Flat World Knowledge’s Disruptive Business Model: Q&A with Co-Founder Eric Frank, Part 1

Eric Frank, President and Co-Founder, Flat World KnowledgeBy Yvette M. Chin, Editor, Digital Book World

In the higher education textbook market, Flat World Knowledge has been an incredibly disruptive force, redefining how business is done. The key to their success is Flat World Knowledge’s somewhat  counterintuitive “open textbook” model: offering freely available browser-based textbooks without skimping on editorial development.

Despite practically giving away their books, however, Flat World Knowledge is uniquely poised in the higher education market, largely because their business model is so disruptive. For example, here’s a brief graphical overview of the economics of open textbooks and Flat World Knowledge’s place in that landscape. Most recently, Flat World Knowledge made the news with word that Random House was investing in the upstart company, adding to an earlier investment from Bertelsmann Digital Media Investments.

I caught up with Flat World Knowledge’s Co-Founder and President Eric Frank to talk about his business and the higher education market, and what he had to say was so compelling that this interview is split into two.

In this installment, we start with the basics of the higher ed market and the business of making open textbooks.

Tell me about the higher education textbook market from Flat World Knowledge’s point of view and why Flat World does the things that it does.

At the core of it, what we, my cofounder and I saw in the higher ed market was that technology, the Internet specifically, was disrupting the higher ed business model, primarily through some basic stuff to supply chain. Every year, the Internet made more substitutes available to students who were seeking lower-priced alternatives to a new textbook.

So, whether that was initially more supply of used books as players like Amazon and eBay and Craigslist got into the mix; or whether that was a greater supply of “rented books,” that is, new startups got into the mix and the old bookstore players started building up their rental models; whether it was building gray markets, where versions sold internationally at lower cost made their way back to the United States through the Internet supply chain; or whether it was growing piracy – all of those things were availing a student of a book that a publisher invested in and didn’t recoup a dollar from. And the problem was getting worse every year, and so our view was that we had to build a business around a different business model that wouldn’t fall prey to all those problems that publishers were facing on the Internet.

Stepping back a little bit further even, if you look at that set of conditions and the way it was affecting customers, it was pretty dramatic. Students were already frustrated about the cost of textbooks, and then as publishers started selling less new units each year, because of the problems I just described, the short-term response was raise prices faster.

What was already the problem causing the trouble to begin with got worse as students started responding, and you sort of got yourself caught in a negative feedback loop, and so students were having a real challenge. And, I think faculty started to really struggle with the problem, not only because they had some empathy with students for the rising cost of books at a time when tuition and fees were already rising, but also because it began to affect them.

As a student bought an old edition, or bought a book from overseas, pages didn’t match or increasingly, students weren’t purchasing the book at all. And so it was really creating a teaching challenge in the classroom, and making it more and more difficult for them to do their jobs. And then ultimately authors were growing increasingly frustrated because they, of course, don’t get paid royalties on the sales of anything other than the new textbook, so they were tied at the hip with the publisher.

At the end of the day, if you think about the primary constituents for the market – authors who make books and generate income from them, faculty who teach from them, and students who learn from them – I think everyone had hit the point of really strong dissatisfaction (probably a fairly mild way of saying it).

So all of that really was the context where we said, “Alright, there’s got to be a better way to do this.” And what we set out to do was build a business model that really leveraged what we saw as three major shifts:

  1. Technology: How we could produce a book, how we could distribute a book, and how we could let people interact with that book we think had changed substantially
  2. Business models: There’s been a real evolution in business models and how one’s able to generate money around content
  3. Legal: The third big shift, the emergence of things like Creative Commons and open licensing enabled new opportunities around content and new ways to provide value to customers around content

So, looking at what’s possible with technology, shifting business models, and changing legal foundations, if we put those things together in a new way, we might be able to build a new business model for textbook publishing, and that’s really what we set out to do at Flat World.

At what point in your development process does Flat World Knowledge diverge from the traditional way textbooks are made?

Our model has three core components today, and the first part of it is really “getting on the playing field,” and that, to us, is just publishing great textbooks. We do still believe strongly in the value of a top expert in an author as the voice of the textbook, and we believe in the editorial development process that publishers put textbooks through. We think all of that actually works, and it generates really high-quality products, and we think that’s what customers want. We don’t think anyone was looking to go backwards in terms of any of that. So, on the front end, we still basically employ a traditional development process, and we still invest in that similarly to the way we did in our previous work with Pearson or McGraw-Hill where my partner [Jeff Shelstad] and I came from.

So, we get this product that basically starts off similarly. Where it starts to get really different is the second part of the model, and that’s really what we think of as “open licensing” or “open textbooks.” So, while we own the copyright to the textbook, or our authors do, we publish the book under a Creative Commons open license, and what that in effect does, is transfer legal rights to the user of that textbook, in this case it’s primarily faculty members, to be able to legally modify that book to suit their own course or curriculum. So, all of a sudden, without having to seek permissions from us for every kind of change they want to make, they have the legal right to reorganize the table of contents; to delete things they don’t cover; to insert links out to articles and readings on the Internet; to add their own case studies, projects, questions, exercises – whatever it is that they want to reassemble into that book they can.

If Flat World legally allows for remixing and customization, how do you handle customization for individual courses and professors without incurring massive costs?

We provide them not only with that legal foundation through the open license, but we also have a technology platform called MIYO or “Make It Your Own,” where they can do all of that really easily. So you can drag and drop chapters and sections into a new order, delete a section by clicking a trashcan. You can click on a paragraph and edit it; you can upload a Word document in between elements in our book, upload video from Youtube, and integrate videos directly into the book.

Really it’s legally and technologically enabled for hyper-customization. We’ve built a kind of “digital-first” publishing architecture, meaning that when we make a book, we don’t really think of it as a book. A book is a kind of an end-output, but we think of it as a whole bunch of database objects. Every paragraph, every image, every video, everything has this unique ID to it, and what happens is: it’s all sitting there in the database, and all of a sudden a customer comes into this MIYO platform and moves things around, inserts things, etc.

But, we don’t really make a new book. What we do is really have the original database objects and now pointers to some new stuff that exists. When the user clicks “publish my book for my class,” it automatically compiles all those objects in the database, including any changes, into a new thing, and it rebuilds the table of contents, regenerates the index page references, updates every figure number on the fly. Then it just runs that new set of objects through a bunch of different “transforms”: For example, it will run through a software program we written to create a PDF file that looks like a textbook; it’ll run it through a different transform and create a .mobi file for the Kindle; it’ll do a different for the EPUB file for the iPad and all the other readers out there. It’ll do a different transform to generate accessible versions for students who have print or learning disabilities.

The platform kicks out, on the fly, a whole bunch of different formats, and within minutes, they are sitting in the shopping cart, priced and available for students to purchase, and each has its own unique customized ISBN automatically assigned.

So that’s the second part of the model, to enable a hyper-level of customization with no additional costs to us as the publisher. It’s all automated: The faculty can make changes, they can click publish, it all gets automatically regenerated, rebuilt, and it’s all sitting there. The incremental costs to us as the publisher is absolutely nothing.

And what about the value for students? How do you account for differences in student needs and reading habits?

So what we really think about publishing today is that we need to be “end-stage agnostic” or “platform agnostic” in terms of how the consumer wants to read that book, because we really don’t know. I think we’d be guessing if we thought we could understand how people want to read books for the next ten years. So, what we try to do is build the architecture such that we could build these “transforms,” and as new things come along, we should be able to take that existing set of database objects and create something new from them, that may not even exist yet today.

But, today at least, when a student shows up in a class, they have a wide range of options, and the first one is pretty disruptive, and that’s the free web-based book. We really are building a freemium model here, where the student could come in, and they could read an HTML book online with an Internet connection – it’s got search, it’s got note-taking, all that stuff, and it’s read through a browser. And it doesn’t cost them a nickel to do that.

Then the way we generate revenue around that free option is by offering alternate formats, study aids. In the not too distant future, there will be some additional things like services. But what we felt today is first and foremost – book formats. While a student can read for free, a significant number of them are actually willing to buy the book for the convenience of a different format than being online. We have a print-on-demand partner, R.R. Donnelly, to make print books, and we make them in black and white and softcover, so that when a student or a bookstore orders them, then they just get printed on demand and shipped directly to the end destination.

A student can buy a book in black and white for about $35, a color book for about $70; they can buy the ebooks, which gives them the .mobi and EPUB files, directly from us, so we don’t go through Amazon or through the iBooks store and give up a cut. We just sell direct to the student because they’re already coming to our website because their professors told them to. So they can download those formats directly for $25; they can buy a PDF file of the book or buy individual chapters. They can print things and store them locally, and we also do audiobooks, at least of the original version. That’s one source of revenue, even though there’s a free book on the Web, but if you prefer another format, here they are and they’re all very reasonably priced.

The second thing we sell is study aids. For every chapter of the book, we create pop quizzes, flashcards, audio study guides, summaries of key ideas of the chapter, and the student can buy those for the whole book or for the whole course. Those are all the things that are available today, and as we move into the future, it’s certainly our intent to begin to do things like make other kinds of content or services available around the textbook, for example, a peer-to-peer tutoring network where, for example, students could tutor one another around our content, and we could keep a small percentage of that.

How is Flat World Knowledge’s business model in any way sustainable?

Today, we are actually generating a pretty significant revenue stream just from selling alternate book formats and study aids. So if you look at our user base, if 100% of a class is assigned a Flat World textbook, 56% of them today are buying something, and 44% are reading for free online. If we just look at the economics of that for a second, I think that the critical issues for us are, first, a different revenue model, and secondly, a different cost model. On the revenue side, we’re not actually selling to much fewer students than the industry is selling to. So, if you look at the industry statistics today, in a class of 100 students, and let’s say a traditional textbook gets assigned to the class, 60 students are buying the book, and 40 are not because they’ve been priced out of the market – they’ve chosen to share a book or something.

So we’re selling to 56%, and we’re almost apples-to-apples in terms of the number of students buying, but obviously the traditional textbook is priced significantly higher, so their dollars-to-student yield is much greater in that first semester. But what happens is that in the second semester, those 60 students that bought the traditional textbook drops down to a little less than 30 in the second semester, because of the availability of used and other.

Our 56% pretty much stays 56%; it goes down a hair, but we don’t have a huge amount of attrition to alternate products or substitutes, and that basic pattern continues. If you model that out over four semesters or two years that a professor adopts a given textbook, at the end of that two-year period, a couple things have happened: We’ve generated a little bit less income or revenue out of that adoption, but we do two things: one is pay our author a higher royalty percentage (20% versus an industry average of 13%). For our authors, when they apply the higher royalty to the slightly lower income actually turn around and make the greater royalty than they might if they wrote a traditional textbook.

And, second, as the publisher, our profitability is a little bit better, which goes to the cost issue, because we’re publishing books that sell at a much lower cost through our “digital-first” architecture. It’s so much less expensive for us to take that book and produce it in so many different formats than it is for Pearson, for example, to produce the book. We can let our customers interact with them and customize them with no additional cost, where every custom job that Pearson has to do for a customer is basically manual and adds additional costs to the process. Then ultimately, we just have a very different cost of sales and marketing structure, because as we go to market and launch a book, we’re offering real value to a market that is demanding a new solution here.

When you put it all together, we have a nice, healthy-looking balance sheet around a really different model.

That’s just the first half of the conversation I had with Eric Frank. In the next installment, we’ll take the next step and discuss how Flat World Knowledge manages its sales and marketing infrastructure, how the company relates to retailers like the campus bookstore, and specific advice to help publishers outside of the higher ed market.

Eric Frank is President and Co-Founder and of Flat World Knowledge, Inc., the largest publisher of free and open college textbooks for students worldwide. Committed to making higher education more affordable and accessible, the company has launched a classic disruptive model in the face of the $8 billion U.S. textbook publishing market. Prior to co-founding Flat World in 2007, Eric served as Director of Marketing for Prentice Hall Business Publishing, and he is a frequent speaker at universities and colleges, educational conferences, and publishing industry events.


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