Will Cengage’s rising tide lift all boats?

Subscription models for reading materials are not unheard of in other industries, but they are a new model emerging within the higher education publishing industry. Late last year, Cengage announced Cengage Unlimited, a subscription based model offering access to its entire catalog of textbooks and related learning materials to college students for a flat price of $119.95 per semester calls Cengage Unlimited. Royalty structures under these models vary. Newer contracts provide broad leeway for publishers to allocate royalties on in a way they deem reasonable.

While boon to students, especially those assigned multiple Cengage texts, it has left Cengage authors wondering about the impact to their royalty earnings.
Since the announcement, Cengage has communicated several aspects of the program to authors via email, webinars and blog entries including how royalties will be calculated. Cengage presented the following detailed description about its new royalty calculations:

Cengage Royalty Calculation Model

 

 

 

 

 

 

 

 

 

 

 

I have received dozens of questions from authors about what will happen to their royalties. Since I regularly investigate royalty calculations on behalf of clients, I thought I would try to estimate out how hypothetical royalties might look in the world of Cengage Unlimited.

I want to preface my analysis by saying this is overly simplistic and does not consider many more subtle calculations that might affect author royalties. However, it is fair to say that if the Cengage Unlimited platform delivers what it promises in terms of one subscription price for access to multiple textbooks and materials, then authors will be getting royalties on just a slice of the pie rather than on stand-alone sales of textbooks and other learning materials (Cengage has told authors royalties will be the same on traditional sales, but the pricing and marketing of these materials show that writing on the wall, and Cengage has stated that it seeks to move to an entirely digital platform).

Let’s look at the royalties for a math professor and author of math textbooks with a 15% royalty rate for both print and eBooks. Assuming the publisher sells one print book for $200 and one eBook for $80, our author can expect $42 in total royalties (total royalty bearing sales of $280 x 15% = $42 royalty).

Under Cengage’s new model, all the money received by the publisher will be split into various pools or slices for pie for Courseware, eBooks and Print Rentals. Royalties will be calculated of author material accessed in each one of those buckets. There are endless ways to model out these calculations given all the possible assumptions and hypotheticals posed in the “bubbles” above.

  • How does Cengage calculate “relative value” to subscribers?
  • How often is the “relative value” calculation updated?
  • How will “relative value” affect royalties under the various subscription plans available (1 semester, 1-year or 2-year access)?
  • How is “Title Quantity and Usage” calculated within calculated revenue pools – downloads, page views, student interaction time with an eBook or Courseware?
  • How much do partners and distributors pay for Cengage Unlimited?
  • Will Cengage treat subscription sales as “bundles” and apply a bundled royalty rate?

Given the forgoing, any hypothetical calculation I could come up with would be meaningless at this point.

Setting these questions aside, we do know that subscription revenue received from any customer or student will likely be divided amongst two or more authors (even if only one author’s works are accessed, the price of Cengage Unlimited is lower than most stand-alone materials).

Turning back to our math professor, applying his royalty rate to money received by Cengage for 1-semester access by a student that also accesses an introduction to biology print book and eBook, we can estimate that royalties will now be reduced from $42 to $9 (Cengage Unlimited revenue $120 / 2 Authors = $60 royalty bearing revenue for each author x 15% = $9). This scenario assumes the math book and biology book are equally weighted in price and usage. Now assume that a student is lucky enough to be assigned three or more Cengage textbooks for the semester. You can imagine how royalties would be further and further reduced. Our math author would need an additional 4 students to obtain his materials through Cengage Unlimited just to make the same royalties. We regularly see articles stating that students skip purchasing required textbooks because of the costs, but in this very simple model, will there really be a 400% increase in access of our math professor’s book?

By and large authors share the same frustration as students about the high costs of textbooks. Cengage has touted its Unlimited model as a solution this problem, and it very well may be, but a major corporation like Cengage isn’t doing this for altruistic purposes. It’s doing it to increase revenue, save costs, and attempt change a business model that is no longer working. Unless Cengage can take significant market share away from Pearson and Mc-Graw Hill Education, I don’t see how authors come out even.

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