Textbook Case: Apple and Others Strive to Be the Next Wave in Educational Publishing Published : February 20, 2012 in Knowledge@Australian School of Business
When Apple introduced a sample of Life on Earth, a new "enhanced" digital biology textbook by E.O. Wilson, on iTunes last month, the reading world took notice. With its videos, animation, moving molecules and guided tours, the book offers a glimpse of what textbooks may become in the very near future.
But that's only a small part of the story. On January 19, the company also launched its new iBooks 2 software for the iPad, an initiative that now includes textbook publishing giants Houghton Mifflin Harcourt, McGraw-Hill and Pearson. All three firms agreed to work under Apple's pricing model -- with titles selling for $14.99 or less -- much like music publishers did for iTunes. In addition, Apple rolled out a new publishing platform called iBooks Author, a tool that enables anyone to publish a textbook, and launched a new iTunes U application that brings courses to its iPad, iPhone and iPod touch users.
In a statement, Philip Schiller, Apple's senior vice president of worldwide marketing, said initiatives like iBooks 2 aim to leverage the 1.5 million iPads deployed in educational settings today. The promise is that students can save money, have a lighter backpack and engage in interactive learning.
Apple isn't the first company to try to crack the textbook market. Amazon.com sells textbooks for its Kindle platform as well as used and new physical books. Startups like Chegg.com offer rental textbooks as well as a marketplace to sell and buy them. Educational software company Kno produces so-called "smart" e-textbooks, featuring tools that, for example, extract key terms and create flashcards for readers. All of these efforts are targeted at two widely cited textbook industry problems: high prices and the need to develop more interactive and digital products for increasingly tech-hungry students.
"The textbook industry is doubly broken. It has all the problems of other forms of publishing, plus a legacy business model that imposes artificial scarcity in a market that ought to be all about low-cost abundance," says Kevin Werbach, a legal studies and business ethics professor at Wharton. "If there is any kind of book that should go digital, it's textbooks. They are used by a tech-savvy population that is served by intermediaries [schools] that could purchase digital readers if the students can't."
But while the textbook industry is poised to be disrupted, the latest efforts by technology firms like Apple may not be enough to overthrow it -- yet. First of all, Apple's approach, which revolves around the company's ecosystem and devices, poses certain limitations for institutions and for students, experts say, and the proposed cost savings from not having to purchase more expensive physical books may not add up. Also, it's unclear whether more elaborate, enhanced textbooks with 3-D graphics and animation will catch on and eventually replace the printed word.
Ripe for Change
For those companies looking to jump into the fray, the market is an attractive one. According to Bloomberg Businessweek, 19 million students spent $4.5 billion on textbooks in 2010.
"Education is a huge market, especially because it's centralized. And as Apple knows full well, usage patterns formed in school carry over when students graduate," notes Werbach. "The company that wins in digital textbooks will have a leg up in delivering content to those users outside of school. For Apple, though, books are just one vertical of digital content, alongside music, video, periodicals and software apps."
Andrea Matwyshyn, a professor of legal studies and business ethics at Wharton, notes that technology companies regularly target students. For instance, law students are given passwords to research services. When they graduate, it's likely these newly minted lawyers will subscribe to the same service. "Education customers can become customers for life," she says.
Wall Street analysts point out that Apple is looking to be a first mover in an effort to lock up students and the textbook market -- and to sell more devices. "Apple's new iBooks 2, iBooks Author and iTunes U announcements extend Apple's first-mover advantage in the race to get tablets into the hands of students," Piper Jaffray analyst Gene Munster wrote in a research note. "Content is critical, and we believe [Apple's] announcements will help to generate demand for iPads in schools."
Indeed, experts at Wharton note that Apple would get a 30% cut of its digital textbook sales, sell more iPads and potentially cultivate customers for the future. The catch is that educational institutions could be locked into Apple's platform. Stephen Kobrin, a Wharton management professor and executive director of Wharton Digital Press, points out that Apple's textbooks won't work on devices such as the Barnes & Noble Nook and Amazon's Kindle line of tablets and e-readers. Without open standards allowing students to consume content on the devices they want to use, interest in iPad textbooks may lag -- and institutions will be wary about being locked in with one company's technology. "Apple isn't the end of [traditional] textbooks, but an interesting direction," he says.
Kendall Whitehouse, director of new media at Wharton, agrees. "When textbooks are $200 a pop, there has to be a different model [for delivering educational content], but the devil is in the details. Ultimately, we'll get an open standard. Publishers will want to write once for multiple platforms."
When it comes to the educational environment, it's critical to maintain the balance between being innovative and remaining sensitive to practical realities, notes Matwyshyn. For example, if institutions were locked into one platform like the iPad, "the device could be outdated before the textbooks." Also, not every student learns the same way and may prefer different technologies beyond what Apple can provide. "The iPad is not the ideal device for all students. A system needs to be set up to allow different types of devices to flourish. For instance, some students may want a stylus with a tablet. Others may want to hear words rather than read them. Having one option -- the iPad -- limits capabilities and can be a hindrance to learning," she adds.
The Price Tag for Knowledge
Although Apple's textbook pricing -- $14.99 or less for each title -- appears to be cheaper than traditional textbooks, the actual costs for students are debatable. In a recent editorial, Bloomberg Businessweek pointed out that Apple's price covers only one course year -- not the three to five years a student might get out of a higher-priced physical book. The Bloomberg piece argued that Apple wanted to join the textbook cartel, not disrupt it.
Kobrin notes that a student may still save money buying a textbook three times on an iPad, but the cost of the hardware offsets those savings. A better, more cost-conscious approach would be to sell the e-textbook and then offer a subscription for updates, he says.
Matwyshyn points out that a student could spend as much as $1,000 over four years to buy two iPads during his or her tenure. "There's a cost of ownership issue." An alternative would be a model where the device isn't the property of the user and includes a flat subscription fee for students that covers the entirety of their college career. Under this model, the costs of a learning device -- Kindle, iPad or tablet -- would be rolled into the subscription, she says.
Whitehouse adds that there is another wrinkle to the interactive textbook cost equation: Availability of titles. Today, it's unclear how many titles will be offered on Apple's iBooks platform. If a student has to buy regular textbooks as well as an iPad and digital books, the ultimate costs could be higher, he notes.
No More Paper
Douglas Arthur, an analyst at Evercore Partners, wrote in a research note that publishers like McGraw-Hill could benefit from participating in Apple's iBooks 2 scheme. McGraw-Hill plans to initially offer five high school math and science textbooks through iBooks and double that amount by the end of the year. Publishers will charge less for a textbook, but also have less inventory and returns to worry about, according to Arthur.
Actual figures are hard to come by, but Whitehouse and Kobrin noted that the costs had to be high to produce an enhanced e-book like Wilson's Life on Earth. The risk is that those production costs -- including video crews, animation artists, programmers and audio people -- would only be affordable to large publishers. However, once an interactive textbook is created, distribution costs fall since software doesn't require paper, fuel or shipping, say analysts.
On an earnings conference call on January 31, Terry McGraw, CEO of McGraw-Hill, said that it's too early to determine how the e-textbook movement will affect his company's education business. McGraw added that his firm has been developing digital education tools for years, recently launched a cloud computing curriculum for science and math, and has already migrated some textbooks to electronic formats.
"I think it's very early on. We have developed five programs for the iPad for the high school market.... You're talking about a huge change in terms of not only the curricula but the distribution and the learning capability of it," said McGraw. "We're very excited about [participating in iBooks] and the $15 price point.... If we get the scale and if we get the volume, we'll be in fine shape."
Kartik Hosanagar, an operations and information management professor at Wharton, is optimistic that Apple's new publishing tool -- iBooks Author -- can bring competition to a market dominated by a handful of publishers. "One of the interesting trends is that with tools like Apple's iBooks Author, it's not just the big publishers, but any individual writer [who] can easily author textbooks. And marketplaces like Apple's iBookstore or Kindle provide ... instant distribution to millions -- something that is really hard to do as [someone] writing an 'old school' textbook. This opens up the playing field and can also help lower prices," he says.
However, Matwyshyn points out that Apple's iBooks initiative might meet some resistance in the education establishment. Are professors going to use a textbook from an unknown writer who happened to upload to iBooks Author? "Traditional professors will push back, and not all faculty will be on board with e-textbooks and iPads," she says. "Professors want to control for quality of content."
The Learning Curve
Perhaps the largest wild card in the various initiatives to upend the textbook market is the extent to which the printed word -- as opposed to new technology -- is embedded in the educational system. For instance, Kobrin has run experiments where each college student in a class received an iPad. "Only 65% of the students adapted to it well and used it for course materials. Not every individual can adapt."
According to Kobrin, it's also unclear whether interactivity translates into a better learning experience. "Textbooks may be enhanced, but it's not obvious that a talking head, animation or 3-D graphics add a lot of value. If they are well designed, they could, but it's not a given."
Hosanagar is more upbeat about the promise of interactive textbooks. Some efforts like Apple's iBooks and Chegg's e-reader software, which finds and highlights key terms, illustrate the potential for students, he says. "Interactive textbooks not only enhance learning, they can significantly change how students learn using textbooks," he notes. "Already, software tools allow bringing in related content from the Internet. Down the road, you can imagine the contents of a book adapting to a specific student's learning style -- [for example,] more pictures and videos for those who learn visually, or interactive quizzes tailored to concepts the student is having trouble with."
"Enhanced" approaches in e-textbooks may depend on the subject matter. For instance, a high school physics interactive textbook will be vastly different than one for an MBA course, Werbach notes. A physics book may rely on more animation and video, while the MBA textbook would require more data and analytical charts. Ultimately, the data and number crunching capabilities available in an e-textbook via an Apple iPad or Amazon Kindle may tip the scales toward digital distribution.
"There's no question that new forms of digital textbooks can enhance learning. However, we're at the very earliest stages of figuring out how to do that effectively," Werbach says. "Just as with online teaching, there are tantalizing examples in which technology creates a better student experience, a better experience for teachers, more effective learning and saves money at the same time." There are also examples in which the technology is simply a gimmick, or replaces real teachers with dull canned video lectures, he adds. "We'll need years of experimentation to develop best practices for interactive digital textbooks, and the best solutions will differ across subjects."