Web Sites Challenge the Textbook Goliaths

The college textbook market has functioned as a near-perfect monopoly. Consider: How often does someone have the authority to order consumers to purchase a product with a limited number of vendors? University professors have just that power, requiring students to purchase particular books for their courses. The often obscure titles must typically be purchased from the college bookstore, which obtains them through special order. With limited competition, at best, prices for new textbooks can easily climb to $100, and have tripled since the mid-1980s (see BusinessWeek.com, 7/12/06, "Textbook Costs Stir Concern").

Now a group of small Web sites is trying to provide students with a cheaper alternative for textbooks and other school supplies, such as computers. The largest of the sites, Chegg.com, has just received $2.2 million in funding, BusinessWeek.com has learned. The company, based in Santa Clara, Calif., raised the money from Gabriel Venture Partners and angel investor Mike Maples. Maples also participated in an earlier angel round.

Chegg allows students to buy and sell used textbooks and other school-related goods and services for free. It's a huge market, generating $11 billion in revenue and $3 billion in profit a year, according to Rick Bolander, a Gabriel co-founder and a member of the Chegg board. "If we can take just 5% of that market, we'll be very happy," he says.

Helping Students Save

Chegg provides goods at lower prices than traditional campus outlets. The margins on used textbooks are often as high as 40%, according to Chegg Chief Executive Osman Rashid. It's just one example of rising education costs (see BusinessWeek.com, 8/10/06, "America's Priciest Dorms"). By eliminating the middleman, the student buyer and seller can split the profit margin among themselves, Rashid says. He added that a $100 textbook that might be resold at the campus bookstore for $70 would go for about $50 on Chegg. "The used textbook business has been wildly profitable for retailers. Our whole notion is to save some money for students," says Rashid, an electrical engineer who previously worked as a sales executive for Chordiant Software (CHRD).

One Chegg user says her book expenses have dropped to $200—from $500 to $600—since she began using the site in September. "It's a really great way for students to find textbooks, tutors, or jobs. The prices are cheaper than other sites," says Stacy Lynn Austin, a junior who is studying journalism and creative writing at New York University.

Chegg has its roots in a site known as Cheggpost.com. It was founded in 2001 at Iowa State University by Josh Carlson, a student at the university. It incorporated as Chegg in 2004, with Carlson and Rashid Aayush Phumbhra at the helm. It expanded nationally last fall, although it's focusing on certain universities and groups of schools. As for the name, it refers to the "chicken and egg" problem that confronts students who are pressed to come up with the money they need for textbooks that will help them earn a living later in life, according to Rashid.

Chegg has been growing through acquisition. It has merged with several smaller sites including UFlipit, Textopedia, and UTank. It's now several times larger than rivals such as Collegemedium.com and DormItem, according to market researcher Alexa Internet.

Staying Competitive

Chegg faces plenty of challenges, though. Online retailers such as Amazon.com (AMZN) and Half.com sell used textbooks, too. And as a free classified service, Chegg depends heavily on advertising for revenue, which can be particularly tough for a small site. Chegg also charges fees to certain nonstudents who live near campuses and want to sell goods to students. It sells new books and computers at a discount as well, by reaching agreements with wholesalers.

How can Chegg hope to compete? Bolander says the company benefits from a lean cost structure and a "hyper-local" business plan. "Everyone from Google (GOOG) to Yahoo! (YHOO) and MSN (MSFT) is going local, and that is an area of strength for us," Bolander says.

The issue of rising textbook prices actually sparks global concern. An online organization called the Global Text Project seeks to distribute free digital textbooks in developing countries (see BusinessWeek.com, 12/11/06, "The Worldwide Textbook"). While Chegg still allows users to make a profit on their goods, the era of a monopoly market—with 40% margins—may be drawing to a close.