Digital Textbook Sales in U.S. Higher Education — A Five-Year Projection

Digital Textbook Sales in U.S. Higher Education – A Five-Year Projection

Report Summary [Download PDF Version] © MBS Service Company Inc.

Over the next five years, digital textbook sales in the United States will surpass 18% of combined new textbook sales for the Higher Education and Career Education markets. This increase will boost revenues for digital textbooks to more than $1 billion and necessitate a general overhaul of traditional textbook production processes. The growth will also create avenues for new content publishers to enter the textbook market, lead to fundamental shifts in purchasing patterns around learning materials, and expedite the formal adoption of open educational resources to augment premium digital content.

Our five-year projections assume a current market share of 0.5% for digital textbooks in the U.S., and an average yearly increase in sales growth of approximately 200%-150% over the next five years. We project that growth to taper to approximately 50%-30% annual growth for the ensuing five years (2015-2019).

Within the general publishing and education markets, the growth of digital textbook sales will be influenced by the following factors:

Digital textbook and e-content pricing
Availability of digital textbook content
Advances in technology related specifically to digital textbooks
Intensified focus on integration of textbook/instruction with student outcomes
Increased growth of online learning
Rise in open educational resources and their use

In addition, the increase in e-textbook sales will be driven by a series of hardware and technology trends. These include:

Success of the iPad and the tablet form factor in general
Increased sales of netbooks and the success of Chrome OS for netbooks
Proliferation and continued popularity of e-reader devices and e-reader platforms
Growth of the smartphone market

Finally, the rise of e-textbook sales will be greatly influenced by consumer and broader media trends that favor the licensing or access of content as opposed to its outright purchase.

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Current Digital Textbook Sales and Trends

While digital textbook sales currently represent a small portion of the overall textbook market – approximately 0.5% – year-over-year increases show strong and steady growth.

CourseSmart, a joint venture of five large college textbook publishers, reported a 400% increase in sales in 2009 from the year before;¹
MBS Direct, representing 900 client institutions and 34 academic publishers, showed increases in digital textbooks sales of more than 100% in 2009;²
Interviews with representatives from leading textbook publishers reveal year-over-year increases between 80%-100% for the past three years, with sales growth in 2009 topping 100%;
According to “On Campus Research Student Watch 2010,” a 16,000-student survey released by the National Association of College Stores in fall of 2009, about 42 percent of students have either purchased or at least seen an e-textbook. That’s an increase of 24 percentage points from 2007.³

These growth numbers for digital textbooks are also consistent with the increase in the general digital trade book market. The International Digital Publishing Forum (IDPF) reported that in 2009, e-books accounted for 3.31% of all trade book sales in the U.S. up from only 1.19% in 2008. Sales of wholesale e-books for February 2010 were $28,900,000 for February, a 339.3% increase over February 2009 ($6,600,000). Calendar Year to Date sales are up + 292.2% from 2009.⁴

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Factors within the Publishing and Education Markets Affecting the Sales of Digital Textbooks

There are a number of factors that will have a positive influence on the sales of digital textbooks over the next five years.

Digital textbook and e-content pricing — The cost of textbooks and course materials remains the strongest determining factor in the purchase decision for most students. With digital textbooks from many publishers selling for 50% of print textbook prices, students continue to turn to digital solutions as a lower-priced alternative. In addition, new publishing initiatives have been launched in the last year that provide steeply discounted or even free digital versions of textbook content. Flat World Knowledge provides the online versions of its textbooks for free, and generates revenue via print versions, print-on-demand (POD) solutions, and sales of digital and print ancillaries. Overall, we expect prices for digital textbooks to remain significantly lower than their print counterparts, which will continue to stimulate the sales of digital textbooks.

Availability of digital textbook content — Reviewing available publisher titles at CourseSmart and MBS Direct, we observe that approximately 20% of current demand for print textbooks is addressed by general digital textbook availability.⁵ While the percentage of print demand trends much higher for larger publishers, it represents a much lower percentage of overall publisher titles. In other words, the long tail of textbook publishing is markedly underrepresented in the current digital textbook catalog. We believe that publishers will increase the availability of digital textbook titles significantly over the next five years due to three factors. First, a continued focus on pricing by students will force publishers to create additional lower-cost digital alternatives. The desire to reduce the percentage of used book sales, which is approximately 35% of the current market, will also drive availability of digital titles.⁶ Finally, the availability of digital textbooks will also be influenced positively by a proliferation of devices and technology standards that translate to increased demand and more efficient production costs.

Advances in technology related specifically to digital textbooks — Over the next five years, we believe student demand will advance well beyond price concerns and will also grow as a result of the new technology factors – devices, software, and marketplace experience. Specifically, the proliferation of mobile computing devices – netbooks, tablets, and smartphones – and mobile OS platforms such as Google’s Chrome OS will generate increased demand for digital textbooks among students and faculty. Moreover, the lock-in of the ePub standard for e-book XML will lead to greater production efficiencies for publishers which, in turn, will contribute to greater title availability.

Increased growth of online learning — Another trend in the market that will continue to drive the increase in digital textbook sales is the growth of online learning in Higher Education. Growth of this market has tracked as high as 20% annually since the Sloan Consortium’s initial report in 2002-2003, and its 2009 report shows a 17% yearly increase (compared with a 1.2% growth of the overall higher education student population).⁷ The online course market will continue its growth rate over the next five years and, keeping with current trends, publishers and institutions will favor integrated digital textbook options for those online courses. In addition, institutions will require improved reporting and tracking options related to all student learning materials in order to satisfy ever evolving state and federal requirements. This will also lead to the adoption of more e-content by the educational institutions.

Rise in open educational resources and their use — Beyond the increased availability of digital textbook content over the next five years, we will also see continued growth in the open educational resource (OER) or open content arena. The OpenCourseWare Consortium, which grew out of the M.I.T. project, now includes over 200 institutions worldwide and offers materials from more than 13,000 courses.⁸ Carnegie Mellon University’s Open Learning Initiative is a parallel undertaking in this space.

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Technology Trends Affecting the Sales of Digital Textbooks

As digital products, e-textbooks and their proliferation within the education market will inevitably be affected by broader technology trends in the consumer space. These trends include proliferation of specific technologies and devices, and all work toward the creation of broad accessibility to technology capable of displaying e-reader platforms with digital textbooks.

Popularity of the iPad and the proliferation of tablet devices — In the past year, the world has evolved significantly from the three essential e-book players in the market: Amazon Kindle, Sony E-book Reader, and the Nook. Between September 23 and December 1, twenty-three (!) new e-reader or tablet devices were announced for sale in 2009 and early 2010.⁹ And, while this new generation of tablet devices first debuted predominantly at the CES trade show in 2010, the current, intensified furor around the new form factor is related directly to Apple’s new iPad device. Released April 3, some industry analysts are predicting the iPad to sell more units that the entire e-reader market combined.¹⁰ The research group iSuppli projects worldwide iPad sales to amount to 7.1 million units in 2010. Sales will double to 14.4 million in 2011 and nearly triple to 20.1 million in 2012.¹¹ We project the iPad and upcoming Android tablets to become preferred personal computing devices for students by 2014. This form factor, particularly suited for media, will accelerate a growth in digital textbook sales.

Netbook sales — Netbooks remain a versatile device for e-books in the education market, pending the release of new tablet devices in the coming two years. October netbook sales were up 264% year over year and rose to an 11.7% share of the portable PC market. With the introduction of Google’s Chrome OS in 2010, netbooks will find a more specific niche in the market and provide appliance-type functionality. They will give users a fully functional mini computer than can turn on almost instantly. Additionally, these devices will focus on accessing all content and applications available on the Web.¹²

E-reader sales — While current e-readers are not specifically suited for digital textbooks, we will see next-generation e-readers in the next five years that support this content. Furthermore, the overall penetration of e-reading devices will drive the consumption of e-content. With regards to the current generation of e-readers, experts estimate that 3 million units will be sold in 2009 with sales of 6 million units projected for 2010.¹³

Growth of the smartphone market — The smartphone represents one of the fastest growing markets in mobile computing. Moreover, the smartphone has proven a popular e-reading device for many users. According to Nielsen research, 21% of American wireless subscribers were using a smartphone as of the fourth quarter 2009, compared to 19% in Q3 2009 and 14% at the end of 2008. The share of smartphones will continue to increase rapidly and, by the end of 2011, Nielsen expects more smartphones in the U.S. market than feature phones.¹⁴ Considering current demographics, this means, effectively, that as many as two thirds of high school and college students may have a smartphone within two years.

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Digital Textbook Sales in the United States – A Five-Year Projection

Considering current digital textbook sales increases, and basing our assumptions of the favorable evolution of factors contributing to increased digital textbook availability and access, we project the digital textbook market to surpass 18% of combined new textbook sales for the Higher Education, and Career Education markets in the U.S. by 2014. Overall digital textbook sales will increase 100% year-over-year in 2010, and continue to grow at rates of 150% and 120% respectively in 2011 and 2012. As publishers struggle with the eventuality of transforming their product models to digital-first, and as they adjust their sales efforts to address the growth in the digital market, we expect a certain amount of churn and an adjustment to sales growth in 2013 and 2014. In those years, digital textbook sales will increase 90% and 80% respectively.

Sales revenues for the same period will exceed $1 billion and will pirate sales from both the existing print and used textbook markets.

With the current Higher Education textbook market estimated at $8.212 billion, and with overall annual market growth projected conservatively at 2%-3% over the next five years, the market could reach in excess of $9 billion by 2014.¹⁵

¹⁶

We anticipate the following sales revenues for digital textbooks over the coming five years. These revenues represent a percentage of new textbook sales, which are projected at 65% of the total textbook market for Higher Education.

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Impact of Digital Textbook Sales on the Higher Education Publishing Market

The projected increase in digital textbook sales over the next five years will have a dramatic impact on the overall textbook publishing industry:

Reduction in new print textbook sales — Currently, digital textbook sales in the publishing industry are incremental to print sales. As digital sales reach 5%, we will see measurable reductions in overall print textbooks revenues. At 13%, digital textbook sales will cause a drop in print revenues that can no longer be accounted for by higher profit margins or a reduction in used book vulnerability [see Appendix A – Print Textbook Profitability Models].

Reduction in used book sales — The used book market will also be adversely affected by the significant increase in digital textbook sales. The predominant business model for digital textbooks in Higher Education will have students purchasing time-limited licenses for content that is protected by DRM. This basic “subscription” model, in addition to the lower price associated with digital textbooks, will offset the general appeal of purchasing used books or of selling back new ones at the end of a semester.

Increase in overall unit sales — Overall unit sales of digital textbooks will necessarily increase when compared to historical patterns for print because units will often be sold with limited licenses, and because second and third year cycles of editions will be pirated less by used textbook sales. This will offset lower price points and current production inefficiencies to allow digital textbooks to remain profitable.

Disaggregation of textbook content and new revenue models — The availability of more textbook content in digital format will lead to greater customer demand for customized content, as well as to a proliferation of digital product models by publishers using the same content – chapters, key concepts, topic bundles, etc. This demand for content disaggregation will translate into new revenue models.

New production workflows — Currently, textbook publisher production models are based on print workflows. Digital textbooks are created at the end of the production cycle when compositors create final production-ready files. As sales of digital textbooks begin to cannibalize print sales, and as their inevitable future as the replacement of print textbooks becomes more apparent, publishers will be forced to alter current production workflows to favor a digital-first process with POD available from XML files and templates.

New market participants — We should not underestimate the complexities involved in transitioning from traditional print publishing to new digital workflows for textbooks. The difficulty with this transition, particularly for larger publishers, will create obvious market entry opportunities for new, digital content publishing houses such as Flat World Knowledge or Lulu Existing publishing houses run a significant risk of being surprised by new entrants on the market due to their excessive focus on pricing and a lack of product innovation.

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Conclusion

Evolutions in content publishing, consumer behavior, and mobile devices are driving significant change in the textbook publishing industry. Over the next five years, this change will manifest itself in the form of increased digital textbook sales that will reach industry-transforming levels. By 2014, digital textbooks for the Higher Education and Career Education markets will represent 18% of all new textbook sales. Additionally, we project that, by the end of the decade, digital textbooks will make up more than 50% of the entire market.

Appendix A — Print Textbook Profitability Models

Current product publishing and finance forecasting within textbook publishing are based on traditional models of print textbooks sales. Viable textbook projects are generally required to have projected revenues of at least 6X plant costs in order to justify company investment. Within this traditional model, digital textbook sales are currently counted as incremental volume, or as added revenue (again, incremental to print), when bundled with a course cartridge or internal assessment solution.

Once digital textbook sales reach 13%, however, the finance model breaks down significantly as digital textbooks are no longer incremental and, instead, actually begin to pirate print sales deeply (6.5% decrease in revenue on the average title). When digital textbooks sales reach 20% of new textbook sales, based on current production and revenue models, textbook publishers will see a 10% decrease in revenues and a 13% decrease in project margin. At this point, publishers will have little choice but to change product, production and distribution strategies in favor of digital versus print.

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Appendix B — Author Biographies

Rob Reynolds was born and raised in Texas, and earned a Ph.D. in Spanish at the University of Texas at Austin. He has taught at a variety of colleges and universities including the University of Oklahoma, the University of Central Oklahoma, Oklahoma Christian University, and Yale University. In addition to scholarly research, Dr. Reynolds also began writing ancillary materials for Spanish textbooks in the late 90’s. After more than a decade as a university instructor, he transitioned into administration at the University of Oklahoma, where he served as a Director of Information Technology. In 2003, Dr. Reynolds left academia and joined the world of textbook publishing. First with McGraw-Hill and later with Cengage, he created strategies to help these companies transition from print to digital products. He co-founded Xplana Learning in 2004, which was acquired by MBS in 2009. Dr. Reynolds currently serves as Director of Product Design and Research for Xplana.

Yevgeny Ioffe was born in Leningrad, USSR and raised in Boston area. After completing undergraduate and graduate degrees at Brandeis University, he joined Xplana Learning in 2004. Ioffe worked for Cengage Learning as a Project Manager in 2006-2007, and currently serves Xplana as a Business Analyst and Researcher.

Notes

¹ http://chronicle.com/blogPost/Leading-E-Textbook-Seller/20566/
² MBS numbers are derived from internal tracking and reports
³ http://chronicle.com/blogPost/Leading-E-Textbook-Seller/20566/
⁴ http://www.idpf.org/doc_library/industrystats.htm
⁵ Numbers are derived from MBS Wholesale Customer Demand Information System data for print demand, and the current list of available e-content titles.
⁶ http://www.nacs.org/Research/IndustryStatistics/HigherEdFactsFigures.aspx
⁷ http://www.sloan-c.org/publications/survey/learning_on_demand_sr2010
⁸ http://www.nytimes.com/2010/03/31/education/31iht-riedopen.html
⁹ This research is part of the author’s research related to our blog, The Xplanation, can be perused at http://thexplanation.com or at http://delicious.com/xdpfguy.
¹⁰ See http://digitaldaily.allthingsd.com/20100324/prediction-1-2-million-ipads-sold-in-june-quarter-and-a-new-iphone-form-factor/?mod=ATD_rss and http://digitaldaily.allthingsd.com/20100402/all-ipad-and-no-play-makes-john-a-dull-boy/?mod=ATD_rss
¹¹ http://www.isuppli.com/News/Pages/iPad-Sales-to-Hit-7-Million-in-2010-and-Triple-by-2012.aspx
¹² http://news.cnet.com/8301-17938_105-10371015-1.html?part=rss&subj=news&tag=2547-1_3-0-20
¹³ http://mediamemo.allthingsd.com/20091007/the-coming-kindle-boom-sales-could-double-in-2010/?mod=ATD_rss
¹⁴ http://blog.nielsen.com/nielsenwire/consumer/smartphones-to-overtake-feature-phones-in-u-s-by-2011/
¹⁵ Total market size based on Eduventures Textbook Market Study and the National Association of College Stores, 2009.
¹⁶ Chart and figures are drawn from 2009 Textbook Market Study by MBS Textbook Exchange and Eduventures

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