Thursday, March 22, 2012

Open Business Models - A Lead Scholar Badge

I have chosen to complete A Lead Scholar Badge that Erin proposed as part of her quest to complete the Open Assessment Designer badge.  She defined the requirements for the badge as:
The rationale behind the design of it is that this badge provides an opportunity for us to be knowledgeable in a topic and to inspire other students to learn more and think deeply about that topic.
In order to fulfill this badge, you follow the step:
1) Choose a topic interests you (refer to our course topics:
2) Let our teacher, David Wiley, know about your decision and get approval
3) Become knowledgeable in that topic by carefully reading all required readings
4) Present main points of readings in class or in your organization
5) Lead a class discussion on that topic by posing meaningful questions or hold an introductory meeting in your organization
I will be leading the discussion on March 23rd in our class meeting on the topic of Open Business Models.  The points from the readings assigned are outlined below.  After presenting in the class of Friday I believe that I will have met the requirements for the badge.

The main concept of the business models is that of sustainability.  As Downes (2007) notes in his paper (not assigned for the topic) there are economic and non-economic definitions of sustainable.  The economic definition of sustainable involves finding a mechanism that will provide the funds that at least equal the costs of the provision of OER.  The costs to provide are ". . . calculations . . . often expressed in terms of 'total cost of ownership' (the make-up of which varies, depending on who is asked)." (p. 33).

Downes also writes that there are non-economic sustainability concerns that some organizations may view as more important than the funding.  These may include the the actual sustainability of the OER itself in terms of lifetime, or objectives that the organization might view OER achieving that otherwise not have been available without the resources used.  Because of these varied considerations of what sustainability means, Downes writes:
What constitutes 'sustainable' is unlikely to be reducible to a single metric or calculation. It will ultimately depend on the economies and the objectives of the provider. This may well explain why there are many models for sustainable OERs. This indeterminacy, though it may raise difficulties for economists, may nonetheless be a good thing. It may allow many organizations in many ways to see OERs as 'sustainable' even in cases where a broad social consensus does not exist. (p. 34)
The articles provided in the topic readings discuss different business model considerations associated with providing resources to sustain the OER on an ongoing basis.  I will discuss the main points in each article and some of the considerations related to business models discussed in each; however, I thought it important to first consider what Downes had to say about definitions of sustainable because I think his point is important to consider.  

Reading 1: Johansen and Wiley (2010) - A Sustainable Model for OpenCourseWare Development

This study considered the development of OpenCourseWare (OCW) at BYU Independent Study and asked three research questions:
  1. How much does it cost to “open” an existing BYU IS course?
  2. How does opening a BYU IS course affect paid enrollments in the course?
  3. If the impact on paid enrollments is positive, is it enough to sustain an ongoing open publishing initiative at BYU IS?
The last question describes how the study defined sustainability.

The study reveals that there have been documented concerns that institutions offering online courses for credit would suffer a decline in enrollments (and revenue) if they provide an OCW version of the same courses.  So the study attempted to determine if there was a significant discernible impact on expected enrollments when an open version of the course is made available.

The second aspect to be addressed was the flow of funds that might be generated by the OCW version to offset its conversion costs.  The study decided to place a button in the OCW pages that would allow the viewer to register and pay for the for-credit version of the course.  This funding source was described by Downes (2007) as a Conversion Model which he says is summarized by Sterne and Herring (2005):
“In the Conversion model, you give something away for free and then convert the consumer of the freebie to a paying customer.”
The conversion of an OCW user to a paying enrolled student generates funding that can be used to cover the costs to convert the course to the OCW format.  Johansen notes that other studies have indicated a conversion rate of approximately 2%.  So there are approximately 2 enrollments for every 100 visitors to the OCW version of the course.

BYU Independent Study courses were converted to OCW with minimal conversion costs because the courses were already fully delivered and available to user in an online format and were largely self-contained with limited use of copyrighted materials.  The study points out that there would be considerably more costs to be covered to sustain the courses if there were development costs from the initiation of the course that needed to be allocated to the open version of the course as well as use of copyrighted materials.

Johansen notes that the University owns the product of the authoring work done by the faculty developing the course so the copyright for the course belongs to BYU. He also notes that BYU Independent Study purposely limits the use of copyrighted content, including required texts for the course.  Most of the text materials are contained within the course itself and copyrighted by BYU.

Due to these ownership considerations, and the fact that the courses were already developed for enrollment by paying students in a near to OCW format, the conversion costs were minimal in these regards.  The most significant costs incurred were for what Johansen calls the transform.  This was the process to take the existing XML formatted content and transform it to a format for OCW use.  This meant that the costs to develop the first course was considerably higher than that of the subsequent courses which did not require the transform development.

Johansen reported the costs to convert as follows:
  1. University Courses
    • first course: $3,485.07
    • second course: $284.12
    • third course $284.142

  2. High School Courses

    • first course: $5,204.34
    • second course: $1,172.71
    • third course $ 1,172.71
The process to convert the high school courses was slightly different and required more labor than that university courses accounting for the difference.

Statistical analysis was used to determine if there was a possible effect of the open courses on enrollments in the paid courses.  This analysis seemed to indicate that there were no significant discernible effects on paid enrollments in the courses.

The study used web-analytics and cookies to count the conversions to the paid course.  The count of conversions was 512 paid enrollments from 20,148 visits for a rate of 2.54%.  The study then assumed the second and third course conversion costs would be representative of future conversions.  This assumption was then used to calculate the costs to convert and then the 2.54% conversion rate was used to estimate the revenue that might be available from conversions.  The analysis used a four-year period for analysis since it is anticipated that the lifetime of the course before needing significant rewrite is four years.

The four year revenues that were estimated for the OCW versions of the courses provided sufficient funds at the 2.5% conversion rate to require an 11% margin on sales of courses in order to sustain the OCW efforts.

Reading #2: Hilton and Wiley (2010) - Free: Why Authors are Giving Books Away on the Internet

This article states:
Anecdotal evidence suggests that exposure to both authors and books increases when books are available as free downloads, and that print sales are not negatively affected.
The authors read past materials written by 10 authors who openly publish their books.  They also surveyed the authors and analyzed the sales of books written by one of the authors.  The most frequent responses given by the authors when asked why they openly publish were:
  1. they had a desire to increase the exposure of the book, and
  2. open publishing is, morally speaking, the right thing to do.
One of the authors said, “I reach new audiences that I couldn’t have imagined [and] I think I’ll sell more books.”  Another author said he was persuaded to openly publish Free Culture because he felt it would increase the dissemination of his ideas.

One of the authors, Lawrence Lessig said, “The number of people who tell me they would never have seen the book had it not been freely licensed is extraordinary.”  Another author, Cory Doctorow, wrote:
Most people who download [a book I wrote] don’t end up buying it, but they wouldn’t have bought it in any event, so I haven’t lost any sales, I’ve just won an audience…After all, distributing nearly a million copies of my book has cost me nothing.
The authors note that the offering of the books in the open formats has attracted attention to their writings.  One indicates that it actually has "extended the long tail" of the book leading to longer period of ongoing sales because of the good will that the open publication has engendered.

The authors note that there are benefits that they derive personally from the open publications that they may not have received without being open.  These are not sales but the satisfaction of "doing the right thing" or the ego strokes that come when they hear from readers all over the world.  There is also the satisfaction that their books are being translated into other languages and readable formats so that those who may not have had access to the books otherwise can be readers because of the open licenses that allowed these modifications.

When it comes to the sacrifice of financial benefit to them personally that most would assume would be part of the decision to openly publish, Doctorow wrote:
A tiny minority of downloaders treat the free ebook as a substitute for the printed book — those are the lost sales. But a much larger minority treat the ebook as an enticement to buy the printed book. They’re gained sales. As long as gained sales outnumber lost sales, I’m ahead of the game…The number of people who wrote to me to tell me about how much they dug the ebook and so bought the paper book far exceeds the number of people who wrote to me and said, “Ha, ha, you hippie, I read your book for free and now I’m not gonna buy it."
Other authors indicated that they had books whose sales far exceeded the publishers estimates and that they thought that was because of the interest generated by the open version of the book.  Another author expressed that he viewed the open version of the book to be a sampler that allowed readers to assess their interest in the book and then make a decision to buy it.  This author believed that some people bought the book who otherwise would never have considered it because they were able to sample it.

The article concludes with a study that tracked the sales of two books be Lessig immediately before and after one of the books that was in print only, was released in an open version.  The conclusion was that there was a possible effect observed    that the decision to "go open" may have lessened the slide in sales that might otherwise have been expected for a publication that was aging in the marketplace.

Reading #3: Hilton and Wiley (2010) - The Short-Term Influence of Free Digital Versions of Books on Print Sales

This paper again looks at the effect of publishing a book in an online open format on the print sales of that book.  The authors make this very important point:
The question of how freely distributing an electronic version of a work affects print sales is difficult, if not impossible, to answer experimentally because there is no way to simultaneously release and not release free versions of a book. It is not possible to determine causation; nevertheless, the effect of free distribution on print sales is an important issue to examine.
This paper was a follow-on study to the last paper in which the authors performed the bookscan analysis that they used for the Lessig books in the last study, expanded to 41 books by different authors in different genres.  They analyzed scanned sales for these 41 books in the eight weeks prior and the eight weeks following the release as an open publication.  The results were mixed and may have been influenced by one of the publishers that had a more restrictive method for accessing the titles.

The authors conclude:
The present study indicates that there is a moderate correlation between free digital books being made permanently available and short-term print sales increases. However, free digital books did not always equal increased sales. This result may be surprising, both to those who claim that when a free version is available fewer people will pay to purchase copies, as well as those who claim that free access will not harm sales.
The authors also note that it will be hard to make general conclusions from this data regarding the effects of open publishing on book sales.  

Reading #4: Hilton (2010) - ―Freely Ye Have Received, Freely Give‖ (Matthew 10:8): How Giving Away Religious Digital Books Influences the Print Sales
of Those Books - Dissertation

This dissertation documents the significant research done by Hilton in this genre of open publishing and it effect on sales of printed books.  Hilton was able to work with Deseret Book and several of their published authors to release eight books in an open version and assess the impact on the sales of those books.  Hilton's Abstract states:
This study examined the financial viability of a religious publisher‘s putting free digital versions of eight of its books on the Internet. The total cost of putting these books online was $940.00. Over a 10-week period these books were downloaded 102,256 times and print sales of these books increased 26%. Comparisons with historical book sales and sales of comparable titles suggest a positive but modest connection between this increase and the online availability of the free books.
It is apparent from all of these last three publications that Hilton is seeking to provide evidence that this open publishing approach will not negatively impact authors and their livelihood and thus make OER a more attractive way to spread influence and learning opportunities.  He has done a good job documenting these possibilities and this dissertation reports research that serves as evidence.  This evidence is played up against opposition and the fear that publishers and authors have that openly publishing books will hurt sales.  One publisher feels strongly about this:
A spokesperson for the Penguin Publishing stated that Penguin Publishing believes that books are too valuable to be given away for free.
Hilton reports the experience of Scott Adams, the creator of the Dilbert comic strip, with open publishing.  He notes that he openly published one of his older books in hopes that it would promote sales of his new book.  He said:
My hope was that the people who liked the free e-book would buy the sequel [which was newly available in hard copy]. According to my fan mail, people loved the free book. I know they loved it because they e-mailed to ask when the sequel would also be available for free. For readers of my non-Dilbert books, I inadvertently set the market value for my work at zero. Oops. (Adams 2007, p. A19)    
 Hilton makes the observation that:
Until authors and publishers can be assured that turning their books into open educational resources will not negatively affect sales of those books, it seems unlikely that authors and publishers will be willing to make them freely available. If research could demonstrate that providing free electronic copies of books did not diminish a printed book‘s profitability, then making books available as open educational resources could become widespread, thus greatly expanding access to information. 
This dissertation documents this result for the books that he was able to make open for this study, as the abstract suggests.  The dissertation reports the detail that is summarized in the abstract quote above.  The study uses the same approach that Johansen used in his OCW study from Reading #1.  The margins that were required for Deseret Book under the different volume assumptions ranged from 17% to 95%.

The study noted a positive correlation coefficient of r = .42 between downloads of the open book and total sales of the print book through all channels.   The same correlation was performed again but limiting the count of print book sold to only those sales through the same medium as the open book, the internet.  The correlation coefficient in this analysis changed to r = .65.  This is a stronger correlation.

The overall increase in book sales of 26% indicates that there was not a negative effect of making the books available in the open format and suggests that there may have been a positive effect.

Reading #5: Hilton and Wiley (2010) - A sustainable future for open textbooks? The Flat World Knowledge story

In this article the authors talk about the business model governing Flat World Knowledge (FWK), a provider of on-line open textbooks and related supplemental materials.  The efforts of FWK (and other open text providers) are in response to the tactics used by publishers of traditional text books in pricing, packaging, and issuing of new editions.  Such tactics are feared to greatly increase the cost of education and therefore the financial burdens on students and families.  These higher costs price many out of the possibility of higher education.

The FWK model is aligned with what the authors referred to as the Gillette model,
which can be summarized as “give away the razor and sell the blades.” This model has been successful for a number of open source businesses.  

The authors also refer to this model as the open source business model (based on its accepted use by providers of Linux) and a "freemium"model where the seller gives away a product or service and then sells related merchandise or services.  The FWK model provides the on-line version of the text and then charges for premium add-ons such as a printed copy, audio version, flash cards and so on.

Two significant parts of the business model are that the authors are paid a 20% royalty rate on the sales of the books and supplemental materials rather than the standard 15% royalty of the traditional publishers.  One of the FWK authors stated:
“Flat World has a great business model. One of the things … that I don’t like about the current marketplace is that the books are $150 or more … So the commitment to make [textbooks] downloadable for free has several advantages for both the professor and for the students. For the student of course it makes sure that if the book is too expensive, well they will just read it online … for the professor it means that if the bookstore didn’t order enough books it’s okay the students can read it online until they can actually their physical copy. The importance of free was really driven home to me when I received an e–mail from an Indian student who said that he had studied my book, and that in his opinion it had helped him gain entrance to an MBA program in India, and that he wouldn’t have been able to do it without the free material. That was one of the most heartwarming things that I have had in my career.”
So in addition to the higher royalty percentage, this author also derives some non-monetary satisfaction  from his text published openly.  The second significant fact is that the alpha and beta testing shows that the faculty and the students support the FWK approach as long as the text quality is of the highest caliber.

The article reports that 442 of the 750 students (59%) enrolled in courses using FWK texts (the beta test) purchased add on materials and spent an average of $28.20 each.  294 of the students paid for a printed copy of the text in addition to the free copy available to them online.  The authors write,
Data from this beta test suggest that in addition to purchasing textbooks, many students are interested in purchasing a variety of course materials, particularly flashcards and audio versions of the text. 
The authors conclude, noting:
From the viewpoint of students and faculty, free online textbooks of acceptable quality may be particularly attractive. Data from the FWK beta test suggest that even when free online textbooks are available many students will still purchase printed versions of the books. Results from the beta test also indicate that students are interested in supplementary products such as flashcards.
Reading #6: Hilton and Wiley (2011) - Open Access Textbooks and Financial Sustainability: A Case Study on Flat World Knowledge

This article reports on the first year of operations of FWK.  It captured the following key statistics for that year of operation (fall 2009 through summer 2010):
  • 57,690 students were enrolled in 1,153 different classes which used FWK textbooks
  • 16,461 print textbooks were purchased generating $479,259 in revenues.
  • 10,970 (67%) if these texts were purchased through a campus bookstore.
  • 29% of students purchased a print copy of the text.
  • 65.7% of the students using FWK texts registered at the FWK website
  • Approximately 25% made a purchase from the FWK website
  • Average buyer made 1.3 purchases
  • Average purchase was $30.89
  • Costs to FWK to publish the first 10 textbooks: $150,000 each
  • Costs estimated for additional textbooks: $120,000 each
  • Costs to recruit faculty to use FWK texts:
    • 2009-2010 $2,500 on average with $225 in gross profit
    • 2010-2011 $ 900 on average with $300 in gross profit (three year payback)
  • 500 faculty adopters summer 2009 - 9% referred by colleague
  • 1,200 faculty adopters summer/fall 2010 - 27% referred by colleague
  • 2009-2010 average revenue per text: $48,00  - 3 year cost recovery
This report shows that the business model has promise.  There is concern that the percentage of students purchasing a text declined in the first full year to 29% from the beta test level of 39%.  This trend could affect sustainability if further percentage declines occur while the number of adoptions increases.

Supplemental Reading: Downes (2007) - Models for sustainable open educational resources 

I have included this reading only to list the eight methods for funding OER that Downes lists in his article.  These eight models are not limited to OER.  This is the same set of models considered for most non-profit public institutions or resources (museums, libraries, parks, cemetaries, schools, colleges/universities, arts organizations, etc.)  These are not unique to OER which has two implications to my mind:

  1. Those who will be involved in supporting the efforts will be very familiar with these models.  This applies to the fundraisers, patrons, and donors.
  2. Because there are so many of these institutions and resources competing for these funds, there is competition for them.
Some of these eight models have been discussed in the readings provided for the business model topic.  But many were not.  All are available in some form to support the expansion of support and strengthen possibilities for sustainability of OER.

The eight models are:
  1. Endowment Model - money is raised from sources and invested.  The fund administrator dispenses the interest each year which sustains the efforts for which the endowment was established.
  2. Membership Model - Interested organizations and individuals are invited to contribute certain sums to generate operating revenues.  Members are granted privileges in return for their fees.
  3. Donations Model - Donations are requested from the wider community and are used for operations or building an endowment.
  4. Conversion Model - See Reading #1 above.  You give something away for free and then convert the consumer of the freebie to a paying customer.  This is a try and buy, sampler, or add-on such as Linux sellers use.  Includes the "freemium" approach described for FWK.
  5. Contributor-Pay Model - In this model the contributor pays the cost of maintaining the contribution where the provider thereafter makes the contribution available for free.  This is the open choice option offered by publishers where the author pays the journal accepting the article, who then provides the article in an open access format.
  6. Sponsorship Model - Includes advertising in the form of commercials, banners, etc. or indicating sponsorship by another entity (brought to you by Microsoft, Apple, etc).
  7. Institutional Model - Institution itself assumes responsibility for the OER and funds its development, support, and maintenance from institutional budgets.
  8. Governmental Model - The government supports the OER through direct funding and grants.
Additional References

Downes S. (2007). Models for sustainable open educational resources [Electronic version]. Interdisciplinary Journal of Knowledge and Learning Objects, 3, 29–44. Retrieved from

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