THE DIGITALText BOOK REPORT2015JUNE JAMRICH PARSONS

Presented at the Text and Academic Authors Association (TAA) ConferenceLas Vega, NVJune 2015

BARGAINING POWER OF SUPPLIERS

THREAT OF NEW

ENTRANTS

INDUSTRY RIVALRY

MOOCs

Boundless

PIRATE

USED

DON’T BUY

BARGAINING POWER OF

BUYERS

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

Last year’s Digital Book Report was structured on Michael Porter’s Five Forces model, with an emphasis on four of the five factors: industry rivalry, threat of new entrants, bargaining power of buyers, and threat of substitute services.

INDUSTRY RIVALRY

In 2015, the textbook industry is still dominated by a handful of ESTABLISHED

PUBLISHERS.

1

Pearson, Cengage Learning, and McGraw-Hill are the top higher-ed publishers, while Pearson, Houghton Mifflin Harcourt, and McGraw-Hill are the top K-12 publishers.

New entrants are no longer “new,” but no startups have yet managed to unseat any of the

dominant textbook publishers.

2

THREAT OF NEW

ENTRANTS

Instead, a bevy of small startups and alternative distribution models chip away many small pieces of the textbook market.

Buyers continue to seek less expensive ALTERNATIVES to mainstream textbook distribution

channels, such as rentals and used books.

USED

PIRATE

BARGANING POWER OF

BUYERS

3

Alternative distribution models may cut off income streams to publishers and authors.

USED

PIRATE

BARGANING POWER OF

BUYERS

3

The economics of mainstream publishing do not have much wiggle room for reduced pricing. Author royalties, editorial costs, sales costs, and overhead make producing a high-quality academic book expensive.

Simply “going digital” does not offer much cost savings. The current model in which textbooks are offered in print and as digital actually increases costs because of the expense of the digital platform and conversion. The digital solution DOES, however, offer a way to eliminate used books.

Source: McGraw-Hill Global Education Holdings Q1 2015 Investor Update

The digital solution DOES, however, offer a way to eliminate used books.

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

DIGITAL BOOKS were once considered a huge threat to the textbook market. Would edtech companies eliminate the

market for printed textbooks?

The surge in overall digital book sales that began in 2010 reached a plateau in 2014. Several studies show that most students still prefer printed textbooks over

digital formats.

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

DIGITAL BOOKS might not be the biggest threat to the traditional publishing model. DIGITAL

PLATFORMS may offer a bigger threat.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

Authors need to remain aware of the trend toward online learning platforms.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

These platforms essentially merge a content management system with a learning management

system.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

Learning content is served to students from within the platform.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

These platforms use “chunked,” or modular content rather than monolithic textbooks.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

These platforms may not require textbooks as we know them, or even digital versions of the textbooks

we create.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

These platforms do need CONTENT, however, but supplying that content may require authors to learn

new skill sets in pedagogy and in the process of creating and submitting material.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

Publishers are likely to pay content creators using a work-for-hire model rather than a royalty model.

4

THREAT OF SUBSTITUTE PRODUCTS

OR SERVICES

The work-for-hire model will severely curtail upside profit potential for authors.

4

BARGANING POWER OF SUPPLIERS

The publishing industry has SUPPLIERS that include paper merchants and commercial printing companies for print books; and cloud service providers, programming teams,

and digital developers for content delivered digitally.

And then there are AUTHORS.5

Source: Margaret Atwood presentation Tools of Change conference 2012

In any ecosystem or business system, there are interdependencies.

Source: Margaret Atwood presentation Tools of Change conference 2012

The publishing ecosystem cannot exist without content creators—authors.

BARGANING POWER OF SUPPLIERS

What do we know about textbook AUTHORS AS SUPPLIERS in the publishing industry?

5

“Textbook Author Survey”

• April 23, 2015 through May 30• 92 participants

A high percentage of survey participants have been active authors for more than 25 years.

Survey Results

Humanities 6 6.7%

Social Sciences 16 17.8%Natural Sciences 15 16.7%

Mathematics or Computer Science 14 15.6%Law 1 1.1%

Medicine 5 5.6%Education 9 10.0%

Business 10 11.1%Other 14 15.6%

What is your main subject area?

How many years did you teach in the subject area for which you write textbooks?

Survey participants are experienced subject-area teachers.

What company is your primary publisher?Pearson 27 29.7%Cengage 28 30.8%McGraw-Hill 13 14.3%Georg von Holtzbrinck

3 3.30%

John Wiley & Sons 2 2.2%Wolters Kluwer 0 0%Reed Elsevier 1 1.1%Informa 0 0%Houghton Mifflin Harcourt

1 1.1%

Other 16 17.6%

What is the HIGHEST royalty rate you’ve negotiated for a print book you’ve authored?

The average “high” royalty rate paid to survey participants was 14.21%.

What is the HIGHEST royalty rate you’ve negotiated for a print book you’ve authored?

A breakdown of the bracket with the highest frequency shows 15% and 18% to be common.

What is the LOWEST royalty rate you’ve negotiated for a print book you’ve authored?

The average “low” royalty rate paid to survey participants was 9.2%.

What is the LOWEST royalty rate you’ve negotiated for a print book you’ve authored?

A breakdown of the bracket with the highest frequency shows 10% and 12% to be common.

Are any of your textbooks sold in digital editions?

Yes 70 76.9%

No 14 15.4%

Not sure 7 7.7%

A significant number of textbooks appear to be available in digital formats.

In which formats are digital editions of your textbook sold?

Publisher’s proprietary formats are the most popular for digital textbooks.

Yes 43 61.4%

No 27 38.6%

Have you viewed your digital book?

Did you have input into any of the following for your digital book?

Layout 10 33.3%Interactive quizzing 13 43.3%Pedagogy 16 53.3%Media (videos, animations, audio) 18 60.0%Other 6 20.0%

Which best describes the royalty rate for digital versions of your textbook?

Royalty rates are the same for digital and print 43 63.2%Higher royalty rate for the digital version 4 5.9%Lower royalty rate for the digital version 21 30.9%

The trend is one royalty rate for print and digital.

Yes 36 40%No 54 60%

40%

60%

Are you aware of any pirated copies of your textbooks?

As more textbooks are distributed digitally, piracy is likely to increase.

40%

60%

Are you aware of any pirated copies of your textbooks?

Pirated copies reduce sales and royalties. Authors can help publishers by watching for incursions and reporting them to the publisher. Authors should be aware of contract wording that describes the publisher’s responsibilities in curtailing piracy.

When your books are sold outside of North America, is the royalty rate reduced?

Yes 67 74.4%No 13 14.4%Not sure 10 11.1%

74.4%

14.4%

11.1%

When your books are sold outside of North America, is the royalty rate reduced?

74.4%

14.4%

11.1%

Digital versions typically do not incur costs for shipping and exporting, therefore tiered pricing based on location may not be equitable for authors.

Is your royalty rate reduced when your textbooks are sold in bulk or wholesale?

Yes 34 37.4%No 23 25.3%Not sure 34 37.4%

37.4%

25.3%

37.4%

Is your royalty rate reduced when your textbooks are sold in bulk or wholesale?

37.4%

25.3%

37.4%

Authors should be aware how “bulk” and “wholesale” are contractually defined. Are Amazon, iBooks, and Nook sales included in this category?

67.8%

26.7%

5.6%Do you have a non-compete clause in your contract(s)?

Yes 61 67.8%No 24 26.7%Not sure 5 5.6%

Although most authors have non-compete contract clauses, this limitation is not universal.

Does your contract give you the right of first refusal for revisions of new editions?

Yes 43 47.3%No 14 15.4%Not sure 34 37.4%

47.3%

15.4%

37.4%

Yes 39 42.9%No 19 20.9%Not sure 33 36.3%

Not Sure

Yes

No

When the publisher no longer wants to publish one of your textbooks, does the copyright revert to you?

56.0%

16.5%

27.5%

Yes 51 56.0%No 15 16.5%Not sure 25 27.5%

Do you have a sunset clause in your contract(s)?

I get half of my previous royalty rate for all subsequent editions 0 0%

I get half of my previous royalties for the first edition, then 25% for the next edition, then 2% for all subsequent editions

4 8%

I get half for the first edition, then 25%, then nothing 21 42%I get 10% of the previous royalty rate for all subsequent editions 1 2%

I get 2% royalty rate for all subsequent editions 0 0%

I get no royalties for editions that I don't participate in 1 2%

Not sure 5 10%

Other 18 36%

Which of the following best describes your contract’s sunset clause?

In 2014, approximately how much did you receive in royalties for your textbook(s)?

Less than $5,000 17 20.0%$5,000-$9,999 2 2.4%$10,000-$19,999 10 11.8%$20,000-$29,000 5 5.9%

$30,000-$39,000 4 4.7%$40,000-$49,000 4 4.7%$50,000-$99,999 11 12.9%More than $100,000 33 37.7%

Pearson

Cengage

Holtzbrinck

Authors earning more than $100,000

Others

McGraw-Hill

Conclusions and Analysis

The textbook industry remains dominated by established major players, though startups and alternative distribution channels eat away at the market.

Established textbook publishers are betting on their proprietary distribution channels to curtail sales of used books and create the impression of more reasonably-priced books.

Authors are a key resource for the publishing industry, but trends toward publisher content/LMS platforms may reduce the use of monolithic textbooks in favor or chunked content.

Publishers are increasing their use of work-for-hire contractors for creating content, which may limit the upside for royalty earnings.

Conclusions and Analysis

Authors have negotiated royalty rates ranging from 1% to 30%; the average “high” rate is about 14%. Authors earning significant income from royalties tend to be published by Pearson or Cengage Learning.

A significant percentage of textbooks are available in digital format with authors reporting that royalties for digital are typically the same as for print.

Many authors are aware of pirated copies of their textbooks; piracy is likely to increase as digital versions become more prevalent.

Author contracts usually have a non-compete clause, which prevents authors from publishing similar content with other publishers or through self-publishing channels.

Author contracts also have a sunset clause and a copyright reversion clause. Authors and publishers may wish to re-examine how these clauses apply to emerging publishing models; particularly how “in print” wording applies to digital products.

June Jamrich Parsons is a textbook author, digital publishing pioneer, and a fellow at the Textbook and Academic Authors Association. Contact the author via LinkedIn