• David Slarskey

Cengage is Forcing Authors -- Rather than Its Shareholders -- to Bear the Costs of Its Decline

Cengage is in trouble. A leading publisher for higher education textbooks, its stock price has fallen from nearly $40/share down to $6. Now Cengage is trying to disrupt the distribution model for college textbooks by pioneering an "all-you-can-eat" electronic subscription model for its catalog of thousands of titles: think Spotify for Sociology, Mathematics, and Advanced Psychology. Instead of buying books on a per class basis, students will pay a one-price subscription fee per semester, for access to Cengage's electronic catalog. I was quoted today by the Textbook and Academic Authors Association on this subject -- but read this article first before you link out.

Under the "Cengage Unlimited" model, Cengage proposes to use its discretion in allocating subscription revenues to several different "revenue pools," first deducting its own costs, of course. Author works will be assigned into the pools, and authors will be paid royalties based on a function of the author's royalty rate and the "weighted average of the number of uses x by net price as a percentage of the total for each title and product type" (that's Cengage's description, see below). Cengage has not yet published the equations for how it will allocate the subscription fees among the pools, or for calculating the royalty payments, but what is clear is that (among other issues) the royalty model employed by Cengage Unlimited depends in substantial part on relative use of a title as compared to other titles in the same revenue pool. Cengage has provided this chart, purportedly to demystify its new model:

Though the details are not entirely clear, the Cengage Unlimited model is clearly a significant departure from the language of most publishing contracts, which provide for royalties to be paid on the sale of a title -- whether the student uses the book once, one hundred times, or whether it becomes a shim for a lopsided dormitory bed. With a fixed pool of subscription revenue to be allocated amongst all of the titles that a subscriber accesses in a given period, and with titles being valued based upon their relative use to other titles (rather than on the volume sold), it is easy to see that this model will have huge implications both on the amount of royalties paid out to authors, and the manner in which those royalties will be calculated.

Cengage says this model is necessitated by changes in the publishing market -- the rise of digital publishing and distribution, electronic teaching aids, and the decline of traditional textbook sales. Maybe it is. Maybe not. One thing is for sure though: this model is designed to attract greater market share for Cengage as a company by providing one-price access to its entire catalog. That might be good for the company, but is it consistent with its contractual obligations to authors, who have agreed to give Cengage their publication rights in exchange for a per-sale royalty? Cengage is not allowing authors to opt-out from Cengage Unlimited, and it is curtailing entirely its support for traditional title sales. Given that, Cengage is frustrating the sale of its own titles in favor of increasing subscription revenue through the Cengage Unlimited model. That's good for the company. Not so good for authors.

As a general rule, authors have contracted with Cengage for the publication and sale of their works -- not to have their works included in an unlimited database, where they will earn a fraction of a fixed subscription revenue base, depending upon how many times a student accesses the title. The expectations of the parties are evidenced by the compensation model that was adopted, which almost always is primarily based upon sale of Works. In place of that bargain, Cengage is forcing authors to accept a unilaterally-imposed subscription model that forces authors to take a fractional royalty, on a relative-use basis, which is not contemplated by the large majority of contracts. Courts might well find that this is frustration of the agreement, or a breach of the implied covenant of good faith and fair dealing.

Here's a prediction: Cengage is going to be sued over this model, and it will come out that the company took a calculated risk going forward -- knowing that Cengage Unlimited is not consistent with its contractual obligations to authors. Cengage is taking this risk because Cengage views this as a "bet the company" strategy: if it can not find another way to shore up its revenue projections, it would land in bankruptcy. Guess what? This revenue model is also bankrupt, because it lacks legal foundation from the wide majority of publishing agreements. But to nobody's surprise, Cengage is forcing authors to pay for the decline of its company, rather than its shareholders.