Cengage Unlimited Draws the Battle Lines in the Curricular Materials War

As Phil wrote about recently, Cengage has announced “Cengage Unlimited,” which is being described in various outlets as the “Netflix” or “Spotify” of curricular materials. It’s an all-you-can-eat digital subscription service to Cengage’s complete catalog. Spotify is probably the more apt comparison, both because the Netflix analogy is contaminated and because the music industry is a more apt analogy for the economic pressure this puts on content creators.

Make no mistake; this is a potential inflection point in the curricular materials market. There is a war raging between curricular materials that are “good enough,” meaning that the lower price has a bigger impact on student outcomes than any differences in the quality of more expensive alternatives, versus “better enough,” meaning both instructors and students believe the product makes a sufficient difference in student outcomes that the more expensive product is worth the premium. Cengage is betting the farm on “good enough” beating out “better enough” and, win or lose, their bet could cause tectonic shifts in how curricular materials are developed, purchased, and used. It will have implications for inclusive access, adaptive courseware, textbook companies, textbook authors, and the landscape of options available to students and teachers.

What it is

Despite having been fairly widely reported, I haven’t yet seen a good description of how Cengage Unlimited works or how it is sold. It doesn’t fully make sense as a direct-to-student sales strategy unless you also understand the company’s free trial period, which predates Cengage Unlimited. At the beginning of each term, students can gain access to any Cengage product for a free two-week period. That gives students an opportunity to assess whether Cengage Unlimited will be worthwhile to them. If, at the end of the two weeks, they discover that they are only using one relatively inexpensive Cengage product—for example, one OpenNow product that costs $25—then students can choose to pay that $25 fee. On the other hand, if they find that they are using several more expensive Cengage products, then they can cap their expenses at $119.99 by subscribing to Cengage Unlimited, which gives them one term of unlimited access to all products in the Cengage catalog.

It truly is a subscription. All products are essentially rented for the term and then the students’ (potentially annotated) copies will be saved in a digital “locker.” If students want to maintain access to the products they have used, they will have to pay a subscription fee. Cengage hasn’t established the price for that subscription, but the guidance I was given by the senior executives suggest it will be substantially lower than the full all-access cost. If a student stops subscribing for a number of years—say, to work before going back to graduate school—she can let the subscription lapse, resubscribe later, and regain access to her annotated materials. Cengage claims the company will store each student’s data permanently, whether or not they are continuously paying the subscription fee.

Cengage acknowledges they have some unanswered questions to deal with about what, exactly, students are able to take with them when their subscriptions lapse. They acknowledged that both OER content and the student’s own notes are kinds of things that students should be able to take with them but do not yet have concrete plans for what students can keep and how that would work.

Cengage Unlimited is being offered under what is known as “agency pricing,” which means that resellers like Amazon, Barnes & Noble, and college book stores will have to offer it at the same price that Cengage is selling it at themselves. The resellers are given wholesale discounts that enable them to make a profit at the fixed price.

Is it Good Enough?

Cengage has made it clear that this is not just some experiment that they are trying out; this is their go-forward strategy. After some undefined transition period, they expect to be selling everything this way. In doing so, they have taken a clear position that “good enough” will win out over “better enough” (although I doubt they will like my characterization). However much they tout the quality of their products, by putting all their products under one purchasing umbrella, they are selling on price first and quality second. From the students’ perspective, Amazon Prime may be as apt an analogy as either Netflix or Spotify. Once they have paid the money to buy in, they have incentive to use as many Cengage products as possible. That may mean students putting pressure on their instructors to adopt Cengage products.

And Cengage needs for something like that to happen, because they are betting the farm on this model. For every student who is already using two or three Cengage products, converting to Cengage Unlimited will cost the company revenues. The only way this model works for them is if they take away significant market share from their competitors, converting large numbers of students from using zero or one Cengage products to using one or two. CEO Michael Hansen admitted in an interview with Phil and me that the company is likely to take a short-term hit to their revenues. They must have some data on how many students use Cengage products whose total value is less than the cost of a $119.99 Cengage Unlimited subscription and have modeled scenarios of how many of those they can convert. Financially, the fact that they went through bankruptcy relatively recently may put them in a better position than their peers to deliberately take a hit for a few years. But if their models are off, then they could be in big trouble down the road.

And this is a very complex and fluid market to try to model. For example, I talked about Cengage needing to convert students from zero to one or one to two Cengage products, but that assessment was based on pricing assumptions that may be either already inaccurate or changing quickly. At the bottom end of the market, Cengage is charging $25 for its OpenNow product and Lumen Learning is charging between $10 and $25 for their product lines.1 On the high end, pricing for products like Pearson Revel and McGraw-Hill Connect vary more widely, from about $75 to about $125. According to the just-released Babson Survey on OER, the average price for a “textbook”—whatever that means—is currently $97. Is that price still coming down? If so, how far and how fast? How different is it from discipline to discipline and market segment to market segment? And how do these factors match up against Cengage’s strengths and current price points? The answers to all of these questions will impact just how much market share the company needs to take away from its competitors in order for Cengage Unlimited to be a money maker.

Keep in mind, too, that a tremendous amount of work must have gone into making this new model possible. From the free trial to the digital locker, these are non-trivial back-end software development projects for a company in an industry that…does not have a great track record for well executed software development projects. Further, those projects had to have been in some level of competition for resources with investments in product platforms like MindTap. So when Cengage decided to invest heavily in “good enough,” they likely also decided to invest less heavily than their competitors in “better enough.”

And then there’s the energy that had to have gone into contract negotiations…

You’ve Been Spotified!

We don’t know whether Cengage will be a winner from this strategy, but we do know who will be the losers: textbook authors. Cengage, of course, denies this. Cengage CTO George Moore, when asked about the contract renegotiations with the authors to make this fly, said only that “Cengage renegotiates contracts with authors all time.” Michael Hansen claimed that Cengage’s interests and their authors are aligned, and that their authors are all very concerned about the affordability of textbooks.

Really?

In February of 2015, Greg Mankiw—Cengage’s blockbuster economics textbook author who has made literally millions of dollars from his relationship with Cengage—expressed perplexity at the The New York Times’ call for less expensive textbooks:

To me, this reaction seems strange. After all, the Times is a for-profit company in the business of providing information. If it really thought that some type of information (that is, textbooks) was vastly overpriced, wouldn’t the Times view this as a great business opportunity? Instead of merely editorializing, why not enter the market and offer a better product at a lower price? The Times knows how to hire writers, editors, printers, etc. There are no barriers to entry in the textbook market, and the Times starts with a pretty good brand name.

My guess is that the Times business managers would not view starting a new textbook publisher as an exceptionally profitable business opportunity, which if true only goes to undermine the premise of its editorial writers.

Given that Mankiw was name-checked in the Cengage Unlimited announcement press release, management must have worked something out with him to keep him happy. We are hearing whispers from the company’s competitors that not all authors were given such an opportunity and that lawsuits may follow. We’ll see whether that bears out. Regardless, though, this model does fundamentally change the relationship that the publisher has with its authors. With buffet-style pricing at a low rental price point, a model like Cengage Unlimited is likely to do to textbook authors what Spotify and other music subscription services did to musicians. There may still be a handful of superstar authors whose books are such outsized hits that they can still command royalties and large advances. But the vast majority of authors will see their income shrink. They either will get smaller royalty agreements or will be paid once on a fee-for-services basis so that the company can own the content outright. My guess is that there will be a lot more of the latter than the former. Keep in mind that copyright negotiations for a textbook or textbook-equivalent involve more than just the author(s). There may be literally hundreds of permissions to track for photographs, videos, animations, and so on. To the degree that “good enough” wins out over “better enough”, publishers will be under strong pressure to own as much of their content outright as they can.

Implications for Inclusive Access

Some Cengage competitors and observers have interpreted Cengage Unlimited as an inclusive access play. Although it does have some implications for Cengage’s inclusive access strategy, I suspect that Cengage Unlimited is more of a tool for getting the benefits of inclusive access without the attendant hassle, at least in the short term.

For those who are not familiar with it, “inclusive access” is actually a term from Federal law. The idea is that institutions negotiate pricing for the curricular materials, bundle the cost as some kind of a course fee, and provide “day one access” (in the industry’s marketing language) to the content for all students in the class. The problem it’s intended to address is that increasing numbers of students are choosing either to not buy the textbook at all or to wait as long as possible in order to make sure they really need it. Textbook publishers live or die on what’s called “sell-through,” which means the percentage of students in the class who actually buy the book. And by “the book,” I mean the new product from the publisher and not used or rented from a third party. Given the high rate at which students choose not to buy a new product (or any product), publishers are willing to give a discount in exchange for 100% sell-through. Which they get if the product is bundled as a course fee.

With the exception of for-profits and the handful of non-profit universities that make top-down curricular materials decisions, inclusive access isn’t a true institutional sale in the sense that the institution itself selects the curricular materials and makes a bulk purchase. That would be considered a grave violation of academic freedom in many institutions with shared governance. Instead, it is a license to hunt. The vendor signs a global agreement with the institution and then goes looking for schools, departments, or even individual faculty members who want to sign up.

Because there is no centralized procurement, tracking growth of this model is difficult. We hear from publishers that the model is growing quickly off of a fairly small base, but it’s hard to validate that. Our best assessment thus far is that there is some truth to it mixed in with a lot of wishful thinking. Inclusive access doesn’t really get around the need to make individual sales in traditional institutions, so the gains are incremental. There may be some inside peer pressure for adoption of this sort of model once it takes hold within a campus community, but we don’t have any hard evidence of that. The contracts are hard to negotiate with campuses because they are politically fraught. And on top of all that, there’s a legal wrinkle. The law says that inclusive access can only be employed when (a) students can opt out and (b) the bundled course fee is lower than the regular retail price. That latter requirement is problematic because prices for the “same” product vary dramatically depending on a number of variables. Are you buying on Amazon, Chegg, or direct from the publisher? How does that price compare to a rental? Which of the sixty-seven minor variations of the product package are you choosing? And so on. There is no canonical price. Therefore there is no reliable way to establish that the course fee is lower than the regular price. Therefore there is no way to completely avoid legal ambiguity around pricing. This is exactly the sort of angst-inspiring lack of clarity that tends to paralyze academic administrators.

The agency model combined with the one all-you-can-eat bundle means that Cengage has one price for everything. This does remove the ambiguity around pricing. If Cengage offers an inclusive access price of $99.99, then that is always a discount to the retail cost of Cengage Unlimited.

But in some ways, this strategy seems to be a way of getting around the need for an institutional contract. The free trial provides a kind of “day one access” without any need to negotiate with the institution at all. And if Cengage can increase the number of its products per term that students adopt and actually use, then students are going to be motivated to get the maximum value out of the subscription they’ve paid for. If they’ve already covered the cost due to their biology class, then they get their psychology class materials for free. At the same time, to the degree that the company is able to produce that Amazon Prime effect, there will be a natural pressure on institutions to sign inclusive access contracts, not to spur demand for it but to show that they are keeping up with existing demand.

Will this work? I don’t know. I suspect there are some clues in inclusive access adoption patterns which, again, are frustratingly difficult to track. But this is a big, bold bet by Cengage which runs directly counter to the “efficacy” message from Pearson and the “learning science” message from McGraw-Hill. Win or lose, it is likely to be consequential.