Institutional licensing: the next school-textbook business model

For years in South Africa, the textbook-publishing industry has face real threats to its future, because — faced with 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, the system is going to change, and publishers can either lead the change or be changed.

Are publishers planning or being planned for? (Image: Pedro Vezini)

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 world 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 10000 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: for instance, a national government, a province, or a consortium of schools. 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?

A high-school textbook might cost R1m (US$76K) 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, 10000 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. (In 2014, the South African government budgeted 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 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 may still be important, to a given publisher, that anyone can buy single copies at a per-copy price for small-scale or private use. Those sales would be small compared to licence-based revenue, and can be easily managed with existing print-on-demand and ebook-retail services.

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.


This was first published on arthurattwell.com.