Jeff Shelstad thought he had created a better way to publish textbooks. Just one problem: getting college kids to pay.

The Backstory

As an executive at textbook publisher Pearson Education, Jeff Shelstad saw an industry stuck in the past. High production costs drove up the prices of college textbooks. To preserve sales, publishers released new editions often, making it difficult for instructors to keep up. And instructors had limited flexibility to adapt texts for their courses: If the books omitted relevant content, instructors often had to assign supplementary texts, further inflating students' bills.

So in 2007, Shelstad and his Pearson colleague Eric Frank co-founded Flat World Knowledge in Irvington, New York. Shelstad sought to make textbooks affordable for students and customizable for teachers. He started by making all of its textbooks available digitally. Using the company's online platform, instructors could edit and remix the books' content, choose among versions, and move to new editions on their own schedules.

Flat World was well placed to address an emerging movement in higher education: open educational resources, or OER. Institutions had begun publishing instructional content that was free to use, adapt, and distribute. But the quality of many OER materials was untested. Flat World's textbooks, on the other hand, were peer reviewed, lending added credibility.

Flat World made basic editions of its textbooks available for free on its website and offered hard copies starting at $30, a fraction of the price of most college textbooks. It also sold downloadable mobile versions. The company raised $10 million in 2009. A year and a half later, Flat World's books had been adopted for more than 1,000 college courses nationwide.

The Problem

Shelstad, the company's CEO, had long suspected that offering textbooks online for free would be a gamble and that many students would simply rely on the free versions rather than pay for the physical books or the mobile versions. But a significant number of students, it turned out, preferred print copies of their textbooks--and were willing to pay for them. In Flat World's first two years, about 40 percent of the company's student customers opted for paid versions of its products.

By 2011, Flat World seemed poised for strong growth. By January of that year, the company had raised an additional $15 million from investors, including Bertelsmann Digital Media Investments and Bessemer Venture Partners, to fund the publication of new titles in additional subjects. Three months later, Random House invested $3 million.

But as the year progressed, Flat World's share of paying customers began to decline. More students were using digital textbooks than in past years, but few of them chose to purchase the downloadable e-books. Instead, most accessed the free versions online. Plus, as print copies of Flat World's textbooks began to enter the used-book market, students could buy them from resellers at a lower cost. By December, only about a quarter of students who accessed the company's textbooks were paying customers.

More students were using Flat World's textbooks, but the company's revenue per customer was dropping. Shelstad knew he had to entice more students to pay for the company's products. "We were going the wrong way," he says, "and we needed to fix it."

The Decision

Flat World began efforts to convert more students into paying customers. In July 2012, the company launched the online $20 Study Pass, which included highlighting and note taking, as well as a supplementary study guide. But by September, only 5 percent of students had purchased it.

Shelstad had an additional concern. Through an institutional licensing program, some students bought textbooks through their schools rather than via Flat World's website. The institutions paid Flat World a fee. Those schools were, in essence, "subsidizing those who chose free," he says. "I felt that making our books affordable across the board was more appropriate."

In other words, he had decided it was time to erect a paywall. That, however, could affect Flat World's relationship with schools that adopted the company's textbooks because of the free access. Further, a shift to a paywall could jeopardize Flat World's open-publishing license, preventing instructors from collaborating.

Ultimately, Shelstad decided that Flat World's business would never be sound unless all students paid. In November 2012, the company announced that it would end free access to online textbooks in January--a move it billed as "free to fair." At a minimum, students would have to purchase the Study Pass. They could also choose to upgrade to products like a $50 so-called VIP Pass to access Flat World's print and online textbooks.

The Aftermath

Some instructors were supportive. Even at $20 to $50, they reasoned, Flat World's textbooks remained much more affordable than those from other publishers.

But others felt blindsided by Flat World's announcement. Instructors who had used Flat World's textbooks specifically for open education initiatives worried about restricted collaboration. "If it's behind a paywall, it's no longer open--that's the bottom line," says Geoff Cain, director of distance education at the College of the Redwoods in Eureka, California. "It feels to a lot of people like a bait and switch."

Shelstad believes Flat World, whose textbooks are now used in around 3,800 courses, has garnered enough goodwill to remain on solid footing. The company has resolved that instructors will still be able to revise textbooks for their own use, though it's not clear yet whether they will be able to collaborate. The company is also looking to expand the licensing program.

The shift in direction triggered management changes. In December, the board named as CEO Christopher Etesse, previously a vice president at the educational technology company Blackboard. Shelstad will remain with the company, and he remains confident in Flat World's mission. "I think the changes are going to have a positive impact for institutions, for authors, as well as the bottom line," he says.

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The Experts Say...

My Concern Is the Long Term

The key in open-source software is galvanizing a whole community to bear the cost of developing a product. But Flat World used a traditional approach to authorship, and it locked its content into its platform. I think in the short term, Flat World will get a bump in revenue. But my concern is that in the long term, it will be just another publisher. Every publisher is developing a platform to modify books now. And over the long term, the cost of books will drop, so that distinction will fade, too.

--Victor Vuchic
Program officer in education, William and Flora Hewlett Foundation

Consider All the Stakeholders

Even mission-based businesses still have to create business models that work. I suspect that setting up licensing deals with schools to provide textbooks at low cost will ultimately work well. Some critics of the company seem to be taking one stakeholder's point of view, that of the student or the school, but the company has to take into account all of its stakeholders: authors, investors, employees, suppliers, schools, and students. Any decision driven by only one or two of those groups won't be a good one.

--Steve Piersanti
President, Berrett-Koehler Publishers

Make Your Model Clear

The fact that something is initially offered for free doesn't mean it will always be free. The key is to make your business model clear to customers up front. Particularly in higher education, there are some people who don't embrace the nature of commercial enterprises, so some of the noise is not unusual. But if it is a small group of people complaining, then I don't think it should be a big concern.

--Steve Murray
Partner, Softbank Capital