Marty Manley on economics, politics, technology, and culture

How the Kindle Helps Destroy Textbooks

When Bill Clinton was elected President in the early 1990's, encyclopedias were a $1.2 billion dollar business in the US. The best encyclopedia, Britannica, owned half of the market and advertised "more than 80 Nobel laureates" among its contributors. A Britannica set cost over $1,000. They were sold door to door by over 2,000 commissioned salespeople who were skilled at persuading middle class families of the essential educational advantaged that 25+ matched volumes would bestow upon their children. World Book, owned by Warren Buffett, was number two.

His friendship with Buffett notwithstanding, Bill Gates destroyed the market for encyclopedias in 1993 when Microsoft launched Encarta, the world's first digital encyclopedia. Encarta had been a challenge to build: Britannica and World Book had both turned down Microsoft, which was forced to turn for content to Funk and Wagnalls — an encyclopedia sold in grocery stores. But the quality of the Encarta content didn't matter, since its quantity was limited to five CDs. Encarta was sold on CDs in part to promote the use of CDs in computers. The disks contained perhaps 20 video clips — you could watch them all in well under an hour. Not only did computer retailers have no idea how to market a box of CDs, but Microsoft priced Encarta $395 when they launched it. At first, the product went nowhere.

Three years later, a lot had changed. Every new computer had CD drives, Microsoft had dropped the price of Encarta to $99, and Britannica was bleeding so much cash that its owners sold it for less than its book value. Encarta had grown to $100 million in sales even though total spending on encyclopedias was $600 million — half of what it had been three years earlier. Microsoft was deliberately shrinking the industry, not growing it.

 By 2001, Encarta had once again doubled in size again and again chopped the market in half. That year, an entrepreneur nobody had ever heard of destroyed the encyclopedia business for good. Jimmy Wales started an open source wiki with no revenue model and no competitive barrier beyond the passion of the devotees of the site he dubbed Wikipedia.

Britannica long ago became an unimportant niche product. Two months ago, Microsoft surrendered and killed Encarta. In 17 years, they had used digital media to transform a $1.2 billion print business only to see the market demolished altogether by open source content.

Keep encyclopedias in mind when you consider the future of textbooks. Like encyclopedias, textbooks will be quickly weakened by digital media and then destroyed altogether by open source content. College textbooks as we now know them will cease to exist (K-12 textbooks will take a lot longer, since their purchase is usually mandated by state school boards. These were surely the folks that Mark Twain had in mind when he noted that "First, God created idiots. That was for practice. Then He created school boards").

The seven large textbook publishers, campus bookstores, textbook rental sites (especially the one that has been comically overcapitalized by a venture fund that should know better) are all heading for waters that will not only be rough — they will be pirate-infested.

Pirates? Yes. Amazon's announcement of the Kindle DX this week, along with similar announcements likely to follow from Netbook makers and from Apple, will enable large scale textbook piracy. Amazon knows it and TechCrunch figured out pretty quickly as well.

The reason is simple economics: textbooks cost students an average of $900 per year — a large fraction of a college student's discretionary budget. Except that textbooks are not discretionary. Just as drug companies exhibit little pricing discipline when the purchase of their products is dictated by physicians, textbook companies freely gouge students who have no alternatives. Publishers raise textbook prices much faster than inflation, release editions with new pagination but few meaningful revisions just to frustrate the sale of used copies of their books, and maintain overseas prices that are much lower. Students can see these "grey market" prices and rightly resent them, much as seniors chafe at the much cheaper Canadian prices for vital drugs.

Free textbooks translates into a lot of beer money — even after you buy a Kindle. The Kindle DX reads pdf files, so enterprising students will scan all major textbooks and post them on Limewire, Kazaa and other file sharing sites. These sites are ready-made for textbook file sharing but without a convenient way to read and annotate a scanned book, there has been little reason to bother. The Kindle DX changes that. Now you can read the books and see illustrations quite well. (You can even annotate with the Kindle — sort of. This is an area where functionality is likely to improve.)

Textbook companies and trade publishers will crack down on piracy of course. Which will annoy faculty who assign the books, since many faculty resent the price of textbooks. If record labels got so little sympathy by suing students that they were forced to abandon the tactic, it is safe to assume that textbook publishers will fare a lot worse. (Whether all books will be pirated is an interesting question. I have some sympathy for Richard Sarnoff's statement to the New York Times that iTunes shows that if priced correctly, customers will pay for digital content. At $5 per trade book, he is probably right. As the price points move higher, my bet moves to the rum-soaked guys with parrots on their shoulders). At present however, college textbooks are made for pirates.

So are college campuses. Not only have American universities never been hotbeds of respect for private property, but analog copyright piracy is rife on most campuses. That's why how there are always plenty of photocopy shops next to college campuses. Professors assign "readers" consisting of collections of xeroxed articles or book chapters. Students shift their spending on course materials from the campus bookstore to the local copy shop. In a some cases, the copy shops collect and pay royalties on this material but often they do not. Moving faculty-sanctioned piracy from analog to digital is not a change in mindset, just in efficiency. Instead of sending a pirated master copy to Kinkos for reproduction, faculty will post their pirated readers behind a login that they share with students. Easier for professors, students, and trees.  That it inconveniences publishers and the local copy shop will trouble nobody.

One reason that faculty could care less about piracy is that they rarely earn significant royalties from publishing their research. I married into this business, so I understand that professors earn a lot when they publish. Their earnings come in the form of paid trips to conferences, speaking or consulting fees, the acclaim of their peers, promotions, and tenure. But faculty typically do not earn significant royalties from their published research. (The exception is if they write a widely assigned textbook, in which case they can make a fortune). Faculty have no incentive to protect the economic rents being extracted by textbook publishers.

Indeed faculty frequently give away course materials that they have written. Sometimes they post these materials on the web and urge students to download it. More often, they simply share material with each other. This instinct combined with open source licensing and the web has given birth to the explosion of open source educational content. The availability of high quality digital readers and of highly portable netbooks make open source content even more compelling.

There are several major open source initiatives — all spreading outward from major US technology regions. Four of the largest are:

• OpenCourseWare: This is an MIT-initiated program that is growing very rapidly. It was started by MIT faculty who wanted to make course materials available online for free.
  It now hosts materials for about 2,000 courses. The site receives over two million visitors each month and they have built more than one hundred content partners — primarily specialized departments of groups of faculty.

• Connexions: boasts 600,000 users per month from 200 countries (OK, we don't have 200 countries. Maybe they need to work on their geography offering). Enables faculty to develop instructional materials online or make use of existing materials. Everything is open-licensed.
  Users can read or print material online, or order a traditional book to be printed on demand.

• OER Commons: (Open Educational Resource Commons) This is a Hewlett Foundation-backed clearinghouse for open source content that began at Foothill College, a community college in the heart of Silicon Valley. OER develops open content and trains faculty to use OER tools and materials.

• MERLOT (Multimedia Educational Resource for Learning and Online Teaching)
  A no-cost digital library of 20,000 online course materials started by California State University.
  67,000 faculty use and develop material and they have built editorial boards in 21 disciplines to peer review the content.

These sources are destined to grow because both faculty and students benefit more from sharing course material than they do from assigning or buying textbooks. Open source content also reflects what Google's Melissa Meyer termed in her Congressional testimony this week "changes in the atomic unit of consumption".

The atomic unit of consumption of educational material is unlikely to remain a standardized expensive textbook — especially since the best teachers want a variety of teaching material. If they pay at all, students want to pay only for what they use. Digital media makes this possible and readers like the Kindle DX make it practical.

Some publishers will adapt to this change. Some will copy O'Reilly Media, which has done a brilliant job of enabling faculty to assemble modules of content from multiple sources and managing the associated micropayments. Others will enable students to select or customize material based on their strengths and interests. Some may employ multimedia and social media in creative and useful ways. Five sophomores at different colleges who realize that they are all researching the transformation of George Washington from a conventional to a guerrilla general might find useful ways to share insights and sources. Companies who are smart about building educational content and tools will find new ways to monetize this capability.

The best of this content will be sufficiently robust and self-directed to replace the worst of our current teachers. Some material will enhance classroom interactions,
others will target people who want to learn outside the classroom — a vastly larger market. New businesses are likely to preserve what is valuable about textbooks: material clearly organized so that students can master it efficiently. Accommodating a variety of backgrounds, knowledge, and learning styles is not likely to happen with a "one size fits all" book  — and we will all be better off for that. These businesses will all discard the cost of corrupt pricing, university cronyism (schools earn lucrative kickbacks from textbook sales at campus bookstores), mindless homogenization and hopeless efforts at ideological conformity or neutrality that characterize textbooks today. 

Most textbook publishers will, of course, go the way of Encyclopedia Britannica. The sooner the better. We are unlikely to look back on them fondly.

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