Wednesday, August 18, 2010

The problem with eTextbook pricing

Let's start with a fact of the college textbook business: Textbook publishers hate used books. They see every sale of a used book as revenue that they should have received, but didn't, thanks to the First Use Doctrine that allows books to be resold by their purchasers. Consider the following case: A college bookstore sells a new textbook title for $100, then buys it back for $50 at the end of the semester for resale as a used book. For the next semester, it sells it for $50 as used. Assuming that the book can be used for ten semesters before it's too beaten up and marked up to resell, and the bookstore buys it back for $20 each time, the bookstore will end up grossing $320 (even if they buy it back the last time and pulp it.) The publisher, on the other hand, will get only some fraction of the original $100.

That's why publishers are increasingly interested in eTextbooks. Unlike print books, eTextbooks can't be resold, and in some cases, they have "time-bomb" DRM schemes that make them totally unusable after 120 to 180 days. Publishers get revenue from every sale. The problem, however, is that publishers are pricing eTextbooks too high to stop used book sales.

Kenneth Green wrote about the problem on his DigitalTweed blog. He compared the price for one textbook, Mankiw's Principles of Microeconomics, from a variety of sellers, in a variety of forms. He compared purchasing the textbook new, used, used with saleback, and as an eTextbook, along with rental. (One title does not a comprehensive analysis make, but it's a fair place to start.) According to Green, he found that title's list price is $172, and that's what most college bookstores will sell it for. However, Amazon priced it at $153. Keep those two numbers in mind, because everything else works off of them.

Green found that Amazon sells the used print version for $83.49. Amazon's Kindle price for the eTextbook is $110.38, and they're underpriced by both CourseSmart and Follett, who sell their eTextbook versions for $86.49 and $87.84 respectively. He could rent the title for the semester from Chegg for $50.49, or from Textbooks.com for $49.49. And here's the kicker: Amazon will buy back the print version for $67.25, no matter where it was purchased originally.

So, here's the breakdown:
  • New list price: $172.00
  • Best discounted new price: $153.00 (Amazon)
  • Best used price: $83.49 (Amazon)
  • Best eTextbook price: $86.49 (CourseSmart)
  • Best rental price: $49.49 (Textbooks.com)
  • Best used price with buyback: $16.24 (Amazon)
The used with buyback option is by far the best choice, but it's not going to be available for all books, and even if it is for a specific title, it may not be as lucrative as Amazon makes it for this title. Considering the other choices, your best option would be rental, followed by buying the title used, followed by buying the eTextbook.

In short, at their current prices, eTextbooks simply don't make sense unless they offer so much value that they overcome their price disadvantage. With today's eBook readers, they don't offer any significant advantages, especially for cash-starved students. If publishers really want to kill the used (and rental) book market, they have to price eTextbooks at about the same as rental, or about a third the best discounted new price.

That scares publishers, because they believe that doing so will devalue their titles and prematurely kill print sales. However, they'd end up with more money in their pockets over time. Let's consider my first example, with a $100 print title sold new once and used nine times. If publishers get 60% of the sale price for that new sale, they'd get $60 dollars in total. However, if they sell 10 copies of the eTextbook version for $30 each and get the same 60%, they'll end up with $180, or three times as much.

Pricing eTextbooks at or below print rental prices will dramatically increase eTextbook sales and hasten the end of used textbook sales and rentals. eTextbooks are also much more convenient for students, and low prices will save them money. In the long run, pricing eTextbooks very aggressively will be a win-win for everyone.
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