P = MC and the Implications for Textbook Publishing and Colleges

Since the advent of the Internet, many prognosticators (myself included) have predicted dramatic transformation in the education industry and the textbook publishing industry. Unfortunately, when I go to a conference today, I hear rehases of the same keynotes as I heard a decade ago. Fortunately, there is some evidence that these transformations are finally happening in both education and textbook publishing.

The decade long belief in transformational change stems from a central tenet of microeconomics. It is that, in a perfect market, the price of a good is equal to the marginal cost of production and distribution of that good. The Internet renders the marginal cost of production and distribution of educational content to almost zero. For example, it costs almost nothing to produce and distribute one more copy of a digital algebra textbook. In theory, a competitive market would push the price down to almost zero. This has dramatic implications for the textbook industry and for educational institutions.

However, neither education nor the textbook publishing are perfect markets. As I noted in another post, the market for higher education is rife with trade barriers. The market for textbooks suffers from a mismatch of the person who makes the buying decision (the professor) and the person who pays for the book (the student). This means that the professor has no incentive to search for low-cost options. Further, the school also frequently receives a portion of a book-store's revenue, further reducing the incentive to reduce costly middlemen. Here is a comment that I wrote about an article about high textbook prices in a higher education trade magazine:

"Textbook prices would come down dramatically if:

1) Colleges made institution wide textbook decisions and bundled the cost of those books with the price of college, instead of letting each professor make their own textbook decisions.

2) Colleges didn’t look to their bookstores as revenue centers.
It is no wonder that textbook prices soar when the professor makes the buying decision, but the student buys the book. If the cost of a new textbook mattered to an instituiton, like it would if it had to be factored into tuition, the school would have an incentive to make better decisions and to shop based on price. Right now, there is no incentive for professors to do this. In fact, many of the largest for-profit schools have done this and they have driven textbook prices way down for their students.

Also, publishers would be thrilled to sell books directly from their websites and cut-out the middleman — the book stores. However, most colleges look to their bookstores as revenue centers. The college gets a piece of the profit. Therefore, the college frequently is the middle-man, again, with no incentive to cut prices."

So what's the good news? Publishers are aware that their existing textbook economic model is not sustainable. The growth of for-profit schools and the extension of the practice making institution buying decisions, the growth of free-content initiatives, and the growth of ad-supported textbooks are all portents of a different economic model. Increasingly, publishers are trying to figure out how to become service providers instead of content providers. Recently, SMARTHINKING announced partnerships with 3 of the 4 largest higher ed textbook publishers. Tutoring services, combined with an increased reliance on instructional administrative systems, are the sorts of products publishers will be selling in the future. These will be sold as subscriptions rather than as things (like books). In short, today students pay for content and get a lot of ancillary materials and services. Tomorrow, students or schools will pay for the ancillary materials and services and the content will be free. Educational institutions are confronted with the same challenge. Does it really matter where someone learns college algebra? What is the value that an individual school brings to education? A question for another posting…