Chegg Spots a Need, Changes an Industry

Chegg, the Silicon Valley textbook rental company, started as an on-campus classified service listing everything from electronics to kung fu lessons to hamster sitting. But its most popular category was buying and selling textbooks.

The company founders noticed that and decided to try an experimental rental web site offering 2,000 textbooks to its users. It proved to be such a great success that now Chegg rents millions of textbooks each year and employs 150 people.

“We had raised $3 million and we had hired a great team and we were sitting on a problem that was still unsolved,” said founder Aayush Phumbhra in this FastCompany video series called “The Pivot” which looks at decisions that helped companies turn into successes. “The cost of textbooks was still very expensive and the market was just waiting to be disrupted.”

The message should be a powerful lesson for those in the textbook industry in general and collegiate retailers in particular, according to Mark Nelson, chief information officer of the National Association of College Stores and vice president of NACS Media Solutions.

“I think the idea behind how they recognized an opportunity and unmet need provides interesting insight into the minds of entrepreneurs and the types of folks who are trying to disrupt our industry,” he said. “Whether stores like it or not, our industry is viewed as one that is ‘ripe for disruption’ and we need to learn to think like these guys.”

Custom is the Next Rental

There is a great article on the Grow Custom initiative in this today's Campus Marketplace.  The piece compares the current developments in Custom to what occured in college stores with Rental textbooks over the past two years.  Stores are well positioned to retain and grow market share in this space, but as with all things there is a window of opportunity.  

The Grow Custom Sponsor's page is also now live with links to each of the companies who are sponsoring this initiative and their booth number at CAMEX.  Check them out.  The new smart custom and tools to help faculty create them may not be the custom you remember.

Book Rental Expanding Fast -- and moving into Digital

Business Insider recently interviewed Chegg CEO Dan Rosensweig who says the four year old company has services available on about 8,000 campuses and processes millions of orders a year.  Yes, the article reported 8,000 campuses. Chegg’s additional services than other their core book rental business include Student of Fortune, a Q&A homework help site, and Notehall, a class notes marketplace.  According to Rosenweig, Chegg wants to provide as much digital content to students as possible including class notes, books, and study groups.

Incidentally, Notehall ran into some legal troubles over its note taking business with some California State University students which violated campus copyright policy.  Chegg has acknowledged the policy and has agreed shut down their note taking business at specific universities effective January 1, 2012.

Finally, Kno, which spun out of Chegg, is working on e-textbooks and a related delivery platform.  Previously the company was working on a tablet type device, but subsequently withdrew that initiative.  However, this month they unveiled their "free textbook campaign" where they tend to give away one free e-textbook to every user.  A copy of their campaign ad appears below.

Follett Sees Growth in Both Rental and Digital

PR Newswire reports that Follett saved students close to $90 million in three months mainly due to their Rent-A-Text program.  According to the article, Follett textbook rentals doubled in 2011 compared to 2010 and expects to see saving of up to $200 million for the 2011-2012 academic calendar.  Follett also saw digital textbook sales double in 2011 compared to 2010.

We have heard other anecdotal information that digital sales, where the inventory option exists, doubled in sell-though this fall, growing from 2-3% up to 5-6%.  This data has not yet been verified or examined across a larger pool of stores. 

Rentals Keep Print the Top Choice on Campus

A survey from Student Monitor found that devices such as the Apple iPad are making gains on campus, but the printed textbook remains alive and well thanks to rental options. The study, detailed on Inside Higher Ed, found that 24% of the surveyed 1,200 full-time students at four-year institutions rented course materials, up from 12% the year before.

Those who rented saved an average of $127. The rental trend should continue to rise, since 36% of underclassmen said they are likely or very likely to rent a textbook next year. Campus bookstores remain the most popular source for rentals, thanks to their efforts to get out in front of the trend. Yet students said they were most satisfied with their experience using the textbook rental site Chegg.com because of price, punctual delivery, and ease of use.

On the electronic side, just 5% of those surveyed said they purchased access to an e-textbook during the spring, and only 2% bought e-texts for more than one class.

However, that may be about to change. The survey found that while just 8% of the students owned an iPad, nearly half expressed interest in buying the device. Students also placed the iPad alongside coffee—but behind beer—when asked to rate media and “lifestyle” choices.

In fact, “drinking beer” was the only nontech pastime students listed in the top five, alongside Facebook, iPhones, texting, and laptop computers. More than half (54%) of those surveyed own smartphones, up from 41% from a year ago, reinforcing the notion that print rentals may be a short-term solution.

CAMEX questions answered: rental

This week's CAMEX questions relate to textbook rental. Here are two questions representative of the ones submitted on this topic:

Q1. Has rental deterred stores from progressing as they should in digital?
Q2. Is rental a short-lived/temporary solution?

Both good questions. The first question is the more complicated to address, and in doing so, much of the second question will also be touched upon. I will apologize in advance for some of the "doom and gloom" that follows. If a different question had been posed, I probably could have inserted more optimism for how we could leverage rental to be more successful at digital, and in business in general, as collegiate retailers.

A1. Related to the first question -- yes, I have heard that some stores believe that "rental will save them." Personally, in my opinion this is a flawed assumption. Certainly there are benefits to rental programs. They can reduce course material costs for students. They can be a source of positive PR on campus. Certainly there are a growing number of programs and offerings that make it easier for stores to offer rental programs with less risk (although depending on the approach taken by a store, less risk is not guaranteed). Rental can be a means to both recapture market share and increase store foot traffic. With these benefits, it is not surprising to see that the number of college stores in North America offering rental programs has soared from roughly 300 to over 2400 in less than two years, and we expect the number to be even higher by this fall. From a market share perspective, rental has negatively affected digital sales within stores, leading some stores to conclude that digital is even further off from the mainstream.

The last two sets of stats provide an interesting challenge, though. Rental programs have been around for more than 40 years at some schools, yet very few schools participated in these programs prior to two years ago. When the right set of enabling factors arise a technology, in this case rental, can take off remarkably fast. What happens when the right set of enabling factors come on stage for digital? Will stores be able to make that transition as quickly?

Relatively speaking, rental is fairly easy to implement given some of the program options out there today for stores. Programs like those offered by Chegg, BookRenter, Follett, and others help leverage and dissipate risk across the industry. While there are contracts involved, the transaction is still fairly easy to understand and students know how to use the product once received.

In contrast, consider digital products. These are far more complex and often require more education at the point of transaction for the consumer to be able to utilize the product. Could the industry make the shift to provide digital products effectively as quickly? Adoption by stores seems to have stalled somewhere in the early majority, but with the right set of enabling factors, it could move toward larger adoption quickly. Stores and the channel would be unwise to deter experiments or establishing the necessary infrastructure just because rental is currently providing a short reprieve.

The effect of rental on used is just the ebbing of the tide that warns us about the tsunami that digital could create. A bit extreme, but both possible and plausible if digital were to take off as quickly as rental has in the past two years.

A2. Related to the second question, let me answer it by proposing a different question to consider: is rental a bridge technology?

Let me explain what I mean by a bridge technology. While we refer to digital as a "subscription," the actual business model is not much different from the rental model. Rental models change the mindset of the student to accept business models where they pay a price and get their savings up front, and then get nothing when they return the product at the end of its lifecycle. With one catch: we have seen stats that up to 20% of students fail to return their rental book, resulting in charges for the replacement book at the new book price. If I were a publisher, I might consider a sales pitch along the following lines: digital textbook rentals -- more convenient than physical book rentals, because at the end of the rental period the book returns itself. As physical book rentals get a new business model embedded in the mind of students -- a business model that looks a lot like many of the current digital textbook business models -- then yet another enabling factor for digital will be in place.

So if rental is a bridge technology, like print-on-demand (POD) in my opinion, then it probably has a 5-10 year lifespan where it will have effective returns in this market. It may extend market share and the role of the store, but at the same time it further enables the transition to digital. Stores might be able to concentrate more on rental for the next year, maybe two. At the same time they have to be looking ahead to how they will participate in the digital environment that is coming. That means improved e-commerce and m-commerce capability, and the ability to be format and device agnostic providers of content. That is something few if any traditional college stores are ready for today, but that the industry must be ready for in the near future. Rental, like POD, might buy the industry a small amount of breathing room, but they are relatively short-term rather than long-term solutions to the radical innovation challenges ahead.

BookRenter Becoming Bigger Player in Textbook Rentals

Textbook rentals are big business on campus and BookRenter is upping the ante. TechCrunch reports that the Sunnyvale, CA, firm has raised $40 million in investment capital to help it add resources and products.

BookRenter’s strategy is to partner with college bookstores and provide an automatic platform for content distribution. To date, the firm is the official rental platform for 560 college stores in the U.S. and is expected to report revenues of $20 million-$50 million in 2010. But it still trails Chegg.com, which projects revenues of $130 million for 2010, by a substantial margin.

The infusion of new capital should help BookRenter give the bigger firm a run for its money.