargaining Power of Buyers (students, professors, school boards)

“A small number of companies control the education publishing market in the US,” said Parsons. “Their extensive list of titles and strong sales forces have been substantial barriers to competition, yet revenues and profits appear to be trending downward. As publisher revenues decline, authors can expect commensurate declines in royalties.”

Within the four major educational publishers – Cengage, Pearson, McGraw-Hill, and Houghton-Mifflin – with annual combined revenues of $7.3 billion, $4.1 billion from higher education, there has been a 7 percent decline in revenues.

Authors can track the financial status of their publishers, she said, by setting a Google alert based on their publisher’s name, checking company financial information in annual reports, and watching stock prices by searching publisher ticker symbols (HMHC, CNGO, PSON).

Bargaining Power of Buyers

One of the factors that is driving this downward trend in educational publishing sales is the bargaining power of buyers: students, said Parsons. According to data from the 2012 National Survey on Student Engagement, 27 percent of first-year students and 34 percent of college seniors don’t buy required textbooks. “Of those who do acquire textbooks, many prefer used books or rentals, or use old editions or pirated copies,” she said.

According to The Key Findings Report: Student Watch™ 2015-16 Academic Year, students spend about $602 per year on course materials, small in comparison to the cost of tuition, room and board, she said, “yet students, awash in a sea of free information, have decided that textbooks are not worth the cost and seek discounted alternatives.”

What students are not considering, said Parsons, is the value proposition of textbooks, which is very good compared to the value proposition for classroom instruction: “We did some fairly lengthy calculations and we discovered that if you look at the per hour cost of instruction for students it’s about $21.63 per hour that they sit in the classroom. Textbooks, on the other hand, cost students about $2.88 for each hour they spend with the book. Now that’s value.”

Threat of Substitutes

Despite the high cost of textbooks, publishers are finding it difficult to be profitable, and students are not wanting to pay for textbooks, which opens the door, said Parsons, to some disrupters, including used books, rentals, and open educational resources (OER).

According to The Campus Computing Project’s GOING DIGITAL – 2016 ICBA Faculty Survey, 15 percent of instructors use OER, 36 percent think it is a viable alternative to a commercial textbook, and 50 percent think they will be using OER by 2020. “The affect of OER on publishers is that they appear to be reluctant to publish in areas with extensive OER materials available, and competing with free OER materials will be increasingly difficult as OER courses become more complete, professional and familiar to instructors,” she said.

For authors, OER may have some advantages, said Parsons, as they may have an opportunity to receive grants, but she cautions, because distribution is free, contract terms must be carefully considered. One of the biggest challenges to OER may be the ability to find quality materials in the sea of course materials available, she said.

Rentals are also disrupting commercial higher education publishing, said Parsons. According to data from Student Monitor: Lifestyle and Media – Spring 2015, about 20 percent of textbook sales are rentals, compared to the 34 percent of sales that are used books and the 36 percent of sales that are new books. Several companies, including Amazon and Chegg rent textbooks to students. Amazon in particular will purchase the books from the publisher, many times at rock bottom prices, and the author only receives a royalty on that first sale. “Look in your contract to see if there are some bulk pricing because your royalty rate may be very different for bulk purchases than they are for bookstore purchases,” she said. In some cases, the publisher may rent directly to students, said Parsons, and in that case, every rental is considered a sale, and the author receives royalties on every rental: “That’s a better situation for us.”

Another major disruptor to the educational publishing model is used books. According to data from Student Monitor: Lifestyle and Media – Spring 2015, 34 percent of books sold in 2015 were used books. Authors receive no royalties on used books, and their sales cut into new book revenues. “Publishers might have proactively repurchased used books and resold them (and perhaps given authors a cut of the profits),” she said. “Instead they wrung their hands and hoped shortening the new edition cycle would limit the damage. That lapse opened the floodgates.”

Prices really started to climb when used books became available on the Internet, said Parsons. It started a vicious cycle – fewer students purchased new books, and to make up for the lost revenue publishers increased book prices, causing students to become more reluctant to purchase new books, causing another drop in new book sales and another increase in book prices to make up for the shortfall. Publishers hope to break that cycle, she said, with the digital model.

Industry Response to Disruptors – Go Digital

For the first time this year, said Parsons, Cengage reported that digital unit sales outpaced print sales with 3.5 million digital sales, a 12 percent increase from the previous year. According to Cengage’s annual report, she said, they no longer consider themselves an educational publishing company but an “educational technology company”, with the CEO promising to hire 150 new people in tech-related jobs. The other major educational publishers are also following this digital trend.

Even though digital is sometimes regarded as a disruptor as well, there are several advantages to digital, she said:

1) No used books
2) Every student pays
3) Publishers and authors earn on every sale
4) Potential to improve learning
5) More accessible

According the National Association of College Stores (NACS), in 2013, 77 percent of students preferred a print textbook. In 2015, NACS reported that 40 percent did. “If I were to make a prediction based on this trend, in three years there probably won’t be much resistance to digital textbooks,” she said. “Virtually all students will prefer digital.”

Parsons said her hypothesis is that the current resistance to digital comes from there being too many platforms, including several open and publisher proprietary platforms, and that the “holy grail of electronic publishing is the one ring to rule them all”: a standard open platform that is not proprietary and that everyone can use.

The main reason for going digital seems to be that it is cheaper, but according to 2008 data from the National Association of College Stores, publisher expenses are 55 percent of the total cost of producing a book. The only cost savings to digital is on the bookstore side (30 percent of total costs), so to really reduce costs, said Parsons, publishers will need to cut some of their expenses or reduce author royalties. Other ways going digital affects authors, she said, include:

1) Concept of a “book” diminishes because publishers can slice/dice content.
2) New distribution models make it hard to track royalties.
3) Some publishers are replacing royalty contracts with work-for-hire contracts, which aren’t as beneficial to authors.

“2016 promises to be a year of continued disruptions as publishing models tried in the past will be tried again, and the educational market searches for the ‘Uber’ of education,” she said. “There are high stakes, with billions of dollars involved, but as with all disruption, there is opportunity for those who are creative and keep pace with change.”

About Kim Pawlak

Kim Pawlak is Director of Publishing & Operations for the Textbook & Academic Authors Association (TAA). She has been writing about the textbook and academic authoring and publishing industry for 20 years.