Textbook Rentals:

A market analysis of print and digital providers

Pamela Prieto Montoya Boston University August 2012

Executive Summary

The textbook rental market has gained firm ground as students familiarize themselves with the process of renting their assigned books, both on- and offline. As new platforms yield more efficient options for students to obtain their reading materials, textbook retailers are also finding opportunities in the e-book market. While this area of the industry is still emerging, there's a big prospect for favorable possibilities in the near future.

The Industry
The textbook market in the U.S. reflects the relatively free interplay of demand and supply and can be analyzed in this context. The demand side of the market

In 2011, the college textbook market was estimated at $8.7 billion. So far in 2012, that estimate is $13.5 billion.

is remarkable because of the separation of those who choose the textbooks and those who eventually pay for them the faculty and the students. First, its important to note that the demand for textbooks is less price elastic than that for other books and that the textbooks market is considered supplieroriented, meaning that few sellers generally deal with many buyers. The supply of textbooks contains three stages. First, publishers distribute books to wholesalers. Currently, five firms dominate the college textbook publishing industry and account for about 80% of all college textbooks published: Thomson, McGraw-Hill, Wiley, Houghton-Mifflin and Pearson. Then, textbooks

Breakdown of Textbook Market, 2011

Friends/ Book Swapping 3% Campus
Bookstore Off- Campus Bookstore 8%

are distributed to bookstores, whether on-campus, offcampus or online, via a relatively small number of

Other 1%

Websites 7% Online Retail 38%

On- Campus Bookstore 43%

wholesalers. Finally, textbooks are sold or rented to students in those bookstores.

New Editions
Publishers tend to push the development of new editions of textbooks in order to remove the inventory of used textbooks, which are not as profitable. Most leading textbook companies publish a new edition every three or four years. According to a study conducted by the Student Public Interest Research Group, a new edition of a textbook costs about 12% more than a new copy of a previous edition, and 58% more than a used copy of the previous edition. Additionally, textbook companies encourage faculty to assign homework that must be done on the publisher's website, which often requires passwords that are available only through the purchase of new books. Publishers may also wrap supplemental and sometimes one-time-use items along with textbooks, such as CD-ROMS, online passcodes, and bonus material, in order to reduce the resale value of textbooks. The typical bundled textbook costs 10-50% more than its unbundled counterpart. According to a report by the U.S. Government Accountability Office, bundled enhancements to conventional textbooks are the primary reason why textbook prices have increased so rapidly. In addition, bundling has also been used as a means of segmenting the used book market. A single textbook could have different combinations of supplemental items and Bundled books are 10-50% more expensive than their unbundled counterparts.

different International Standard Book Numbers (ISBNs). Therefore, when a bookstore attempts to track down used copies of textbooks through the ISBN, only a subset of the copies of that book will be found through that particular number. To help alleviate the rising costs of textbooks and other educational materials, the Higher Education Opportunity Act was passed by the U.S. Congress in 2008. It requires publishers to tell professors the price of the books they are ordering, and mandates that colleges include textbook costs in Internet course schedules. High-profit bundled materials must be priced and offered separately. The act also requires publishers to make clear what is different in each edition, which may dampen professors' tendency to order the latest and most expensive version.

Estimated Share of Textbook Purchases, 2012

E-Textbooks

Rented Print

Used Print

New Print 0% 10% 20% 30% 40% 50%

Used Textbooks
Approximately 10% of students share at least 1 textbook with classmates.
The prices of used books are varied, and the Internet plays a particularly large role in the purchase of used textbooks. At college bookstores, profit from used textbooks is slightly higher at 34% than that of new books, whose average gross margin is around 22%. There are four ways of purchasing used textbooks: campus buybacks, online book buyers, student-to-student sales, and textbook exchanges. When considering campus buybacks, the price a student receives is largely dependent on the decisions of the faculty. If a book is in good condition and will be used on the campus again the next term, students will receive around 50% of the original price. Otherwise, only 5 to 35% of the new retail price will be paid to students. Another method of resale is through online book buyers who buy textbooks to resell them for a profit. They operate year-round and often offer students free shipping. Additionally, students may sell or trade textbooks the traditional way, by reaching out to other students either by posting booklists online or around campus. Finally, students can exchange their textbooks online. Most of the websites who specialize in online marketplaces handle buyer and seller payments, and usually deduct a small commission only after the sale is completed.

Textbook Rentals
Textbook rental is considered among the most price-conscious options available to students. If a typical textbook costs $100 for a new edition, a used copy will cost around $75, an e-book or digital version $55, and a rental will be $45. Books need to have a decent shelf life so they can be rented several times because a bookstore won't recoup its costs if the fourth edition of a book is quickly replaced by the fifth. Although terms differ from retailer to retailer, textbook rentals are a simple transaction. The student pays a fee and is allowed to borrow the book for a set amount of time, sometimes with such restrictions as not being allowed to write in the pages or highlight text. Some companies offer students the ability to avoid late fees by extending their rental periods for a nominal fee, though campus bookstores generally have a set date of return that coincides with the end of the semester at their campus. Despite different merchants having different policies for textbook rental services, it is true with every company that not every book is available for rent. A 2010 survey of more than 2,000 college bookstore managers revealed that of the median number of titles available for rent was only 31 at each store, compared to the 850 titles available for purchase. However, nearly all stores (about 96%) said they were likely to continue their rental program.

Students have several options for choosing where to rent their textbooks. As the practice became more common, campus bookstores saw the opportunity to profit from the textbook rental business, and many now offer it as an alternative to buying required reading materials. Online companies such as Chegg.com, Collegebookrenter.com, and ecampus.com, also saw this opportunity and are currently vying for students attention when it comes to book rentals. Established booksellers, such as Barnes & Noble and Amazon, have also embraced rentals in order to appeal to the student demographic.

Electronic Textbooks
The e-textbook market has grown considerably in the past months, and is expected to grow rapidly within the next 5 years. In 2011, approximately 30% of textbooks became available in digital formats. Despite data from the National Association of College Stores (NACS) that shows that 75% of students would still prefer a bound book to a digital version for taking a class if the choice was up to them, research suggests that various other factors will affect the rapid growth in availability of digital textbooks. These factors include the advance of e-reader technology, as well as an increase in digital-first publishing and open textbook movements, such as those by Flat World Knowledge and the state-funded program Open Course Library.
Expansion of for- prot and online learning ins8tu8ons

Increased availability of digital content

Popularity of online textbook retailers

Factors that will aect the rapid growth in digital textbooks

Student buying/sharing trends

Popularity and evolu8on of tablets and smartphones

Rising costs of tradi8onal textbooks

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Although e-textbooks accounted for only 3% of the market in 2011, projections for the next 5 years place the segment at 44%. The market share for 2012 was already surpassed at 9%, according to estimates from CourseSmart, an emerging provider of digital textbooks.

Digital Textbook Sales Yearly Growth ProjecCons, 2011

44%

% of U.S. Textbook Market

35% 26% 19.5% 11% 3% 6%

2% 2010

2011

2012

2013

2014

2015

2016

2017

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Key Players
Chegg
The online textbooks rental market was developed largely by Chegg.com in 2007. Chegg is an online platform that has been praised for making the lives of college and high school students easier by enabling smart and resourceful decision-making. Chegg claims to be revolutionizing the way students learn by connecting them to the people and tools needed to succeed before, during and after college. Cheggs primary focus began with textbook rentals, but they have recently expanded their business to include textbook buybacks as well other student-centered aspects, such as homework help, course selection advice, note-taking services, and information about college selection and scholarships. Chegg has positioned itself as one of the leading online textbook rental companies whose mission to save college students money through textbook rentals has made it one of the Internets fastest growing businesses. Two years after its 2007 launch, Chegg saved students across the country more than $65 million off the cost of textbooks. By 2010, the company passed the $100 million mark in terms of student savings and was estimated to have made $1 million in revenue per day during the

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2009-10 winter semester. In 2010, Chegg reportedly received $146 million in investment totals. Most recently, Chegg began attempts to tap into the e-textbook market. In January 2012, the company unveiled their eTextbook Reader. Rather than an actual device, Chegg's eReader is a platform using HTML5 technology to allow students access to their digital textbooks through the gadgets they already own, such as PCs, Macs, iPhones or iPads. The eReader includes study tools, note-taking capabilities and access to other students' notes and highlights. What differentiates Chegg's eReader from other platforms is access to their Q&A Homework Help boards, which promise expert responses in 2 hours or less. For students ordering physical books through Chegg, the eReader will also give them access to the digital version for 7 days while the book goes through shipping and delivery.

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Barnes & Noble

Established bookseller Barnes & Noble ventured into the textbook rental market in 2009, starting with their partnerships at campus bookstores and continuing in their online platform. The company first piloted the rental program in six campuses, but by 2010 more than 300 of their campus bookstores were renting textbooks, accounting for about 30% of all sales on a given campus. Barnes & Noble currently operates more than 650 campus bookstores, and they claim to offer more textbook rentals than any other bookstore provider. According to the company, they were the first major retailer to offer new and used textbook sales, book rentals, and digital formats all in the same place. When purchasing new books, Barnes & Noble gives consumers free shipping for all purchases over $25, and some textbooks are marked down up to 30% off the original price. Used textbooks are promoted as being of the highest quality with limited damage. The rental program offers rentals of 30, 60, 90, or 130 days, with the option of extending the rental period or purchasing the book and the company. Thanks to campus partnerships, students can rent online and right on their campus. For the 2011-12 school year, Barnes & Noble College bookstores claimed to have saved students close to $250 million. Barnes & Noble released its own e-reader device in an effort to divert market share from Amazon's Kindle. The NOOK is now heavily marketed in

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college bookstores as well as in regular Barnes & Nobles nationwide. Through the NOOK, students can access the more than 2.5 million titles available in digital format from Barnes & Nobles. For digital downloading, Barnes & Noble also utilizes NOOK Study, a free software program that does not require the NOOK device. Similar to Chegg's eReader, NOOK Study allows students to access digital textbooks, interact with content, access coursework and take notes through the free application available for PC and Mac computers only. NOOK Study also includes free 7day trial periods of e-textbooks, 25% of which result in a sale of the e-book. Finally, Barnes & Noble stepped up its digital publishing with their PubIt! application. Since its launch in 2010, more than 11,000 independent authors and publishers have used the application to add more than 65,000 new titles to the Amazon Kindle Barnes & Noble NOOK

company's digital collection. In addition to self-publishing capabilities, the application also lets authors set their own price and track the sales activities of their digitally published material. These capabilities have great potential for professors who wish to bypass traditional textbooks in favor of their personally generated content. l

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Amazon
Amazon recently announced their entry into the textbook rental market as well. The company promises savings of up to 70% off the original retail price for textbook rentals in the U.S. With an Amazon Prime Student membership, students can receive their book rentals in as little as two-days' shipping. In addition to renting traditional textbooks, Amazon previously released Kindle Textbook Rentals in 2011. The rental service enables students to download the book on Amazon's Kindle e-reader for a set amount of time. Amazon promotes the reader as a less expensive and more convenient alternative to a standard paper textbook. The company indicates that books purchased through Kindle Textbook Rental will save consumers up to 80% off the list price of the textbook. Additionally, Amazon says that students only have to pay for the amount of time they need to use the textbook as they allow students to set their own rental period from anywhere between 30 and 360 days. A Kindle device is not necessary to access Amazon's
NOOK 22% iPhone 16%*

Student E-reader Ownership, 2011

iPad 10%

Kindle 52%

*Only if used to read e-books via apps.

textbooks, as their free Kindle app can be installed on a myriad of devices ranging from PCs to smartphones. Amazon also has its own publishing software. Kindle Direct Publishing allows users to publish and sell their books on the Kindle Store for up to 70% royalties. During the second quarter of 2012, 20 of the top 100 bestselling Kindle books were by Kindle Direct Publishing authors.

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Challenges
The main challenge for textbook rental services is the used textbook market. Students' textbook dollars are primarily being used to purchase used textbooks, with 70% of students having bought at least one used textbook compared to the 27% who rented their used texts. Textbook providers have tackled this issue by becoming part of the used textbook market themselves and offering buybacks at prices that are competitive to what is offered at campus bookstores. Additionally, low prices are the main advantage that textbook rentals have over used textbooks, and companies should continue to emphasize the amount of money students can save by renting, instead of purchasing, their required reading materials. Another important challenge for independent book rental companies is competition from colleges' own campus bookstores. According to the NACS, students are spending an average of 57% of their course material budget at their university bookstore, whether in-store or online. Some firms are taking advantage of this by partnering with existing campus bookstores to provide rental services, such as the Powered by Chegg Program available at select campuses. Others, such as Barnes & Noble College, are becoming the campus bookstores themselves. Among challenges faced by the industry is the fact that oftentimes students don't buy the textbooks at all. A recent poll of 1,200 students by CourseSmart revealed that only 58% of students buy all their required textbooks; on average, students purchased 77% of their assigned reading

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materials. One way companies are dealing with this is by offering additional services with their textbook rentals, especially for digital content. The ability to access advanced features with the rental of a textbook is a premium that is gaining strong ground with the increasing number of digital textbooks available. Of course, the realm of digital content is not without its obstacles. The main worry is that students don't want to use electronic textbooks. Consumer insights have yielded results that would suggest that students are not interested in utilizing digital learning material. A 2011 survey by the NACS found that only 18% of students had purchased en e-textbook in the past three months, and that only 25% would prefer it over a printed textbook if the choice was up to them. However, industry leaders are confident that as increased content becomes available, students will respond favorably to etextbooks. In light of Amazon's launch of their textbook rental program, Kate Worlock, Outsells lead education analyst told the Financial Times, Print
Top Reasons Students Prefer Digital Textbooks, 2010-11
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% All course materials in one place Less weight in their backpack Convenience Saves paper Price Prefer technology

textbook rental is essentially a shortterm model which

2011 2010

will be overtaken by the digital alternatives."

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Finally, the key to e-textbook rentals is not to focus on a particular piece of hardware, but to make the content available on a wide range of platforms. For example, according to data from CourseSmart, 66% of students now consider Apple's iPad device to be "in" on campus, compared to only 11% in 2010. However, the same survey suggests that only 5% of all college students even own iPads. The benefit in e-textbook distribution is not in exclusivity, but in accessibility, which is why Amazon and Barnes & Noble offer their content on a plethora of convergent media, despite proprietary relationships with specific e-readers. There are a variety of reasons why students would choose to digital textbooks over print editions. As digital content becomes a more common offering among college textbook providers and with the increase in technology usage around campus and in students' daily lives, digital content is projected to become a staple of college bookstore offerings in the near future.

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Focus Group Guide

In order to better meet students' needs, it is important for textbook companies to understand how the rental experience is received by students. The following is a guide of core questions for conducting focus groups aimed at gathering deeper insights into college students' attitudes toward textbook purchases and rentals.

Objective: To understand students' perceptions of textbook rental services. Participants: College students who have rented textbooks at least once, whether online or in-store. Question Rationale

What are three things that you would Primes students to begin thinking about their say influence your decision of where past experiences when shopping for textbooks. to obtain your textbooks at the beginning of the semester? Have you ever rented a textbook? Although everyone has been screened for a positive answer, this question introduces the topic of the focus group. Sets a reference point for students by asking them to recall a particular instance of textbook rental. Introduces the online vs. in-store paradigm. Provides insight into reasons for renting from different types of outlets.

When was the last time you rented a textbook?

Was this book rented online or in a store? What were some reasons that you decided to rent your book in- store/online?

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Show of hands: How many people prefer renting to buying their textbooks? Probing Questions:

Introduces the topic of benefits/disadvantages of textbook rentals.

Provide greater understanding of the > For those who prefer renting: What benefits/disadvantages of textbook rental as are some benefits of renting instead perceived by students. of buying? > For those who prefer buying: What are some benefits of buying instead of renting? Has anyone rented both print and digital textbooks? If yes, how was the digital textbook rental different from renting a print textbook? Probing Questions: > What are some benefits of renting digital textbooks? > What are some benefits of renting print textbooks? If you had to review your textbook rental, what are some ways you would describe the experience? Probing Questions: Brings discussion to a close as students evaluate their rental experience. Introduces the topic of print vs. digital textbooks.

Provides deeper insight into differences between print and digital material as perceived by students. Provide deeper insight into advantages/disadvantages of digital material as perceived by students.

Help develop evaluations of rental experience as If you could change anything about it, perceived by students. what would you change? If you were recommending it to another student, what would you say?

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Conclusions
With big-name retailers following the lead of online pioneers, the textbook rental market is in a state of constant evolution. A higher offering of textbooks for rent on the part of retailers and a growing sense of ease from students make it likely for more and more bookstores to add this model to existing offerings. Additionally, online textbook rentals are also expected to continue to grow as technology evolves into better, more interactive platforms for learning and interacting with digital content. Challenges for retailers include the prevalence of the used textbook market, the overbearing presence of campus bookstores, and students' unwillingness to buy textbooks at all. For digital content, the challenge will be in changing students' attitudes toward their preference for physical textbooks over electronic ones. For established retailers or those interested in adding textbook rentals to their list of services, the focus group provided can serve as a guide for evaluating their existing rental program or to gauge students' attitudes toward textbook purchases and rentals.

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