Apple Creates New Wrinkle In Start-Up's Plan To Disrupt Textbook Industry

(This article appears in the February 13, 2012 issue of Forbes.)

Dan Rosensweig is open to the idea that the textbook as we know it will someday no longer exist. He just doesn’t think it’s going to happen anytime soon. “Anything is possible,” says Rosensweig, the chief executive of Chegg.com, a five-year-old company that rents textbooks to college students on 7,000 campuses. “But if you spend any time in higher education, you realize that we’re dealing with the same education system that existed 200 years ago.” The more immediate change, says Rosensweig, is in how and where students buy content, not the content itself. His bet will determine the future of Chegg—which is not profitable but generated estimated revenue of $200 million last year, up about 38% over 2010.

Textbooks, a capital-intensive, low-turnover business, is ripe for disruption. Undergrads at private four-year colleges spend an average of $1,213 on textbooks every year; nationwide, including K–12, textbook sales are a $10 billion industry and have been rising at twice the rate of inflation over the past 20 years.

The question is whether Chegg, the best funded of a group of firms vying to control textbook rentals, will be around long enough to be the disrupter. It has raised a huge amount of money since 2007: $221 million from venture firms such as Kleiner Perkins Caufield & Byers and Insight Venture Partners. (Its closest competitor by market share, Bookrenter.com, has raised $60 million since 2009.) But while Chegg, based in Santa Clara, Calif., has been investing “tens of millions of dollars” in technology that helps it to determine the best price to buy, sell and rent books, the industry is changing around it.

Today Chegg charges between $10 and $174 for a textbook rental of up to 125 days. The continued growth in e-textbooks, which Chegg already sells, could crush Chegg’s traditional business. Apple in late January announced that it will sell $15 electronic versions of K–12 textbooks, which usually sell for $75. Colleges and publishers are starting to offer lower-priced digital course material, and Amazon and Barnes & Noble are offering cheaper shipping costs and rental options for traditional textbooks.

Rather than compete head-on with its larger, more established rivals, Chegg is trying to become a site where students will buy everything they need for school and, in the process, share ­information that Chegg can sell to marketers. The company has made five ­acquisitions, companies like ­Cramster (for homework help) and CourseRank (for picking courses), that allow it to sell other school-­related goods and services. With these investments Chegg hopes to make money during the entire year, rather than the six-week-long period when students rent and buy textbooks. Rosensweig wants Chegg to be an open platform, like Facebook is to Zynga, and take a cut of whatever revenue other companies generate from the 5.8 million registered users in Chegg’s database. “The print rental and textbook business is milk in the back of the store— everyone needs to have it,” says Rosensweig. “This has ­allowed us to get all of these students, plus their credit cards. It’s at the centerpiece of the student graph.”

Chegg got its start in 2000 as a side project for Josh Carlson, then a sophomore at Iowa State University. He built a site called CheggPost.com as a Craigslist for college students, who used it to buy and sell furniture, sporting goods and textbooks. Students paid nothing to post. Carlson planned to sell advertising once traffic picked up. He teamed up with Aayush Phumbhra, an Iowa State M.B.A. student, and in 2005 landed $50,000 in funding. But inventory was low and traffic remained flat. Carlson left, and in 2007 Phumbhra and a new team refocused entirely on renting textbooks. They raised more money and in 2010 brought on Rosensweig, 50, a former Yahoo exec who ran the Guitar Hero division of Activision, to run the company and create Chegg’s digital strategy.

Despite the acquisitions Chegg is still rooted in traditional textbooks. Only 3% of overall book rentals and sales come from e-books, and only 7% of total sales come from something other than books. According to Chegg, a year ago students spent an average of three minutes on Chegg.com. Today they spend only 30 seconds more and 15 minutes total on the other sites that the company acquired. Course­Rank’s users have risen from 50,000 to 400,000 since Chegg bought the site. Cramster’s user base has “more than doubled.”

Someday when Nike wants to launch a new golf shoe and needs to reach NCAA golfers who live a certain number of miles from a course, they would be able to target via Chegg, says Rosensweig. “That’s not something the big guys are going to do.”

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