On July 24th, I had the opportunity to interview Paul Corey of Pearson by phone for about an hour regarding the recent announcement that Pearson will move to a digital first strategy for its textbook business. Paul is the Senior VP of Global Content Strategy for Pearson, and thus plays a key role in developing and implementing plans like the digital first strategy. Paul also has primary responsibility for Pearson’s relationships with authors, so I was especially appreciative of the chance to hear his thoughts on how the new direction might affect authors.*

To begin the second part of our dialogue I asked Paul whether Pearson’s intention is to continue selling “one textbook to one student for a particular course, whether in digital form or print or some combination…or do you expect to see more aggregate sales where a single student gets access to a large body of content.” This led us to further distinguish between inclusive access, where an institution negotiates lower textbook prices for their community, but covers the costs with fees to each student, as opposed to a broader type of subscription model, where each student gains access to a publisher’s full textbook list for a single price.

Paul acknowledged that there are forces working on textbook publishers that may require them, including Pearson, to make department or institution-wide deals. As he put it, “It depends on the institution.” He noted that some want course materials to be included in fees or tuition, so they will negotiate for “inclusive access” arrangements. Paul asserted that the economics of inclusive access arrangements can be attractive, so it is possible to provide lower pricing without much damage to total income – a classic win/win situation. Paul said, however, that Pearson intends to avoid what he called “all you can eat” models, where a student paying a single flat rate may gain access to all the textbooks the publisher offers, even ones not needed in their coursework.

In the Pearson announcement, CEO John Fallon spoke of average prices expected as Pearson transitions to the new strategy. He thought a digital textbook would sell for $40; a print version of the book might still be rented for $60; and a charge of $79 would cover “a full suite of digital learning tools.” I asked Paul about differential pricing. Would Pearson seek to flatten their pricing toward the averages Fallon mentioned or would there be ways to recognize different market sizes, varying complexities in production, and other market differences that would normally result in different prices for works?

“There will absolutely be some differential pricing,” Paul responded. Pearson wants itspricing to reflect the value of the product being provided. It is impossible for a ‘one-price’ aggregation to do that since it cannot recognize differences in the costs of developing a product, or the differences in the size of the market of potential users. The market potential is also different for books depending on whether they are designated as required, recommended, or optional reading for a course. Further there are differences in expertise and production required between introductory and advanced courses, or between pre-professional and survey courses. All these factors should be reflected in the price of the work, so the prices cited were only intended as averages and examples.

Nevertheless, Pearson expects that the digital first strategy will lead to substantially lower prices for textbooks in general. I asked how the lower pricing was expected to impact Pearson’s revenue, and ultimately its ability to pay author royalties in the short term and mid-term. Paul stated that the strategy will roll out over time, not all at once, and that in any case, Pearson already has a sizeable digital footprint. He expects the strategy will help them stabilize revenue in the short term (roughly the next two years), and then lead to growth.

How will this work with prices so much lower? A key element of the strategy is to increase the number of units sold by reducing or eliminating the used book market. Paul referred to this as “monetizing more of the share of the classroom we already have.” This is certainly a long-standing goal of many textbook publishers, who have seen sales decline as the vicious cycle of used book sales leads to higher prices, which in turn further incentivizes used book sales, cutting further into new textbook sales.

Paul estimated that Pearson and its authors only receive compensation from about one third of the students in a classroom where a Pearson text is designated as required reading. In effect, the students who pay full price for the textbook are subsidizing those who do not pay anything to the publisher. If Pearson can monetize 80-90% of the classroom,the companycan dramatically lower prices without losing in total or net revenue. “The used book market is our biggest competitor,” Paul stated, “it has a much bigger share than any single textbook publisher.” He also noted that it is not uncommon for a single textbook to pass through 6 users after the initial sale, resulting in no revenue returned to the publisher or author.

I pressed further on the question of how author royalties would be affected by the digital first strategy, and whether Pearson will be able to appropriately attribute royalties as new models and inclusive access sales come into play. Paul addressed the author community directly to say, with this model “if we get paid, you get paid.” Authors, he said, will benefit from the plan if it works, and if it doesn’t, both parties will suffer. He expressed confidence in their analysis of the market and the unsustainability of publishing in an environment with high used book sales. Eventually, he noted, “the secondary market staunches creativity and reduces the incentives for authors to put in the time and effort required to make an authoritative work.”

Paul also noted that Pearson pays the same author royalties on net proceeds, whether the revenue is generated from a sale or a rental, so there shouldn’t be a need to increase author royalty rates to keep them whole, as long as they can monetize more of the market as the plans call for. He even noted that the author could, under some circumstances, get paid twice for the same sale, in effect, if for example the student rented the print editionand then after the course decided to pay to keep the book.

Finally, I asked whether Pearson expects to shift its business model away from royalty arrangements and more toward flat fees for acquiring content from authors going forward. He indicated they already make flat fee arrangements in some cases, for instance, if value is not placed on the author’s brand or there is not much differentiation with a competitive title. “But we believe in producing authoritative, curriculum-aligned, continually-refreshed content and we want to compensate authors for the value they add to a work.”

Once again, I’d like to thank Paul Corey for the time he spent with me, and the candor of his remarks. The idea of shared risk between authors and publishers is certainly reasonable and appropriate, and over time we will see how successful Pearson is in its strategy to increase sales, lower prices, and maintain or grow revenue. TAA urges authors to stay in dialogue with their publisher as strategic transitions occur, and to advocate for their rights and for an appropriate apportionment of both risk and rewardto authors as new markets and methods for textbook publishing are explored.

*This article is the second of two. In this piece we mainly discuss the financial and royalty implications of the strategic shift that Pearson has announced. Part One reviewed Pearson’s strategic goals and the logistical ramifications of implementing dramatic changes to the revision process for textbook publishing. Part One can be found here.

Please note that these articles are not a transcript of my conversation with Paul. I have tried to be careful, when ascribing views and positions to Paul or to Pearson, to ensure that these are fair characterizations of his views. Items in quotations were confirmed accurate by Paul. Even so, this was one conversation. I would urge readers to email your own contacts at Pearson directly to further your dialogue and learn more about their take on this important change in textbook publishing.

For a legal perspective, read Pearson’s ‘digital first’ announcement: A legal perspective
For an introduction to Pearson’s ‘digital first’ announcement, read Pearson announces move to digital-first

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Michael Spinella is Executive Director of the Textbook & Academic Authors Association (TAA). He can be reached at Michael.Spinella@TAAonline.net.