JANUARY–MARCH, 2010 VIRGINIA LIBRARIES PAGE 5

Building a Better Model: Eric Frank on

by Edward Lener and Cy Dillon

ike everyone interested in Why did you start Flat World become more prevalent; gray mar- books, librarians are chal- VL Knowledge? kets have emerged for reimporting lenged by an era of upheaval After spending more than thirty low-priced international editions Lin the publishing industry, and no EF combined years in the college back into the United States; online part of that industry has been more industry at market leaders piracy is growing; and textbook controversial recently than textbook McGraw-Hill, Pearson, and Thom- rental models are sprouting. Pub- publishing. Faced with dramatic price son (now Cengage), my cofounder lishers generally do not compen- increases, frequently revised editions, Jeff Shelstad and I reached the con- sate authors for any of these. and new options in content delivery, clusion that almost nobody was It was into this environment students, parents of students, fac- happy with the textbook indus- that we set out to build a text- ulty, and librarians alike have sought book publishing company — one lower-cost solutions for acquiring that would dramatically reduce texts and other class resources. In [We] reached the textbook costs, provide students response to this potential market, a with more choice of formats and wide variety of alternatives, includ- conclusion that almost price points, give faculty control ing rental books, online versions of to modify and integrate content print texts, cooperatively written and nobody was happy with into their courses, give customers updated online texts, books available the textbook industry control over timing of changes to from sites supported by advertising new editions, and provide authors revenue, print-on-demand books, anymore. with a steady royalty stream for used-book cooperatives, and a variety their intellectual property. Our of combinations of these approaches, model is better because it addresses have come into being, in most cases try anymore. Students, who are the main concerns of all parties as Internet commerce initiatives. At often on the edge financially and involved and is consistent with the this point the most innovative of these struggling to stay in school, are way people will consume content alternatives is a company called Flat outraged at the cost of many text- in an Internet age. World Knowledge. Cofounder Eric books. Unable to afford Frank responds here to our questions, for all their classes, they may have Tell us a little bit more about describing in detail how the company no choice but to go without, which VL your open textbook model. came to be and the methods it hopes puts them at a learning disadvan- Flat World Knowledge is the to use to acquire a substantial share tage. Educators are often frustrated EF leading publisher of commercial of a market currently dominated by at the difficulty of adapting text- open-source textbooks for higher a few traditional publishers. Flat book content into their courses. education. Well-respected subject World’s innovations and concern for Both of these groups are exhausted matter experts write our textbooks. both customers and authors suggest by the pace of new editions, which The books are peer-reviewed, pro- that publishing as a whole has the often seem to be published solely fessionally edited, illustrated, and potential to emerge from the current to drive used books and other designed, and made available free state of confusion into a new order of lower-cost alternatives from the online under a flexibility and responsiveness to read- market. For their part, authors have license to educators and students. ers’ needs. watched with growing alarm as the Educators have the freedom to use textbook publishers, like music the books as they are or to reor- studios, seem to have lost control ganize and edit them to suit their of their content. Used books have unique requirements. Students PAGE 6 VIRGINIA LIBRARIES JANUARY–MARCH, 2010

can access the books free online or of a complete, free online book, to three things. First, even in bad purchase alternatives ranging from students did purchase alternative times, an innovation-oriented mar- print-on-demand versions of the formats (print, audio, etc.) and ket always has capital investments books, to audio versions, to down- study aids (online practice quizzes, for good ideas that can work. A loadable versions (by the book or digital flashcards, etc.) in sufficient poor economy may decrease the by the chapter) at a fraction of the volume to build a sustainable, prof- total amount of capital available cost of traditional textbooks. Our itable business around an open and make the holders of that capi- approach is device agnostic, so textbook model. As for the quality tal more stringent about how and students can use our digital books of our books and related teaching where they invest, but in the end on their laptops, favorite e-reading resources, the faculty who used good ideas and execution will, I devices, or web-enabled mobile them rated them as comparable believe, get funded. The textbook phones. Students can choose to or, in some cases, better than the market is ripe for innovation, and purchase from a range of digital traditional textbooks they had I think funders saw that. Second, study aids that we create to support used previously. Beyond validation our backgrounds helped us raise each book. These include audio of those two important elements, money. A lot of venture capital was study guides, online interactive we learned that while the mantra burned up in the 1990s in educa- quizzes, and digital flashcards of tion without many positive results key terms and concepts. Flat World for investors (or consumers). Many Knowledge backs our textbooks of those ventures were led by tech- with an online social learning … the mantra of building nologists who did not understand platform that also allows students online real estate education. That is clearly not the to learn from one another through case with us. Our team brought a things such as the ability to take needs to be “usability, lot of experience in the higher edu- and share notes. cation space, with over thirty years It seems to be working. In spring usability, usability.” of experience at the big textbook 2009, we had twenty-seven classes publishers. Investors knew we had with 750 students using our books. a good idea, but more important, By fall 2009, we had expanded to of physical real estate is “location, they believed that we understood 480 classes and approximately location, location,” the mantra of the nuances and potential hazards 40,000 students. We are grow- building online real estate needs in the textbook market and could ing through word-of-mouth more to be “usability, usability, usabil- successfully navigate those to build than anything at this point, which ity.” It was really eye-opening to a business. Third, the higher edu- is gratifying to see so early in our observe how people used our site. cation market generally behaves launch. Things that we thought were obvi- counter-cyclically to the overall ous were not, and people often economy. As the economy con- You conducted beta testing at tried to do things that we never tracts, enrollments expand. Those VL several colleges and universi- intended or considered. Therefore, new enrollees are often economic ties. What were some of the most we essentially engaged in a com- refugees, and they are acutely important lessons you learned plete redesign of the site, and con- price-sensitive when they arrive at from this real-world testing in stant redesign is now a dynamic a college or university. Such stu- classrooms? process going forward. dents embrace solutions that can In the fall semester of 2008, reduce their cost of education. As EF we ran in-classroom tests in Publishers Weekly reported a result, in many ways, the overall twenty university classes with VL that you acquired additional timing for us to launch our busi- around 500 students enrolled, fol- financing in 2009. To what do you ness was ideal. lowed by a larger test in spring attribute your success in such tight 2009 with twenty-seven universi- economic times? Why would an author initially ties and 750 students. In doing We raised $700,000 in private, VL be drawn to your publishing so, we learned a number of valu- EF angel investments in the fall of model? able lessons. Most important, we 2008 as things began to implode As of this writing, over half of validated two critical components around us in the economy. Next, EF our authors (and we have over of our model — first, that “free” we raised over $8,000,000 in ven- seventy under contract) are success- can work as a business model, and ture capital in February 2009, right ful textbook authors at the major second, that quality matters. We in the heart of the “Great Reces- publishers. The others are all rec- found that despite the presence sion.” We attribute our success ognized scholars or leading teach- JANUARY–MARCH, 2010 VIRGINIA LIBRARIES PAGE 7

ers in their fields who have never customers to make changes to the of the new venture. They get stock written textbooks previously. Our book and then capturing all of options in the business when they model attracts authors for some those changes in a reportable for- successfully deliver a manuscript clear and compelling reasons. mat, we are able to provide authors for publication. We also offer First is a potential for higher with real-world information about options for authors who bring us royalties. In an apples-to-apples how people use their books. other authors that we eventually comparison (i.e., a typical adop- Authors will be far better equipped sign. We are in this together with tion of one hundred students), to make changes to the next edi- our authors. our authors will likely earn higher tion of the book based on this type royalties. We pay one flat royalty of data than they are today, thus How many titles do you cur- rate of 20 percent on all sales, in all producing an increasingly effective VL rently have under contract? channels, anywhere in the world. book with each modification. We have forty-two titles under This compares to a traditional EF contract today, and are expand- industry average rate closer to 11 Tell us more about your author ing rapidly. We published our first percent. To maintain fairness and VL agreements. eleven titles in the spring of 2009, transparency, there is one simple and will publish another five titles royalty rate applied to every dollar, in the winter of 2009. no matter where it is earned. Next is a potential for higher Your business model is based market share gain and impact. The Our model attracts VL on free access to the online ver- textbook market is a highly com- authors for some clear sion of the textbook but charging petitive one. Every course has books for other services. What percent- available from multiple publishers. and compelling reasons. age of students do you anticipate For authors at the big houses, they will choose to purchase alternate are not only competing with books formats such as print or audio ver- from other houses, but with books sions? What about buying study from their own publisher! So how Our authors keep control over aids or supplementary materials? can a new entrant successfully EF of their books, and Given two in-class testing peri- break into the market? We believe in essence license them to us to EF ods, and now significant usage that the open model provides a key publish in our model. Given that in fall 2009 (over 40,000 students), competitive advantage on which to we do make a substantial invest- we are developing a good sense build market share. We can pub- ment in the development, sales, of this. Perhaps the best way to lish a book of comparable or better and marketing of each book, we answer is to share some results quality than those of the market ask for an exclusive right to publish from our spring 2009 beta. Six leaders, but then make it open. should we be “successful” in the Flat World Knowledge books were Students have free or affordable market. Together with our authors, used as the primary textbooks in access, and instructors have the we define at the outset what success twenty-seven classes. These books power to modify content and con- means to both of us and establish a are Exploring Business; Launch! trol the timing of moves to new dollar floor. If earnings sink below Advertising and Promotion in Real editions. These value propositions that, our authors are then free to Time; Fundamentals of Income Tax then drive adoption. publish their books elsewhere. Theory and Practice; Organizational Our approach also allows We are also collaborating with Behavior; Principles of Management; authors to gain behavioral intel- our authors as partners in ways and Principles of Microeconomics. In ligence about users. One of a text- that look forward. Nobody knows total, approximately 750 students book author’s greatest frustrations when we sign an agreement with enrolled in these classes. All of is the lack of knowledge about how an author what the future of pub- these students had access to the customers actually use the book. lishing is going to look like, or free online version of the textbook, What topics are they covering? exactly how authors will earn their and no purchase was required of What topics are they skipping? compensation. As new revenue these students. Of these 750 stu- How quickly do they move through streams are developed, our authors dents, 442 students (59 percent) the material? In what order do will get 20 percent of all of that placed at least one order with us, they cover the material? All this revenue, because they are the rea- with the average student spending can leave authors uncertain about son someone is on our site to begin $28.20. In total, 294 printed text- what kinds of revisions, if any, to with. books were purchased by students. make to new editions. By enabling Our authors are a critical part Thus, approximately 39 percent of PAGE 8 VIRGINIA LIBRARIES JANUARY–MARCH, 2010

students chose to purchase a print for great learning exists within to knowledge is paramount for copy of the textbook, even though online textbooks. Environmental those who want to improve their the free online version of the book sustainability is an increasingly standard of living. Technology provided them a means of success- important issue on campus. Online allows for the free flow of knowl- fully completing the course with- textbooks save trees, and dramati- edge around the world to those out making the purchase. Many cally reduce the carbon footprint who want it. However, old busi- of these purchases included not of the publishing industry. Finally, ness models can often prevent that only the textbook but also study timeliness is an advantage. As free flow. OpenCourseWare opens aids that were bundled together the world changes, the book can knowledge to those who want it; with the textbook for a nominal change without large numbers sit- so do open textbooks. Open text- increased price. ting in inventory in a warehouse books add value to open courses precluding that change. because often, open courses refer- Can you talk about online One disadvantage of digital- ence proprietary books and read- VL textbooks in terms of advan- only books is that many students ings. An open course built around tages they may offer for updating still prefer to read offline. After all, an open textbook is of more poten- or production costs? Are there also print books have excellent resolu- tial value to a learner. disadvantages to consider? We do not think of ourselves You have chosen to focus on EF as publishing online textbooks, VL business and economic text- for the primary reason that many … we fundamentally books at launch. Was there a par- people still do not just want to believe that knowledge ticular reason for this? read online. We think of ourselves For tactical reasons, we wanted as an open textbook publisher that is the black gold of the EF to focus on a single disciplinary simultaneously publishes our books area. This would allow us to better in multiple formats. The reader twenty-first century. leverage our finite resources more can decide which of these formats efficiently. We chose business and best suits his or her learning style economics because we had strong and budget. With that said, I will tion, are highly mobile and readily author contacts there. In addition, outline what I see as some of the transferable, have no worries about the books tend to travel well glob- advantages and disadvantages of battery life, and are DRM-free. In ally due to similarities in curricu- online textbooks. addition, in a digital-only work- lum and the frequency of English Among the potential advan- flow, the potential for decreased language instruction in business tages, decreased production costs quality exists. Long and expensive programs. Finally, faculty in busi- are actually not a major factor. print runs do have a way of keep- ness and economics think a lot The cost of making the textbook is ing a publisher honest — the cost about business models and disrup- still high, as much of that consists of fixing something that is wrong tion, and as such, we thought it a of fixed costs (royalties, editorial is exceedingly high, so publishers receptive place for launch. work, illustrations, etc.). The cost strive to have little wrong in the of distribution does come down print world. Finally, there is a lot Wired magazine recently substantially, which helps lower of ambiguity about the longevity VL reported that you were plan- the final price some. Convenience of file formats. Print books have a ning to move into books for gen- is a definite plus, with no more big, long shelf life. However, ambiguity eral education classes. Are there heavy books to carry. People are creeps in around the longevity of any prospective books you can tell increasingly living “in the cloud” digital books. our readers about? and having books stored and Our pragmatic approach of accessible there in an “anytime, What do you think of initia- EF starting in business and eco- anywhere” fashion that is con- VL tives like MIT OpenCourse- nomics was really to stay focused sistent with changing lifestyles. Ware that place online course through launch, which we did in Enhanced functionality is another materials on the web, free? spring 2009. We have established lure. Online books offer full search I think they are great. The rea- that the business can work. We can capabilities; multimedia and assess- EF son that we named our com- attract great authors, faculty will ment can be directly embedded; pany “Flat World Knowledge” is adopt, and students will buy. Con- primary references can be linked; that we fundamentally believe sequently, we have begun signing and collaboration between readers that knowledge is the black gold authors in nonbusiness and eco- is possible. Overall, the potential of the twenty-first century. Access nomics courses. To date, we have JANUARY–MARCH, 2010 VIRGINIA LIBRARIES PAGE 9

signed agreements for titles in alge- Can you talk about ways, There are many new approaches bra, genetics, geographic informa- VL including using resources VL being considered for textbooks, tion systems, psychology, sociol- such as Blackboard, in which fac- from e-books to Kindle versions to ogy, and college and career success. ulty members can customize your rental models, and more. Where We will continue to expand our online textbooks for their specific do you see open textbooks in that list aggressively. classes? mix? Our open license, which is a Ultimately, each of these What differences have you EF Creative Commons Attribu- EF approaches is trying to solve VL observed in the ways different tion-Noncommercial-Share Alike an existing problem or address members of the university com- license, provides the legal foun- a limitation. Rental makes it less munity (students, faculty, and dation for faculty members to do expensive, for example, to read administrators) respond to the idea almost anything to our books. a textbook. Kindle may make it of adopting an open textbook? They can redistribute it freely, less expensive and more portable. Are you encountering resistance modify it, and add their own E-books might become better among any of these groups? materials to it so long as they stay learning platforms with the addi- Taken together, all of the groups within the bounds of the license. tion of features such as integrated EF you mention are supportive. media, assessment, etc. The nice The exploding cost of textbooks thing about the open model is that and many of the practices imple- it can address all of these things. mented by publishers like faster The entire book reformats In the end, I think that open text- revision cycles have caused prob- on the fly, including a books are the most transformative lems for each of these communi- for two basic reasons. First, they ties. Students embrace the solution new table of contents, provide the most access for the with gusto. It provides them with most people. Second, they fully choices of formats they have not pagination, and index. unlock the potential of content by had before, and puts them in the enabling users to add to them and driver’s seat when deciding how build upon them. When you open much money to spend, starting We also provide tools on our site to access and unlock latent potential, at zero. Faculty get a great book, make this easy to do. For example, great things can happen with pro- but also get control over the con- one can use our interface to create found and positive long-term con- tent, so they are excited. They are one’s own digital “copy,” and then sequences. VL more cautious, however, and their move chapters and sections up and first response to us is often “Okay, down, or delete them. The entire what’s the catch?” They assume book reformats on the fly, includ- there must be one, or that the ing a new table of contents, pagi- quality of the books will be sub- nation, and index. When finished, par. When they realize there is no that modified book is available catch and that the books are good, online free, in print format, etc. We they adopt. Nevertheless, there is also have tools available today to a bit of a “wait and see” approach add annotations or notes. Coming amongst faculty. Now that we shortly, we will add a full online have nearly 500 of them using our editor for faculty to actually delete books, we anticipate faster adop- paragraphs, edit them, and add tion rates going forward. Adminis- new ones. One of the nice features trators are interesting. At so many of being open is that somebody institutions, when they do exit can also use a learning manage- surveys amongst students, the ment system (LMS) like Blackboard cost of textbooks comes up in the to point directly to a section of a top three “frustrations” expressed book with no additional log-in/ by students. Customer-centered sign-on needed for the student. administrators want to solve the Our books can be divided into problem. They just do not feel they parts and then reassembled via the have much control over it, and course outline in the LMS. therefore may not engage as much as the other two groups.