Apple textbook domination? Not so fast.January 20, 2012: 3:33 PM ET
A look at the math behind yesterday's iBooks announcement.
FORTUNE -- At yesterday's Apple event in New York City's Guggenheim Museum, senior vice president of worldwide marketing Phil Schiller was quick to point out how education has been at the core of the company since the beginning. But announcing a revamped iBooks program (as well as the launch of the iBooks Author and iTunes U apps) will do more than just affect how students learn arithmetic. It has the potential to change the math for all of educational publishing.
A detail overlooked by most, yesterday's event centered on K-12 books, a category that reported $5.51 billion in net sales in 2010, according to data provided by the Association of American Publishers. Because of the way electronic titles are bundled with other course materials, it's not possible to calculate how heavily e-books weigh into K-12 sales. But by comparison, net revenue for higher education publishing for 2010 was $4.55 billion, with $570 million coming from digital sales, a 70% increase over 2008 during which print saw only a 16% lift.
While it would seem safe to assume that the K-12 textbook market experienced a similar digital adoption rate, there is a fundamental difference between the two schooling systems as it applies to book sales: In higher education, students buy material (and computers) for themselves, while at the lower grade levels, publishers sell courseware packages direct to school districts, which also purchase computers for their classrooms.
In other words, yesterday's iBooks announcement only applies to schools that have iPads -- or are about to get them. Selling iPads to schools, not e-books, was Apple's (AAPL) big play of the day. Like in the 1980s, when they tried to control the PC market by getting kids hooked to Print Shop running on a school's Apple IIe computers, Apple is again trying to lock in young users by cornering the educational e-publishing market. The difference this time, however, is that Macs, iPods, and iPhones are ubiquitous outside the classroom, where last time Microsoft (MSFT) dominated the home and office, fencing Apple into the schoolyard and out of the larger world.
iPads aside, there is still a great deal of cash for Apple to reap by embracing the textbook industry. Assuming they are using the same 70/30 revenue split that they successfully pushed on the music industry and app developers with iTunes and their App Store, the company stands to add quite a bit to their coffers as the program matures. Most industries scoff at Apple's proposal and scuffle for more points. But the publishing industry is wise to take the split, because the costs associated with physically producing a book (printing, binding, warehousing, and shipping) roughly equal the share that Apple is taking for itself.
Genevieve Shore, chief information officer and director of digital strategy at London-based publishing giant Pearson (PSO) says iBooks and textbooks are not a like-for-like comparison because the process behind making these two products are very different. But the math does shake out quite neatly. "We're happy with the economics," says Shore, "otherwise we wouldn't be doing it." Pearson, which in addition to its educational publishing arm owns The Financial Times and the Penguin Group, generated $3 billion in digital revenues in 2011.
But one number that's markedly different from iBooks to textbooks is the price. According to Apple, iBooks will cost $14.99 or less, while textbooks prices can range anywhere from $65 to $120. In K-12 publishing, the reason for the high prices (aside from costly production values like reinforced bindings, hard covers, and four-color printing) is that books are typically bought to be used over a seven-year period, so the cost is amortized over that period of time.
With iBooks, says Shore, the textbooks will only be used for one year, and can then either be renewed or replaced with a new purchase. Despite the price change, Shore thinks the numbers will add up in the end. "It's all going to work out to adoption, usage, and engagement -- how effective teachers find these learning materials to be in this form," she says.
But San Mateo, Calif.-based CourseSmart has its doubts. With a catalog that includes more than 90% of the core textbooks used in higher education, the company has priced their e-books lower than physical texts since it launched in 2007. According to chief marketing officer Jill Ambrose, students who buy from CourseSmart generally save up to 60% compared to physical bookstore prices, but that is still a far cry from the low bar iBooks set yesterday. In addition, CourseSmart's e-books can be read on a variety of devices, including Apple's iPad.
"The challenge with this interactive content is that it's costly to create," says Ambrose. "Can they afford to do that at the prices they set today? I think it's a question of what's a scalable business model. There's not enough content going through there just yet to really determine that."
Yet by distributing the iBooks Author app for free, Apple cuts the cost and complexity of production for publishers, while locking them into selling on the iOS platform. (Reports have surfaced that iBooks Author codes with the popular, open ePub format, but encloses it in a proprietary iBooks wrapper.) That means Cupertino needs only to concern themselves with the production costs of iPads -- and finding ways to get more of them into K-12 schools.