And Then There Were Two…?

At first glance, the news that Thomson is selling their college textbook publishing business seems unlikely to be of much interest to the average college student. However, this may end up being the biggest and costliest trick you get this Halloween.

Currently, three publishers control some 85% of the college textbook market — Pearson/Prentice Hall, McGraw-Hill, and Thomson Learning. (Chances are, most if not all of your textbooks this semester were produced by one of these three.) There are others, like Wiley and Worth, but they hold small market shares in a handful of subject areas and cannot compete with the Big Three across the board.

So how did the Big Three grow so big? Over the past twenty years or more, each of these goliaths swallowed up smaller publishing companies like Dryden, Longman, Addison-Wesley, Irwin, etc. That's how they showed their shareholders growth — they'd grow 5% by buying a company that had 5% market share. It was an effective strategy for many years, but one that is no longer viable — they've run out of significant companies to buy!

So how does this affect the average student? Well, here's how. They can't grow 5% per year by buying up companies anymore, so how do you expect them to deliver that 5% growth to their shareholders? That's right, they jack up the textbook prices.

This worked for a while, until about five or six years ago when students started rebelling against the unreasonably high textbook prices. Since then, overall unit sales have been in decline — in other words, students are buying fewer books. So, again, how do they deliver that 5% growth to their shareholders? That's right, they jack up the textbook prices even higher.

This background on the state of college textbook publishing is important to understanding the Thomson sale's possible outcomes. As I see it, there are three ways this sale could go:

  • Another textbook publisher buys the whole thing – This is highly unlikely. The other Big Two would face a prohibitive amount of regulatory barriers, and the smaller competitors just can't swing the $5 billion price tag. This is a non-option.
  • Thomson sells off pieces to other textbook publishers – Difficulty in finding a buyer could, as time progresses, cause employees and authors to start abandoning Thomson. (Face it, would you want to stick around?) This will put downward pressure on the sale price, and ultimately force Thomson to sell in bits and pieces — the Chemistry list here, the Business Math list there. The bottom line here is that the Thomson imprints get absorbed into the remaining publishers, meaning less players and fewer choices for you the consumer.
  • Investors outside the publishing industry buy the whole thing – If the business is sold intact, this is the only way it will happen. How likely is this scenario, though? I mean, Thomson is currently the #2 college textbook publisher in the world and they're still looking to bail out of the business. Given the economics I described above, and the continuing trend of lower unit sales, who in their right mind would want to do this?

Out of the three scenarios, two of them have the same affect: Thomson ends up walking away from this market with a few billion dollars of your money, and you'll end up with fewer choices and higher prices. The third could be a new player in the market (possibly a Web 2.0 company?) with a different agenda of market disruption, which could ultimately be the change we are looking forward to, cheaper books. The first doesn't sound like a treat to me, but the second might be a disguise worth waiting for.

At All Costs,
Professor Cram