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The Blockbuster Video model for college text books

One benefit of living through a deep recession is that the hard times have a way of spurring innovation.  A rising tide lifts all boats, but the opposite can be said of a falling tide.   During recessions, inefficient businesses and business models either evolve or die.The few exceptions tend to be in “recession-proof” industries like higher education.  But, as we’ve discussed in prior posts, this recession has had a way of rattling industries that have never before been rattled.  

One of these is the sleepy market for college textbooks. This market has always been highly profitable for “middle men” like the college bookstore, as students generally unload their books after finals for pennies on the dollar, and new students buy them used from the bookstore three months later at a substantial premium.  The spread between the two prices, after factoring in operating expenses and storage costs, is pure profit to the bookstore.  As a middle man operating in an inefficient market, business is good.  And the internet, which has cut out so many other middle men in countless other industries, has thus far not made much of a dent.

This may be changing, however.   The New York Times had an article about a company called Chegg that is operating a textbook rental business, along the lines of Blockbuster, or probably more accurately Netflix (”We Rent Movies, So Why Not Text Books?“).  

The Times writes,

 With demand for good deals on textbooks running high, Chegg’s success comes in large part from being able to address those inefficiencies. While Chegg primarily rents books, it is also essentially acting as a kind of “market maker,” gathering books from sellers at the end of a semester and renting — or sometimes selling — them to other students at the start of a new one. That provides liquidity to the market, said Yannis Bakos, associate professor of management at the Stern School of Business at New York University.

The Chegg model is an interesting development, though we don’t believe the innovation will stop here.  With products like the Amazon Kindle now commercially viable, it’s questionable whether students will be using “hard copy” textbooks at all five years from now.  Given the expense of printing, the short time horizon of use, and, frankly, the sheer weight of most textbooks that college kids have to lug around, moving all college texts to digital editions makes a lot more sense over the long run.

At any rate, Chegg — even if it proves to be a temporary, interim step in the evolutionary process — is an interesting model.  Technology has just cut out one more middle man!

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy