blumenthal-hart Ltd.

Should E-Books be less expensive that printed ones?

Jeff B. — Sat, 01 Jan 2011 19:10:06 +0000

There is a common belief that since the cost of producing an e-book is virtually nil and certainly less than printing one, that e-books should cost less to the consumer. The answer is maybe. It all hinges on several variables including the fixed a variable costs along with the revenue model used.
Let’s define a few parameters first.

F — the fixed cost of developing the book, i.e. copy 1
V — the variable cost of producing and distributing a book
P — the price of the book
U — the units sold

The revenue, cost, and resulting profit to the publisher is given by:

Revenue = P x U
Cost = F + V x U
Profit = Revenue – Cost
= (P – V) x U – F

In deciding to publish or not, various estimates are made as to the expected values of the variables involved. On the cost side F and V can often be gauged by prior publications, and P is under the control of the publisher and market realities. Eventually one arrives at a set of estimates that yield a profit to earn the cost of investment F.

Here’s where the story diverges. Trade books have very low values of F compared to textbooks that have increasingly higher fixed costs of development. While advances in printing technology have resulted in moderate variable costs, trade and text do have structurally differing values. E-Books have virtually no variable costs associated with them.

Now the remaining question revolves around the risk involved. If we define risk as the variance of profit, then we have:

Risk = VAR[Profit]
= (P – V) x VAR[U], assuming P and V are known

As V goes down, Risk goes up. Also, as F goes up, the need for profit goes up to cover the cost of capital (and Risk).

Trade books can survive these economic considerations and still be competitive, but the textbook with very high fixed development costs cannot, at least under the current revenue model.

With revenue totally dependent on volume there is no wiggle room. If, on the other hand, revenue was guaranteed, fixed at a level independent of units, the the low variable cost, high fixed cost model will work.

We will see electronic materials (textbook replacements) in the Elhi market before the Higher Ed market. District and state wide adoptions guarantee revenue up front, whereas the individual professor adoption, single student purchase model leaves too much risk on the table at this time.

The Balanced Scorecard in Education

Jeff B. — Sat, 01 Jan 2011 07:00:00 +0000

The top level goal in education is most often measured by achievement on standardized tests. Unfortunately, by the time the test is administered, it is often too late to make a difference. During a project with Chicago Public Schools to help turn around the failing Medill School, we developed a Strategy Map for the project. Strategy Maps are a graphical representation of the Balanced Scorecard approach for driving change.

Strategy Map used to drive the turn around of Medill School

Test

Joan B. — Thu, 16 Dec 2010 22:06:38 +0000

Test post

Price Elasticity of College Textbooks

Jeff B. — Thu, 16 Dec 2010 22:12:14 +0000

Ask any student and they will say that college textbooks are expensive.Having worked in the textbook industry for many years, I am familiar with the used textbook market, sell through of books in the college store, and all the stories about how students try to save money through various actions. As an economist, I wanted to know the price elasticity of the textbook. Elasticity is defined as the coefficient that relates a percentage change in units consumed to a percentage change in price.

This is not a straight forward calculation. As consumers, students would purchase no more than one particular textbook so a change in the price would not impact their decision to buy or not to buy. Also, books are for the most part, priced the same across the entire college market. How then do you calculate elasticity?

Consider a bookstore. In any particular year they will have a certain sales volume in units driven primarily by the enrollment on campus. Last year’s sales are a good indication of what next year’s will be. On the other hand, the quantity of used books available does change from year to year. The percentage of used books in the mix is a surrogate for pricing a student’s basket of textbooks.

Looking at a cross section of college bookstores, one can construct an estimate of units sold based on the units sold in the previous year and the relative price from the mixture of used and new titles.

As expected the biggest factor in the units sold is the units sold in the previous year. However, there is a statistically significant value for the coefficient of relative price, our measure of elasticity.

That number is -0.6 or a one-percent increase in price will result in a 0.6% decrease in units sold. Textbooks are very elastic. Unfortunately for the student, the number of used books is most ofter limited.

There is a vicious circle here, as publishers try to reduce the number of used books by bring out new, more elaborate editions at a higher price, there is more demand for used or less expensive alternatives. Electronic materials won’t kill the textbook, it’s too busy committing suicide.

-0.6

The Used College Textbook Market

Jeff B. — Thu, 16 Dec 2010 21:59:32 +0000

What makes the market tick.