The McGraw-Hill Cengage Learning merger — and the perils of dog food marketing

Two competing textbook publishers, McGraw-Hill and Cengage Learning, have proposed to merge. Reducing competition in markets fueled by predatory pricing is a bad idea. But why are textbooks so expensive?

When I worked in the textbook publishing industry, the CEO of my startup publisher told me that what we did was “dog food marketing.” When you are selling dog food, he explained, you don’t sell it to the dogs. You sell it to the dog owners, and tell them that the dogs will like it.

Similarly, in textbook marketing, you don’t sell the textbook to the student, you sell it to the professor, and she requires the student to buy the book. The difference is, the dog doesn’t pay for the dog food, the owner does. In the textbook market, the student pays for the textbook. So she’s even worse off than the dog is.

Having been trained since then in analyzing markets, I can tell you the results of that simple fact about market structure.

First, there is no control of prices. Professors don’t care that much about prices because they don’t pay. (They do care, but not enough to recommend a cheaper book that’s not perfectly suited to the course.) So the publisher is free to price the book however they want. Since publishers are profit-making enterprises, they keep raising prices. This is how we get $200 economics textbooks.

Second, the focus is on the professor’s ease, not the students’. As textbook publishers, we were constantly coming up with tools for the professor: lesson plans, sample exams, and the like. No one ever even proposed tools that were for students only, because those took work but didn’t pay off.

Third, the textbooks grew and grew to be enormous, holding every possible topic and chapter. This way, every professor could know that his specific pet topic was included. This is why the $200 economics textbook has 880 pages and weighs 4 pounds.

Fourth, we revised the textbooks every couple of years. The only reason for this was to interfere with the used book market. The most important rule was that the new edition needed to have different pagination from the old one. This meant that if you bought the used version of the old edition and the professor told you to read pages 287-304, you couldn’t keep up (even though that content was probably in your book, just on different page numbers).

If textbooks still cost $25 as trade books do, there wouldn’t be as much of a used book market — students might actually keep their textbooks. The high prices also led to pirated PDF copies of the books, which again required publishers to change things up for very little reason.

This bloated, ever-slightly-changed market eventually led publishers to develop online learning systems (which don’t give you back problems the way 880-page economics texts do), but once again, those learning systems are optimized for the professor, not the student. That’s how we got the terrible design of systems like Knewton.

Mergers are the endgame of this twisted short-term thinking

The textbook industry now finds itself needing to make huge investments in online learning. This threatens the obscene profits that come from dog-food marketing environments. Having spent so much of their resources on raising prices, fending off used-book sales, and needlessly revving editions, they’re now behind on pedagogy. This is what happens when you focus on the needs of the decider (the professor) rather than the buyer (the student).

Cengage Learning and McGraw-Hill Education are two of the five biggest textbook publishers. Here’s what they say about their proposed merger:

Better Learning Together

Cengage and McGraw-Hill are joining to create a new global learning company to provide students with more affordable access to superior course materials and platforms. The new company will positively impact the lives of millions of students globally and will accelerate and expand affordability initiatives for college students in the U.S. . . .

This new global learning company will deliver superior experiences and greater value for students, educators, and professionals worldwide.

The combined company will help accelerate innovation and accessibility, offering seamless integration across our range of learning sciences, adaptive solutions, and learning tools.

We will strengthen our commitment to offering more affordable options for college students in the U.S.

Give me a break. The textbook business, like all other businesses, is about profit. The objective is not to save students money. It is to get professors to require students to pay as much as is feasible.

Look for this pattern in other markets

Regulators should block this merger. It will simply reduce the number of choices available to professors. (Why support two calculus textbooks when you can put all your energy into one and reduce competition?) And what happens when the number of choices goes down? Prices go up.

Every merger claims it will decrease prices and benefit consumers. Every one reduces competition and prices go up. This is simple economics. Regulators need to read those economics textbooks before they even think about approving this merger.

Now that you know about dog-food marketing, observe how the same dynamic is driving up prices in other markets.

Doctors recommend drugs. Insurers pay for them. So pricing doesn’t matter . . . until it goes so high that the insurers pass along those prices to patients. Even so, we don’t usually have a choice — “I won’t take my insulin today” is not an option.

Colleges raise tuition; students pay for it with loans. What’s the difference between owing $40,000 for four years or owing $50,000? It’s not coming out of the student’s pocket — yet. It’s just a cloud over their future earnings.

Video producers keep raising the costs of production. That goes into the costs that cable operators pay for TV channels. So cable prices keep going up. What’s the consumer going to do — stop watching television?

If you read that last one, you may see what often happens in these markets: disruption. In the case of video, that comes from streaming. Online courses are disrupting education. And in the case of textbooks, there are plenty of startups working on creating new services.

Since incumbent companies are incapable of dealing with disruption, they buy up the disruptors and mismanage them, and they also merge with rivals to reduce competition and maintain margins. Nearly every time you see a merger in a mature industry, this pattern is in play. It allows the companies to continue to bleed their customers, reduce price competition, keep the dog-food marketing in place, and stave off extinction.

Mergers in these industries are bad for consumers. Regulators should block them. If they don’t, they’re just treating us captive consumers like dogs.