Apple Sold 350,000+ Units of…

Apple broke yet another record over the weekend, selling more than $5 million worth of a hot new item. Textbooks. That's according to Global Equities Research, which reports that the Mac maker has sold more than 350,000 of the high school textbooks currently offered from the iBookstore. iBook Author, the free authoring tool released last week, has been downloaded more than 90,000 times. “Apple's decision to launch with introductory textbooks is a good decision, as more than 50% of textbook industry revenues comes from the sales of introductory books,” said Global Equities, which released a new report after speaking to two publishers and five iOS developers. Many critics have questioned the viability of Apple's latest venture. Even those who think Apple will thrive are concerned about the pushback from book publishers, particularly those in the college sector. But based on its discussions with publishers and developers, Global Equities believes that publishers will make more money selling iBook textbooks at $14.99 than they do selling printed textbooks at $125. “[The] used book market [is] 35% - 50% of [the] textbook industry….and publishers get zero revenues from [it],” Global Equities wrote. “Supply chain markup: Publisher gives textbooks to the distributor, distributor to the wholesalers, wholesalers to the retailer, and then to the end user (student). The supply chain markup is between 8% to 15% at each step, totaling between 33% and 35%, and this excludes the distribution costs.” Further, Global Equities said that the cost of iBook production is 80% less than a print publication, and at $14.99, the textbook unit consumption market is 40% - 60% more than that of textbooks at $125. A few other points from Global Equities:

• “Developers tell us that iBook 2 textbooks [are] very slow on iPad 1, but performance is fine on iPad 2.”
• “Developers feel that as interactive content on textbooks increase, iPad 2 may be slow too.”
• “Developers feel that iBook 2 will force Apple to upgrade the A5 chipset on the next generation of iPad from current dual-core to quad-core to facilitate [an] even….richer textbook experience.”
• “Developers indicate that if the minimum configuration on new iPad 3 is 16 GB vs. 8 GB as is currently [available] on [the] iPad 2, it may indicate that Apple is expecting significant textbook attach rate on iPads – maybe 8 -10 active textbooks per iPad. Investors need to pay close attention to this configuration to gauge textbook traction on iPads.”

Guaranteed Success? When Apple AAPL sells a large number of something in a very short period, the assumption is that the product – whatever it may be – is an enormous success. Based on Apple's track record, this definitely seems to be the case. Just look at the initial downloads for Mac OS X Lion or iOS 5, or the first weekend sales of the iPhone 4S. Consider the original iPad, which sold less than analysts initially expected and still became one of the hottest selling products of 2010. However, even if Global Equities' sales figure is accurate, Apple's textbook venture could still fail to be a success on the level in which it is being hyped. From the onset of this announcement, it was clear that Apple came to the education industry to sell iPads. If successful, Apple could theoretically sell several hundred million iPads to students, parents, and schools worldwide. But as I pointed out last week, Apple has a number of hurdles to overcome before it can “reinvent” the textbook industry. Why, for example, can't students view all of their Apple textbooks on all of their Apple devices? The iPad exclusivity is absurd. And teachers agree. “I have trouble seeing why students can't access much of the same multimedia and text content on their home computers, which are much more widely available to students and their families than iPads are,” educator Stephen Warner wrote on The Verge forums. “As the current marketplace stands then, iBooks are only for those families (or much less likely) the schools that can afford to purchase iPads for their students. Most schools in our country can barely afford twenty outdated and obsolete computers for a computer lab, let alone 2,000 new iPads for every student!” The Verge's own writers are also having a difficult time supporting the notion that Apple has reinvented the industry. And they aren't the only ones expressing a few concerns. Beyond the technical limitations (such as battery life), the physical limitations (if you drop your iPad down the stairs, it's less likely to survive the fall than a good-old-fashioned book), and the introductory expenses (most experts say that buying overpriced books will still be cheaper for schools than buying an iPad for every student), there is still the issue of long-term cost. First and foremost, Global Equities brought up an interesting (if not horrifying) point: as textbooks become more interactive, the iPad 2 may not be able to keep up. As it stands now, iPad 1 users reportedly need to upgrade in order to experience the iBook textbooks in proper form. (I haven't tested this myself, but as an owner of the first-generation iPod Touch – which struggled to run new apps after the second- and third-gen iPod Touches were released – I'd say this is pretty darn accurate.) If iPad 2 users are forced to upgrade to take full advantage of the next-gen iBook textbooks, then Apple will place an even greater financial burden on students than they had before. Apple, of course, does not care about the burden – it only cares about sales. And it may not really care if most students, parents and schools cannot afford an iPad so long as some can. Some is enough to ensure that the Apple ecosystem goes on forever. The mere fact that Apple has already sold 350,000 textbooks proves that this venture will be very profitable. Let's examine what will happen if Apple only manages to sell textbooks to students who already own or have access to an iPad. While exact figures have not been released for each quarter, there are probably about 30 to 40 million iPads in America (first- and second-generation sales combined). Let's suppose that 1/4 of those owners are students or have a student in their household. That means that Apple has somewhere around 7.5 million to 10 million customers who are very likely to be interested in buying digital textbooks. That would be huge for Apple. The iPad 3 will surely increase the company's user base this year, and the iPad 4 will likely do the same in 2013 or 2014. Thus, even if Apple fails to revolutionize the industry, the company still wins. All things likely, that was the Mac maker's real goal last week: not to persuade teachers and educational institutions, but to convince a few million iPad-toting students that they must switch to digital. But the focus right now is on high school students. How much will college textbooks cost, if and when they are released? Most people realize that the $14.99 pricing model is out of the question. (For those who hadn't realized this, then let me be clear: there is no way you are ever going to be able to buy a $300 college textbook from Apple for $15.) Rumors suggest that Apple will charge $75 for the equivalent of a $200 textbook. Under that belief, one can imagine that students will pay somewhere around $100 for a $300 textbook. The $200 savings is great. But it does not offer the cost benefit that is currently being provided by the high school pricing model. A more realistic model would price the college textbooks at $40 - $60 at launch. Every other semester, the price would increase by a small amount. Apple would attempt to justify the increase by pointing to the interactive features, among other exclusive elements. But with or without an excuse, most students would not complain about a $5 increase every six months. And that is likely what Apple is hoping for. Follow me @LouisBedigian