Textbook Publishing in a Flat World

• By Dian Schaffhauser
• 08/06/08

According to the National Association of College Stores in a 2007 survey, the average cost of a new college textbook was $53. The founders of Flat World Knowledge, which launches with its first run of college textbooks this fall, consider that too high--so high, in fact, that they'll be offering textbooks for free, at least in versions that can be read online.

If the student wants to buy a printed copy of the textbook, it will be printed on demand by the company and provided in color for one price or black and white for a lesser price. For the student who prefers to listen to the book on an MP3 player, audio versions will be available too. Each format will have its own cost structure, but on average, it'll tally up to about $30.

In this interview, Co-founder and CMO Eric Frank explains how he and Co-founder and CEO Jeff Shelstad expect to make money following an open source model of publishing and why faculty members from 15 schools--among them, The University of North Carolina at Charlotte, Houston Baptist University, Arapahoe Community College in Littleton, CO, and Santa Ana College in California--have signed on to add one of the Flat World textbooks to their courses as part of a beta-testing phase.

Dian Schaffhauser: What do the economics of the Flat World textbook look like?

Eric Frank: There are two major factors that play in our economics. We build our model on the average student spending $35. That means some will spend zero; some will spend $50 or $60. Most of that revenue is renewable. Certainly, some [books] will come back into a used book market, but they are a far lower volume than a traditional market because there isn't sufficient margin on those used books for the big players to aggressively jump into the game.

If you take an average course of 100 students and you take a traditional publishing offering, that first semester that new edition is available, they sell a new book to 80 students. Twenty buy nothing because it is too expensive, and they just don't see the value. Then, that 80 turns to 48 the next semester, roughly speaking. What happens is that used books displace about 40 percent of the sale each subsequent semester that the book is out.

... Our model is saying, we're going to make less the first time, but we're going to get more students in that class to buy things, and they are going to buy them more consistently over that same timeframe. Our revenue flows over a two-year adoption are very similar to a traditional publisher.

That is secret sauce No. 1. Secret sauce No. 2 is we're also able to significantly reduce our cost of doing business. There is lots of process innovation that doesn't happen in big publishing companies.... I just fundamentally do not believe that we need 350 sales reps to sell, given that our model is so dramatically different. We need reps, no doubt. We need marketing, no doubt. But do we need nearly as much? I do not think so.

Schaffhauser: What's open source about Flat World's scheme?

Frank: There are two major drivers of what makes us open source. No. 1, there's a legal foundation. Our books are still copyrighted, although one difference is that our authors retain their copyright. We do not. They simply license it to us to be able to market and sell under our model. Nonetheless, when we make it available to a customer, we do so under a variation of a Creative Commons license, [which says] some of our rights are reserved and many rights are not reserved. They are given to the customer with the right to create a derivative on that original work.... The only restriction is that they need to attribute their derivative to the original authors and to Flat World; they need to make their version available under the license under which they got it; and they can't make commercial profit--they can't commercialize the thing that they have created.

There's also a technological foundation. You've got to give people a platform in which it is easy for them to make the kinds of changes they want to make. If you think about the average instructor, they have to cut themselves to fit the book and say, "I am going to make a syllabus. It's going to jump around in different places in the book. We're not going to cover that; I'm going to give you a reading on something else or some of my own problems or my own case study."

What we're saying is, "We're going to give it to you on a platform that allows you to make the book fit. You can reorganize chapters by clicking and dragging and dropping the sections. You can delete things at a click of a trash can. You can add your own Word file into our document, and it will paginate, it will be added to the table of contents, it will design it automatically to look like the rest of the book. We're giving them a platform to be able to do all that.

When a customer creates their own version--I just want to be clear about this--is this a Wiki? It isn't. We fundamentally believe that most customers who come to Flat World, they're going to be most interested in the original version of the book that is being authored and maintained by experts in the field that are highly recognized. But when somebody makes a copy of that and modifies it, they are really doing it because they believe there's value for their teaching and for their student's learning in their class. We give them the option of either keeping that as a private version or adding it back into our catalog as a derivative of the original and explaining to their peers what it is that they have done. So that somebody who comes in over time might actually be looking at, "Oh, here is the original book, and here are 12 derivatives that have been created. I wonder if there's somebody that has done something that is more along the lines of what I would do, and I am going to start with their versions and then go from there."

Schaffhauser: How does the author get compensated?

Frank: Students have made it very clear to us that at the right price point, they would pay for convenience. "Yes, I can read your book online for free," and about 10 percent of them tell us that is what they would do. But the rest tell us that they would buy some combination of a black and white version of the book for around $30; a print version; a full color version of the book for around $50; an audio version of the book for around $20.... The point is there's convenience. They can choose how they want to consume it, how much they want to pay. Our authors get a 20 percent royalty rate, which is higher than industry average on any sales, on any of those versions.

The other thing we do is create sales study aides around our books--things like podcast study guides for each chapter, Web-based practice quizzes for every chapter, animated solutions of complex problems with video instruction, mobile flashcards, all the key concepts for chapters that you can use digital flashcards for. We sell those iTune-style, where it's 99 cents whenever you need one, or you can buy a subscription for all of them for the entire semester for $19.95. We pay our authors 20 percent of that.

In the future, we believe that there are additional revenue streams available to us. For example, let's say I have 20,000 students studying from my junior-level accounting book, and I go out and find mid-sized accounting firms around the country that want to recruit but don't have the funding to put the recruiter on campus like the big four accounting firms do. Well, we could say to our student customers, "Hey, if you are looking for a job and you would like to be contacted by a recruiter that fits the place you are looking for, then you can opt in and fill out the survey about your career interests, what area of the country you want to work in, what accounting you want to specialize in, and we'll parse that data and pass it along to our accounting firm partners who are willing to pay for it, and they will contact you." Then our authors will get paid their 20 percent royalty on that.

Schaffhauser: Is the fundamental product, the textbook itself, going to be same as what we're accustomed to right now?

Frank: I think the answer to that is more yes than no. We actually think that, over time, there are interesting ways to enhance the product like embedded tutorials and more and more things that really enrich the learning experience. But initially, by and large ... we're actually trying to create a product experience that feels familiar but with a radically different usage and distribution pricing model. I will say that our online books are complete books. I do think that there's more functionality in that online book than what people are getting today.

For example, our first book in advertising follows the unfolding of a campaign that this ad agency in New York runs with MSNBC.com. We feature players from both of those--in the agency and the company--and we do audio podcasts and video footage integrated through the book. There's innovative multimedia; there are pedagogical advantages. We can pull all the key terms into the column and you can click it. It will pull off the definition of the key term so you can study efficiently. We have the ability to search the book for a term or search across the entire Flat World Knowledge portfolio of books for a term.

Schaffhauser: Will Flat World be launching with first edition content?

Frank: Yes, they will all be published initially as first edition. And then we will, like publishers do, publish new editions. Our office will publish and maintain new editions over the life of that book. I think the difference is, in our model, we should not be doing new editions based on market pressures. We will do them based on content and when the expert author feels like there has been enough change that a new edition is merited.

Schaffhauser: When you make the statement that market pressures would not drive the decision to put out a new edition, is that the standard practice?

Frank: Yes, I think that the practice of publishing new editions has largely become an exercise in flushing used books and international gray market books and pirated editions out of the marketplace and refreshing revenue for the publisher. It has become a necessity. If you look at the publisher two years into the adoption of the book by "University of X," they are getting almost zero new books sold at that point. There are so many of these other things in the marketplace that if they waited four years to come out with a new edition, they would have almost three years of negligible sales. They just financially cannot do that. They are under this pressure to flush all those used books out and replace them with new books again.

Schaffhauser: Are there curriculum categories or subjects where this model seems to resonate more closely with the potential authors, the faculty, and the students?

Frank: Initially, we're focusing on business and economics. Internally, we just have a lot of expertise in that area, a lot of author relationships that we can bring to the table. It is also a great curriculum globally, so a lot of times, a course taught in this country looks a lot like the business course taught in Singapore. The curriculum travels very well. It is also a curriculum that is taught oftentimes in English around the world so, that adds that global potential for business and economics textbooks. I think faculty is sort of open and receptive to understanding new models and approaches.

Once we establish a beachhead of success, we'll likely begin to identify and publish in other fruitful areas. I think engineering is another one--very expensive books, very global curricula....

There are some markets like science that might be challenging on the cost side for us. The expense of rendering really sophisticated anatomy and physiology images, it might be prohibitive for me in the early years of the business, whereas the cost of typesetting mathematical equations in engineering isn't.

Schaffhauser: What haven't I asked you?

Frank: I do not think about this as a traditional print book versus an e-book. I actually think of [us] not as a digital publisher, although, of course, at the heart of this thing is a digital workflow, but at the end of the day, we're a publisher. We publish books, and when we do, instead of publishing them in one format, which is print, we publish them in multiple formats, which is black and white print, color print, audio, digital. I think that is really the key difference. I think that the key technology that unlocks this whole thing is actually print-on-demand more than anything else because I think that the highest demand is still for a print book. At the end of the day, I want to be known as a textbook publisher with simultaneous formats.

I think the fundamental problem that Flat World is fixing ... is that there has always been this imbalance in this marketplace. A faculty member chooses the book, but he or she doesn't pay for it; so they do not think a lot about the price. As a result, as prices continue to go up, the students are going to be paying. What we're fundamentally saying is, "Listen, professor, you can do your job, take a great book, get a great author, get a great book, but when you make a decision to use a Flat World book, what you are doing is taking great learning material, but now giving your students the choice about how they want to consume it and if and how much they want to pay. Once you have done that, you're fixing this imbalance that exists."