By Stephanie Simon and Madeline Will
(Reuters) - A booming market in recent years for selling and renting used college textbooks has saved students across the United States a ton of cash.
But it has put textbook publishers in a bind. They don't make a cent unless students buy their books new.
So increasingly, publishers like Pearson Plc and McGraw-Hill Education are turning to a new model: Creating online versions of their texts, often loaded with interactive features, and selling students access codes that expire at semester's end.
Publishers save on printing, shipping and process returns. The e-books are good for learning and good for their bottom line. There's just one catch: Persuading students to go digital isn't easy.
Online products accounted for 27 percent of the $12.4 billion spent on textbooks for secondary schools and colleges in the United States last year, according to research firm Outsell Inc.
But the publishers expect that percentage to grow, and are retooling their businesses to compete in what they see as the future of the industry.
Half of Pearson's total revenue last year came from digital products and services (not all of which are digital), and executives expect that to increase. The company recently announced a restructuring to emphasize online content.
Cengage Learning, which creates customized courses, has pledged to emerge from a recent bankruptcy filing more focused on digital. McGraw-Hill Education, which was recently acquired by private equity firm Apollo Global Management, has taken an equity stake in one software company focused on digital learning and purchased another outright.
Still, the transition will not be immediate, executives said. Students have to learn to adapt to a textbook that can almost read their minds.
"How do we get from the Old World to the New World as quickly as possible?" said Andrew Kvaal, a senior vice president for Cengage. "An awful lot of people still resonate with having a physical book in front of them."
Some 77 percent of college students said they preferred print to e-books in a survey conducted last year by the National Association of College Stores. Another survey, by the research firm Student Monitor, found only 14 percent of students enrolled in college this past spring had classes that required online texts and just 2 percent bought most of their books in digital format.
And most students said they did not see much use for the touted special features of digital textbooks, such as embedded quizzes, electronic flash cards, or the ability to share notes online.
Michael Hardison, who is studying political science at the University of North Carolina at Chapel Hill, is among the skeptics. He likes straight-forward e-books, but said textbook software with built-in tutorials made him feel that he was being spoon-fed the information instead of letting him wrestle with the material on his own.
Cost is another concern for many students.
Consider the widely used textbook, "Biology", by Sylvia Mader and Michael Windelspecht, published by McGraw-Hill. The ebook costs $120, a steep discount from the $229 cost for a new print textbook.
But savvy shoppers do better. The same book in printed form can be rented for $36. It can also be bought used for $102, and later resold on the secondhand market for up to $95, according to the website CheapestTextbooks.com.
These alternative markets have transformed the industry. Average student spending on new textbooks per semester dropped from $192 in the fall of 2008 to $138 this spring, according to Student Monitor. That is despite the prices of new textbooks rising about 6 percent a year, according to the U.S. Bureau of Labor Statistics.
Digital textbooks could hurt the secondhand market, analysts said. But they will have to contend with open-source sites - free or almost-free compilations of resources that are only a small threat now - and students sharing files rather than buying their own.
With online books, publishing companies "get a steady stream of revenue," said Will Ethridge, the outgoing chief executive of Pearson's North America division. "It's a better model for students, a better model for the business and a better model for the environment."
The transition "obviously doesn't happen overnight," he said, "but we do think the direction is very clear."
Executives say students might be wary at first, but once they try the new software, they are hooked.
McGraw-Hill's LearnSmart software - which serves almost as a personal tutor, guiding students through e-books - debuted in 2010 with just 150,000 student users. Two years later, more than a million students were paying $25 to $35 per course to access the online tutor, which they purchase separately from the online textbook itself. Executives say sales are expected to rise again this year.
Some digital texts embed links to videos, articles and clips from a professor's lectures, while others will monitor a student's progress and draw up personalized study plans to keep them on track.
"We can even predict what you're most likely to forget...and when you're most likely to forget it," said Jeff Livingston, a senior vice president at McGraw-Hill Education.
Manju Bhat, an assistant professor of physiology at Winston-Salem State University in North Carolina, monitors how much time his students spend reading the digital texts he assigns, how they do on embedded quizzes, and which concepts stump them. Bhat, a paid consultant to McGraw-Hill, uses that data to shape the next day's lesson.
The students' grades improved so much that "My department chairwoman called me into her office and asked me, 'What did you do?'" Bhat said.
There is another advantage of online texts: They can be edited and updated quickly, with new material pushed out to all users around the world.
"Ten years from now, almost 75 percent of students believe that e-textbooks will be used more than print textbooks," said Cindy Clarke, a senior vice president for CourseSmart, an online joint venture of five textbook publishers. "It's happening, and I believe it will start to happen more and more exponentially."
(Reporting by Stephanie Simon in Boston and Madeline Will in New York; Editing by Jilian Mincer and Leslie Gevirtz)