Digital Delivery Services in Education: A White Night for a Grey Market

Digital Delivery Services in Education: A White Night for a Grey Market

 

Digital Delivery Services in Education: A White Night for a Grey Market

Supap Kirtsaeng came from Thailand to the United States to study at Cornell. Much to his chagrin, he found that Wiley textbooks cost considerably more in the US than back home.  Seeing not only a less expensive way to get the textbooks he needed, but also a business opportunity, Kirtsaeng had relatives in Thailand send Wiley textbooks to him in the US, which he sold on eBay.

Textbook Arbitrage

Kirtsaeng realized that he had an opportunity to arbitrage the international pricing discrepancy of the same textbook.  He was able to profit from this arbitrage opportunity, to the tune of $1.2M.  Not surprisingly, Wiley took him to court in 2008.

Kirtsaeng vs. Wiley was put to rest on March 19, 2013 with a decision from the US Supreme Court, who found in favor of Kirtsaeng.  The decision of the Court was based upon the first-sale doctrine of the US copyright law.   The first sale doctrine addresses the rights of distributors of physical copies of copyrighted works.  The first sale doctrines states that once a physical copy is sold, the copyright owner no longer has a claim in the specific material object in which the copyrighted work is embodied, and that the buyer of the copy can then dispose of it as he or she sees fit, including reselling it.   If that content is protected under copyright, the buyer cannot create additional copies of the book, but the buyer can sell their copy. On that basis, Kirtsaeng had the right to resell the copies he purchased, even if he purchased them in Thailand.

Publishers did not meet this decision with enthusiasm.  For some time, US educational publishers have sought opportunities for revenue growth by selling textbooks abroad that are nearly identical to the books sold in the US.  However, acknowledging realities of local economics, publishers typically sold those books at prices far less than in the US.  They could afford to do so because the international sales represented purely incremental revenue. The Kirtsaeng decision essentially removes publishers’ ability to differentially price for international markets: if they price the foreign sales lower they are exposed to Kirtsaeng-style arbitrage entrepreneurs who will undermine their US pricing.  On the other hand, if they price international sales at the same rate as US prices, they will likely lose the international sales.  Both paths are unpleasant for them to contemplate.

The damage caused by the international grey-market, illustrated by Kirtsaeng, is dwarfed by the damage that results from the used textbook market.  Like Kirtsaeng, resourceful students who completed courses and no longer needed the textbook saw an arbitrage opportunity to sell their copy to the next student—and the used book market was born.  To combat the used book market, publishers adopted a planned obsolescence strategy by shortening revision cycles.  Shorter revision cycles oblige Publishers to increase book prices to recoup costs in a reduced revision cycle—which ironically made the used book problem even worse.

Challenges presented by grey-market reimportation and the used book market are the same problem: legal book buyers using their rights under the first-sale doctrine to exploit arbitrage opportunities outside of the control of the publisher, and in doing so negatively impacting sales.   Publishers have attempted to mitigate this risk with reduced revision cycles and litigation.  But the results of these defensive strategies are decidedly mixed.

There may be a solution to this market challenge if publishers can expand their offerings beyond the physical creation and distribution of print copies and move toward the creation and delivery of online services on a subscription basis.  By embracing the creation and delivery of media and information services, rather than solely the distribution of hard goods, the publisher can regain control of pricing and revenue dynamics. The subscription component of such an offering could include pedagogical resources such as interactive and multimedia assets, assessment resources, and other teaching and learning components that most suitable for digital or online delivery.

Section 109 of the US Copyright code prescribes that first sale doctrine does not apply if the possession of the copy is “by rental, lease, loan, or otherwise without acquiring ownership of it.”  The first sale doctrine does not apply to subscription services.  With subscription services, publishers can price services for different markets without fear of reimportation.  And the used book market is eliminated.

There may well be a print component offered as a companion to the online subscription service.  The role and scope of the print component, if there is one, is likely to vary across subjects and market segments.  In this way, print is ancillary to the core offering—the online subscription service—not the other way around.

Publishers seem hesitant to move away from the traditional textbook model.  This hesitation may be rooted in fear of change and concern regarding short-term top-line shortfall.  Even if the revenue trajectory is more stable and sustainable with a subscriptions-based approach, there may well be less revenue during the first year of a subscription program when compared to the traditional revenue curve of a new print edition, even with the subscription revenue.   However the subscription model’s overall revenue would be comparable, gross margins more favorable, and business results more predictable than the traditional print-based delivery and revenue model.

If educational publishers can present a new pricing and delivery approach, they may be able to both better serve the market and achieve a more sustainable business model. The era of the monolithic print textbook is coming to a close.  The Kirtsaeng decision is the latest indication that it is not sustainable.  It is time to move on.