What Manufacturers and Publishers Need To Do To Facilitate The Move to Electronic Delivery of Legal Books — Reducing Costs to Compete With Used Books

(This is part of a series; the earlier posts are here.)

Electronic distribution has long been touted as making content cheaper for consumers. This has largely been true: Newspaper articles, including articles from out-of-town or foreign newspapers, are now largely available for free. So are many magazine articles. Many old books are available for free on Google Books and Project Gutenberg; the latter books can be easily downloaded onto the Kindle 2. And many Kindle versions of legal books already tend to sell for about 20% below their list price (though some remaindered copies of slightly older paper books actually sell for a deep enough discount that they cost less than the Kindle versions).

But that discount likely won’t be enough by itself for a broad conversion to ebooks, for two reasons: the used book market, and libraries.

Used book sales, and library borrowing, are both enabled by the so-called “First Sale Doctrine” of U.S. copyright law: Once a book is sold, buyers are free to resell it or lend it, and don’t need the author’s permission for that.

And people routinely take advantage of this. Law students often buy used textbooks, and then sell them back to the bookstore when they’re done. Legal academics can borrow pretty much any book they want from their university libraries. Likewise, lawyers routinely borrow books from the firm library; even sole practitioners may pool their book collections with other lawyers in the same suite of offices. We’ve gotten used to borrowing books for free, once someone at our institution — such as a university or a law firm — has bought a copy.

Yet the same transactions would likely be infringing when done for e-books (and are often technically stymied by copy protection). The First Sale Doctrine only applies to “distribution” of books, which is to say the transfer of tangible items. It does not apply to copying of materials. And “reselling” or “lending” an e-book that’s stored on an e-reader’s disk drive necessarily involves copying.

Even if you copy the book to someone else’s e-reader and then delete it from the original, thus trying to mirror a traditional resale or lending arrangement, you’ll still have performed a copy, and thus infringed the copyright in the work. [Foonote about why the fair use defense is unlikely to allow such copying omitted. -EV] So you can only buy e-books “new”; you can’t lend or borrow them, or buy or sell them used.

This is both a barrier to the wide acceptance of e-book textbooks, and an opportunity for publisher. First, the barrier: One can often find used books on Amazon at a much steeper discount than Kindle books tend to provide. Likewise, many college bookstores offer used textbooks at about 75% of the price of new textbooks, and then buy them back at 50% or so of the sale price, if the store expects the same edition to be used again the next semester.

Let’s consider, then, the economic lifecycle of a textbook. Assume an edition comes out in 2010, the textbook is used in one class per year, and a subsequent edition comes out in 2014 (something that the book¬store sees coming, so that it doesn’t buy the book back after 2013). Assume a national average sales tax (6%), which is charged when one buys the book, new or used, but which isn’t charged when one sells it back to the distributor. Here’s how the transactions might look:

Semester Transactions Net cost to student
Fall 2010 Buy new, sell back at 50% 56% of list price
Fall 2011 Buy used at 75%, sell back at 50% of the sale price 42% of list price
Fall 2012 Buy used at 75%, sell back at 50% of the sale price 42% of list price
Fall 2013 Buy used at 75%, no sell back 79.5% of list price

Of course, this pattern won’t be perfectly followed: Many students keep their textbooks for future reference. Some students delay selling back their textbooks, and when they’re ready to sell them back might find that they no longer can. Some students prefer to buy clean books, without someone else’s possibly misguided highlighting and notes distracting them from the text. And some bookstores might refuse to buy back books with too much writing in them. Nonetheless, this table suggests that, for many students, a 20% discount from list price might not be enough to get them to buy an e-book version of the textbook.

Now the opportunity: Textbook publishers are already unhappy with the used paper textbook market. One reason they urge authors to come out with new editions is to dry up the used book market, at least for a while.

Textbook publishers, then, have a substantial incentive to charge much less for e-books, precisely because e-books can’t be resold (and because they’re cheaper to produce and distribute). In the example above, for instance, a publisher could charge 35% of the paper list price for an e-book (amounting to roughly 37% with tax included) and still make more money as well as saving students money. [Footnote: The author would also make more in royalties, assuming the rate remains what it has been, since both the author and the publisher now get nothing from used textbook sales.] The savings will come out of the money that the bookstore would otherwise pocket; the book¬store’s costs and profits would no longer have to be paid for.

The students would also get clean copies of the books rather than having to deal with others’ highlighting and marginal notes; and they would get to keep the books for future reference. All these would be further incentives — in addition to portability and, with the revised pricing plan, cost — for them to embrace e-books. And this would happen naturally, if textbooks coexist in the e-book and paper editions: The competition from the used book market would pressure publishers into reducing the e-book costs.

Of course, if publishers can persuade instructors to adopt e-book-only textbooks, then the competition will be absent. Publishers could continue charging high prices for the e-books, because the used paper books won’t be an alternative. And of course the selection decision is made by law professors, while the cost has to be paid for by law students. Still, I assume that professors will be at least mildly interested in saving their students money, and will react to the student annoyance that would likely be created if the professor’s decision makes students pay more for e-textbooks than students have historically had to pay for used paper textbooks.

More on libraries to come.