Institutional licensing: the next textbook business model

Right now, in South Africa, the textbook-publishing industry faces a real threat to its future, because – faced with constant non-delivery of books – government is desperate to change the way it buys them. Other countries face similar challenges. Government officials often cite the ‘high price of books’ as a key issue. Whether you buy the state’s argument or not (I don’t, though I get why they’re fed up), the system is going to change, and publishers can either lead the change or be changed.

Are textbook publishers planning or being planned for? (image by Pedro Vezini, CC-BY-NC-SA, Flickr)

Are publishers planning or being planned for?

To have any real effect, the change must be a fundamental change in the mainstream textbook business model: instead of selling copies, we must sell licences. Specifically, we must sell licences with no limitations on the number of downstream copies. This is especially urgent and appropriate for school books, though it’ll work for universities and colleges, too. And it’s perfectly suited to a digital future of tablets and ebooks. Best of all, it will save government money and make publishers’ jobs simpler.

I’ll describe the model in some detail as I see it, and please contribute your thoughts and criticisms in the comments or directly with me. I’m particularly interested in hearing where similar models have already been implemented.

The textbook problem

The root of our problem is per-copy pricing. (I’ve written about this at length before.) From the moment they’re conceived to the time they’re paid for, textbooks are priced per copy:

  • If I’m a commissioning editor planning a new book, I use a spreadsheet to cost it. First, I enter my per-copy selling price, based primarily on what my customers are used to paying. Then I multiply that price by a sales guesstimate, and work out my production costs. If price × sales covers my costs, leaving some profit (often 10–15% nett), I can publish.
  • If I’m a writer, my potential royalty is a small percentage of the per-copy price. Will it justify the time I’ll spend writing? I do the maths in my head to work out how much I get from every book sold; but I have to gamble: what I’ll really earn is utterly unpredictable.
  • If I’m a marketing person, my job is to convince customers that my per-copy price represents ‘good value’, as if the effect of a given book on a child’s education can be reduced to currency. I may have a lot of work to do if I’m going to hit the publisher’s sales guesstimate. Or not – there is really no telling beforehand.
  • If I’m a state employee buying books for schools, I want to work out how many copies I can buy. So I divide my budget by the per-copy price of the books. For instance, one million rand divided by R100 per copy equals 10 000 copies. If I want more books, I ask the publisher to lower their price (or I change the rules to force a race to the per-copy-price bottom). The publisher then makes a judgement call, weighing maximum profitability against the possibility of losing the sale.

Here is a scary truth: from a textbook’s conception till the day the cash is banked, the whole system is based on false assumptions. The per-copy price is based on predicted sales, but there is no way to accurately predict sales for a given book. When future sales are always a wild guess, every aspect of a book’s financial forecast is fictional. So the per-copy price is fictional, too. For any given book, the ideal per-copy price is probably much higher or much lower than it needs to be to make the publisher a sensible margin.

Per-copy prices only start looking accurate when averaged out over dozens of loss-making and profit-making books. Once you’ve sold many different books, this fiction begins to look like truth, till we hear publishers say, in defending their prices, ‘books must cost x per copy because it costs y to create them’. Publishers say this all the time, but it’s an illusion of averages, a mirage of the fictional world we’ve chosen to sell our books in.

This is why larger publishers seem so much more successful than small publishers: the big ones don’t make better decisions, they just publish enough books to even out their guesswork.

Since everyone is in on the price-per-copy game, the entire industry is set up to make the fiction look like truth, by building business models around per-copy margins.

How did we end up in this fiction? We confused customers with beneficiaries, and our product with our solution. When your customer is your beneficiary, per-copy-pricing makes sense, as it does in general-interest publishing – when I buy a novel for myself I am the customer and the beneficiary. But in education, especially in state schooling, large institutions are our customers and their students are our beneficiaries. The state doesn’t want ‘ten thousand copies’, it wants ‘every child to have textbooks’. Those are two fundamentally different products. As publishers, we keep trying to sell ‘ten thousand copies’, when we should be selling the solution to the state’s problem.

The licensing alternative

Per-copy pricing is so ingrained that an alternative model seems inconceivable. But licensing is not only worth exploring, it’s already happening. As I’ll explain later, it’s been around for years under other names.

What do I mean by licensing? Instead of selling copies of finished textbooks (in paper or as rights-managed ebooks), a publisher sells a single, flat-fee licence to an institution. That licence lets the institution produce and distribute as many copies as they like for their beneficiaries, in print and digitally, for as long as they like.

For example, let’s say the state needs to give each learner a grade-ten maths textbook. It has to allow for a lot of uncertainty:

  • It doesn’t know how many learners will take maths over the next few years.
  • It doesn’t know when central government will change the curriculum.
  • Some learners need the book in print, and others as an ebook. This ratio will vary constantly across the country.
  • Different schools have different kinds of learners, so schools need to be able to choose, from a wide range, the books that best suit theirs.

The state’s textbook team looks at several publishers’ books and identifies their favourites by publishing an approved-books list. Teachers then get to see the books and say which ones they want to teach with.

In the traditional per-copy-pricing system, provinces would estimate how many copies they need before placing orders. For the ebooks, they’d have to know whether the publishers’ ebooks will work with the province’s ebook platform, and especially their DRM scheme, and whether those ebooks come with time-restricted licences (e.g. some publishers’ ebooks expire after, say, three years). Some provinces also work through bookstores, whose margins are included in per-copy prices.

Under a licence-based system, instead, central government would buy a licence from each publisher in return for a flat fee. Each publisher hands over a set of open digital files watermarked (in document metadata and on visible pages) with plain-language details of the licence. For instance, the title page says ‘Smart Maths 10 may be freely used by teachers and learners at government schools in South Africa. For any other uses, contact the publisher.’ Each publisher provides the state with:

  • a print-ready PDF
  • a web-optimised PDF
  • an epub file.
  • Potentially a web-based, free-to-view version.
  • Potentially a content-database API.

Each of these formats makes the licence more valuable to the state. The licence lets the state print their own copies centrally in big runs, and lets its schools and parents print their own extra copies as needed. The licence lets them email the ebooks, with no digital rights management, to all their schools. This gives all teachers electronic access to all approved textbooks, in addition to the printed copies of the one they chose for their own students. This diversity enriches their teaching and exposes teachers to new publishing brands.

If the publisher provides a content-database API, too, the state, provinces and schools can integrate the content and exercises into Learner Management Systems. (This is turn feeds usage data to the publisher. If there is a free-to-view website version, the publisher also gets to collect data on user behaviour there.)

Importantly, there is no need for expensive DRM systems to control access to digital textbooks. Right now, the per-copy-pricing model requires installing and maintaining content servers running DRM schemes that uniquely identify devices and students and lock content to each, tracking identities with hardware addresses and user logins. In under-resourced state schools, DRM is going to be a massive, complicated expense fraught with technical and educational problems. With DRM-free ebooks and free-to-view websites, all that goes away. Learners and parents can even use their own devices in addition to those provided by the state or the school, which in turn mitigates the problem of lost or damaged devices and the security risk of having children carry valuable devices around.

The licence fee

The big question is this: how much should a licence cost?

We can safely say that a high-school textbook costs about R1m (US$100K) to create. That includes paying writers, editors, artists, photographers, designers, developers, project managers, and management and admin support staff, all of whom will be working on several books at a time. That means that for a R2m licence fee, a publisher could make a good margin that lets them invest in new books before future licence deals are secured, and cross-subsidises titles that don’t get licensed.

What would it change for the state? We can make some ballpark estimates. If a country has 100 000 grade-ten learners enrolled for maths, and buys a R120-per-copy textbook for each one, it’ll spend R12m on physical books before distribution costs. If they can’t deliver a copy to every child (perhaps they under-order or under-deliver in some districts, as often happens), they’ll incur further purchasing and logistical costs to fill the gaps. If they want to buy a further, say, 10 000 ebooks at R100 each, they’ll spend another R1m before the cost of DRM infrastructure, training and maintenance. If we conservatively ballpark the DRM setup at R10m per year, the state is in for at least R23m. (Today, the South African government budgets about R5bn for books, which is very roughly R20–50m per subject per grade.)

Let’s say the state wants ten different maths textbooks for teachers to choose from. If they bought a once-off R2m licence from each publisher instead, they’d spend R20m on licences. The state could then print 100 000 copies for, say, R3m, depending on the books’ specs.

But now that the licence is paid for, next year they could print more copies without paying any further fee. Schools could fill their own gaps by printing off extra copies on school copiers or at nearby print shops, reducing the need for top-up orders. This saving would apply every year till the curriculum changes, when the publisher creates a new book for a new licence sale. Curriculum changes and updates are inevitable, so there will always be work for publishers.

Moreover, there is almost no cost for distributing ebooks, because there is no need for DRM, which is a major cost factor in ebook distribution, given the skills and server infrastructure required to manage it.

Licence fees would likely be negotiated over time and price bands might settle. Ideally, quality, popularity and value-added services (such as LMS-pluggability or multi-platform support) might factor into final pricing. This would be an important way to keep a diverse range of publishers in business. Book diversity is critical to a healthy educational system.

Leakage

What happens when the textbook leaks out of the institution? For instance, if a private school uses the textbook that was licensed to the state. Or, in contravention of the licence terms, a university puts on its intranet a textbook only licensed to another university.

Exactly what happens today when an institution illegally copies a book for its students: the publisher can choose to take legal action. Under a licence-based system, this is much easier to do than in the per-copy-pricing system:

  • Firstly, the licensed files can be watermarked (and even digitally fingerprinted), which makes them trackable and identifiable downstream. The traditional per-copy-pricing system makes watermarking a book with every customer’s details very difficult.
  • Second, institutions that matter as customers are generally easy to identify and take legal action against. They are legally exposed and must stay above the law just to stay in business.

Of course it would still be important that anyone can buy single copies from publishers at a per-copy price for small-scale or private use. But those sales would be small compared to licence-based revenue.

Institutional licensing by any other name

Licensing like this is not new. The DBE’s printing and distribution of Siyavula books is one similar system. While Siyavula books are open-licensed for anyone, not just for a specific institution, the effect is the same. Essentially, Siyavula’s philanthropic and corporate funders have paid the licence fee up front on behalf of the education system. From then on, the state can distribute copies for as long as the books suit the curriculum.

Institutional licensing is already the norm for many publications: every time any institution commissions a publication, they are effectively buying a licence to make and distribute unlimited copies to their beneficiaries. For instance, if a medical company pays a small firm to brand a book on diabetes for them, they can print and give away as many copies as they like. Many media-production companies run this way, producing IP for institutions to distribute to their beneficiaries. There is no reason this can’t work for the ones we call textbook-publishing companies.

There will still be a measure of risk-for-reward: a publisher is a company that invests in creating content in advance of a sale. After much of the initial investment is made, the state must approve and buy the licence for the investment to pay off. But licensing is a much simpler model than per-copy pricing, and with fewer marketing overheads.

In another way, institutional licensing is already baked into the DNA of the publishing industry. When a publishing company signs a contract with an author and pays a flat fee for the right to distribute their work, they are entering into exactly the kind of unlimited-copy, institutional licensing scheme I’m describing.

The challenge

To become reality, institutional licensing for textbooks requires a special kind of alchemy: perfect timing. The state must phase in a licence system at a time that fits with curriculum change and book-publishing timeframes. This is very difficult. And publishers must be ready to sell licences when the state comes knocking, despite limited resources and immediate challenges.

In South Africa, our current crisis provides, perhaps, the opportunity we need: a state department determined to change the way they buy books, and a clan of publishing companies facing an uncertain future. We are about to see what we’re made of, and it’s an exciting time to play a part.

Book Dash: the power of the crowd + hard graft

For several months I’ve been working on Book Dash, an initiative to create high-quality, low-cost children’s books. We get creative pros to volunteer time to create the books, and help sponsors get them printed and distributed to children. I’ve written elsewhere on why this is commercially important in the long term, but right now it’s all for the love of children’s literacy.

In this interview, I sum up our story and our aims.

Right now, we’re raising money to get books printed by crowd-funding with Thundafund. It’s going well, but it’s been extremely hard work.

Crowd-funding is not easy money. But it is quick money, compared to other ways to get sponsorship. By the end of our campaign (mid December) I reckon we’ll have raised about R80K (we’re just short of R50K now with two weeks to go). We’ve spent about two months on the campaign, including planning.

Our campaign overheads are time (some provided to Book Dash on credit by Electric Book Works where Tarryn and I work, the rest as volunteering), the rewards we promise for donors, and Thundafund commission. Thundafund takes 5% commission for non-profits (as of yesterday, Book Dash is a registered NPO), which is fair enough – I estimate they have to see R1m raised to employ one manager for a month. And Thundafund adds a surprise card-transaction fee of about 3% for the donor to pay at checkout – something I think is a real pity, because it must annoy donors just when you want them to feel happiest. (I’d rather pay Thundafund 8% and hide that fee from the donor; but these are just wrinkles to iron out.)

We’ll probably end up spending 90% of the funds raised on printing books and 10% on related donor rewards and admin. If things work out well, there’s a good chance we’ll print even more books than we’ve promised.

For Book Dash’s general overheads to date over six months, Electric Book Works has provided interest-free long-term credit totalling about R100K (with about R50K to come). It’s been very expensive for EBW, but we’re trying to be the change we want to see in the industry.

We’re learning fast, but never fast enough.

‘In South Africa, Crowd-sourced Publishing Tackles Book Poverty’

On Publishing Perspectives today, I talk about the sobering state of South African books, and what we’re doing at Book Dash to help fix that.

If as a publishing industry in 1994 we’d taken a twenty-year view, we might have seen that our biggest challenge lay in making books visible to South Africans. We’d have given away millions of free books to children – just as the UK does on National Book Day every year – and seen many of those children blossom into keen book buyers today. Seen this way, the market-based challenge lies not in finding right business model, but in taking a long-term view. Less like Jack’s beanstalk, more like bonsai.

Read the whole article here.

 

Crunch time for South African publishing

rhino_royal-ontario-museum_CC-BY-SAIt’s rare that a national industry is confronted with a single threat to its future. That just happened to South African publishing. A few days ago, the South African Department of Basic Education released a policy document, for public comment, that explains how the DBE would like to handle textbooks going forward. (If you’re in publishing, read it, here’s the PDF. Instructions for official public responses here.)

The document has big, important ideals, and contains many smart ideas. The emphasis is on making sure every child has textbooks, and no one can fault that. There are many ways to help make that happen: the department must make its textbook money go further, the distribution of textbooks must be simpler, and schools must try to reuse all of their textbooks from year to year. The document addresses these issues and more. The issues have inherent challenges and complexities, and it’s clear the authors have thought about them.

But the document contains one, huge, glaring misadventure: the DBE wants to buy a single textbook in each subject for the whole country. For example, every grade 10 child in the country will use exactly the same maths textbook. The same history textbook. The same life-orientation textbook. Whether they’re at a high-end school in suburban Joburg or a rural school in the Northern Cape.

The theory is that, this way, the DBE will find economies of scale that will reduce the cost of textbooks and their distribution, and that this will help them achieve universal textbook coverage.

It’s very difficult to respond to this theory seriously, because it’s flawed to the point of absurdity. Even if the DBE did save money this way, it wouldn’t save much, and the damage done would be far more costly in the long term:

  • Teachers would no longer choose the textbooks they want to use. They’d be less interested in a textbook prescribed for them centrally, and wouldn’t be able to pick a textbook that suits their particular class.
  • Right now, we have a few dozen educational publishers, dominated by about five big ones (Pearson, Oxford, Macmillan, Via Africa, Cambridge). Within two or three years, publishers who don’t get to sell their textbooks would go out of business. Publishers I’ve spoken to reckon there would be space for three or four publishers, and only if they have owners with deep pockets to help them weather years with no government sales.
  • Private schools, which are growing rapidly, would continue to buy whatever textbooks they choose. They’d benefit from choice and diversity, and have the ear of those publishers that survive. This would further increase the gap between the quality and perceived quality of state and private schools. Gaps like that create self-reinforcing vicious cycles.
  • Given the make-or-break high stakes involved, the process for choosing only one textbook would be even more prone to corruption than the current system. In the current system, the DBE chooses eight books per subject, a number that is already the result of a massive concession made by the publishing industry a couple of years ago. Before that, any number of textbooks might have been approved for sales to schools.
  • We’re only beginning to figure out how best to create and distribute digital textbooks. To evolve great systems, we need a diverse environment, a constant churn of solutions adapt-or-dying, funded by risk-taking angel investors. A one-textbook policy would kill that process in an instant and set digital textbooks back years.
  • Promising initiatives to create open textbooks (like Siyavula’s) could all but disappear. Open textbooks rely on philanthropic sponsors to cover their development costs, and sponsors would be wary of funding textbooks that might never be used in state schools.

No doubt there will be much public comment on these issues. Signs are ominous that it might not make much difference: a senior DBE leader told a group of publishers recently that their position on procurement (which includes buying one textbook per subject) is very unlikely to change. We could have guessed that: weeks before the proposed policy was made public, the Minister had already announced it in her budget speech as given:

2014/15 has been targeted as the year by which the sector will be moving towards one textbook, per learner, per subject.

In South Africa, the vast majority of publishing revenue comes from the government purchase of textbooks. This revenue cross-subsidises the less lucrative publishing of fiction, children’s books, and reference books like dictionaries and atlases. As I’ve mentioned, it funds much of the experimenting around digital textbooks and online learning. And educational publishing – despite many weaknesses in this regard – supplies most of our country’s book-publishing skills. As a country we’ll pay a terrible price if our educational publishing sector shrinks.

That said, the DBE is not the root of the problem. They are simply reaching for the biggest hammer they can find to solve a long-standing problem: the gross under-supply of textbooks to poor students, and the perception that books in South Africa are too expensive and exclusive. Even if it’s the wrong hammer on the wrong nail, as the publishing industry we have to take a long, hard look at the part we’ve played getting to this point.

The spectre of state publishing and a single-textbook system has been around for many years – certainly for the twenty years I’ve worked in publishing – and always in response to these same basic problems. And yet publishing companies have not changed anything substantial about their publishing models or processes in those twenty years. As educational publishers, we’ve repeatedly fallen back on our unshakable belief that we’re already producing the best possible books for the lowest possible price. And each time that the state has threatened to force our hand, we’ve persuaded them to let us keep doing things the same way. There have been tweaks to the system, but the basic model has never changed. What if we’ve been wrong the whole time?

So perhaps the chicken has finally roosted. We’ve scraped through our tests, but now it’s exam time and we have just hours to prove ourselves. Can we find different ways to do things, or do we tell our editors, writers, designers, marketers and salespeople to find other jobs? Whatever happens, we have a lot of honest, open talking to do.

Fights and rights—Amazon and the evolution of publishing

Virginia Woolf. Flush- A Biography. London- Hogarth Press, 1933For some years now, Amazon and major publishers have been arguing about how the book industry should work. Most recently, Amazon has been tussling with Hachette. Alistair Fairweather has a neat overview in the Mail & Guardian:

For more than six months Hachette, a large publisher, has been wrestling with Amazon – the largest online retailer of its books – over pricing. The dispute soon escalated from private negotiations to a public brawl with all the hallmarks of a schoolroom hair-pulling fight.

(Read the rest here, it’s interesting.)

Amazon is becoming a vertically integrated book company, a single house that handles everything from commissioning to sales. That’s what many publishers were a hundred years ago. Think Virginia Woolf and the Hogarth Press. (In some countries, like Egypt, they still are, as Ramy Habeeb explains in this great talk.)

Over the years, businesses that specialised in certain parts of the publishing process became independent of the rest of the publishing chain, until they formed distinct industries of their own. Specialist printers took the work of the publisher’s printing department. Specialist agents and editors took on the role of curating authors’ work. Specialist booksellers took on the work of putting books in front of consumers. The days of the vertically integrated publisher were over, at least in the developed world where books are big business.

Some companies managed to keep two publishing functions in-house: rights and branding. Rights mostly means entering into contracts, and branding means deciding which stories to tell and how to package them. Pretty much anything else could be left to the specialists. But if you kept rights and branding in-house, you could call yourself a publisher, because you got to decide where and how your books would reach people. And so, in the world of books, we use the word ‘publisher’ really to mean specialists in rights and branding.

USE, Re-use, repeat, recycle, rejoice! via the Incline Press at Chetham's LibraryIn this world, for fifty years or more, the specialists lived in relatively peaceful symbiosis. This was possible while the constraints of the book trade were constant: given available technology and good sense, you could change very little about the way books were made, moved and sold. Advances like computerized typesetting and print-on-demand shuffled things a little, but they did not fundamentally change the natural constraints of making, moving and selling books.

Most of us grew up in that world, so we think it’s normal. But it’s really just a phase in the evolution of the book business. A phase held in place by constraints on what was possible. And perhaps the biggest constraint – an effect of the physical nature of books and the way we sold them – was the book-selling specialists’ inability to sell books to exponentially more consumers.

Amazon changed that. Bezos and his team solved the constraint on sales, as Fairweather puts it, “by consistently pleasing millions of customers for nearly two decades”.

With a key constraint removed, the symbiosis was over. For a few years now, Amazon has been vertically integrating publishing under its very big roof. Today, Amazon is a publisher (rights and branding), a self-publishing service in ebooks and in print, and of course a marketing and sales powerhouse. It owns a large piece of the Internet’s infrastructure. And last year Bezos bought a major newspaper, which may help Amazon do and learn more about marketing.

Don’t think that this is normal, either. Or that Amazon will remain the only troll under the bridge. This new phase may last fifty years, as the last did. Or the rapid change that the Internet makes possible will shorten it dramatically.

In the meantime, if you’ve been working for a publisher, it may be useful to focus on this: if rights and branding are what you’re good at, get better at it. Most importantly, be creative about it. Ever since the Internet made copies almost free, the biggest barrier between you and new customers is a rights barrier. Don’t make rights your admin person’s side job. And don’t clog your rights department with lawyers: a lawyer’s job is to eliminate risk, and finding new customers always involves risk. While you may have to lose battles with Amazon, you don’t want to lose the battles over rights, such as battles over exclusivity, lowest pricing, and territory.

Of course rights are exactly where Amazon needs to win on its road to vertical integration. Amazon often asks for exclusivity in key areas (such as lowest pricing), for instance. And its direct approaches to authors are a move on original rights. Your best defense in rights discussions may be your own precedents: if you are already creatively exploiting rights you control, it’s that much harder for Amazon and others to claw them off you.

There is another reason to get creative with rights, too. In another part of this galaxy, but not so far away, open-licensing players are getting stronger every day. They are doing high-quality, game-changing work. The publishing industry’s us-vs-them attitude to open licensing (see this PDF press release and this PDF paper) is self-defeating: open licensing isn’t other than book publishing, it’s a creative tool of business.

I would love to see the publishers of today become the creative rights managers of tomorrow. Not only would it make my job at Paperight easier, but because publishing companies employ so many of my good friends and family. Ultimately, we all care most about the individual lives affected by all this fuss; the people who make the books and the people who need them. Wherever they’re coming out ahead, the book business is doing well.