Back in January, online textbook rental service Chegg sent a lawyerly letter to rival Bookrenter, insisting that it stop referring to itself as “#1 in Textbook Rentals” — a title to which Chegg had laid claim.
At the time, Chegg had already raised a stunning $144 million in cash and debt, including from Kleiner Perkins, Foundation Capital and Insight Venture Partners. BookRenter only had collected $6 million, from Storm Ventures and Adams Capital Management.
Given their respective sizes, the decision to bear down on Bookrenter seemed ill-conceived, to say the least. (When I interviewed Chegg CEO Dan Rosensweig back in March, he made a point of explaining that he “hadn’t even started at the company” when that letter was sent.)
Today, BookRenter is fighting back, both with a fresh, $10 million round and a new direction that’s picking up traction. Unlike Chegg, which is placing an expensive bet on developing its own brand and competing with college bookstores, BookRenter thinks it can capture more market share by working with the universities. Whether it works longer-term remains to be seen, but since launching the platform in April, 75 schools around the country, including the University of Texas at Austin and the University of San Diego, have created their own online rental stores using BookRenter, and BookRenter is predicting that hundreds more will be up and running by the fall term.
Yesterday, I talked with BookRenter’s CEO, Mehdi Maghsoodnia, about that platform, and why he thinks his approach will win, despite his exceedingly well-funded competition.
You’ve raised another $10 million. Great, but how do you compete with Chegg’s massive war chest?
The college textbook market is about a $9 billion market, and right now, collectively, all of the startups selling books for rent are doing about $200 million in revenue. Chegg is producing around $100 million; we’re doing about a fourth of that. So collectively, the rental space is still very small. It’s the beginning of the game. In fact, if you talk with students, most aren’t yet aware that renting books is an option.
It’s also worth noting that we’re now getting as big a share of the market as they are — our rate of growth is comparable — even though we came on 18 months later. And we’re doing it in a far more capital efficient manner.
What’s most wrong with Chegg’s model, in your view?
Chegg has chosen an expensive way of competing. They want to buy the books that they think customers want ahead of time. They are spending millions of dollars on inventory ahead of demand. Chegg has also spent $27 million building out its [6,000-square-foot] warehouse [in Kentucky], trying to perfect its SKU service and so forth. But Amazon has been doing shipping on a performance basis for 15 years. It’s complicated. You don’t become good at this model overnight.
Which is presumably your case for partnering and not competing with Amazon.
Right, we partner with Amazon, Follett, Alibris and four other partners, because they know what they are doing when it comes to shipping books and because effectively from a selection perspective, it gives our users far more options. All of our partners would have to be out of a book for you not to be able to order it.
But what percentage of your revenue are you giving to your partners?
Basically, the margins in this industry come down to the overall cost of business — what it costs to service a customer. In terms of pricing, we’re beating Chegg. That’s possible because textbooks have a net pricing; I buy a book for same price that Amazon buys it and Chegg buys it. The cost does not change across channel.
And we don’t have the same sunken costs on a book. I don’t have the fixed cost of warehousing. I’m not paying for a lease, or electricity or insurance and salaries for a huge employee base. [Chegg employs 120 people; BookRenter employs 35.] In fact, I don’t take any risk on a book until I’m paid, and I’m paying my backend partners on a real-time basis. I pay you when you warehouse and ship my book. After it’s gone, I don’t pay you anything. We’re much higher margin than Chegg as a result.
So Chegg is pursuing the Zappos model. Is that such a bad thing?
You’re right. Chegg is arguing that it’s establishing a brand that increase its market share, including through repeat purchases. Its bet is akin to that of Zappos: I’m going to spend more money acquiring and servicing you because longer term, my brand is going to pay off.
But in this market, that decision doesn’t make sense. Even after 15 years in the market, Amazon does less than 30 percent of textbook sales. In fact, 60 percent of textbook sales still happen at the campus bookstore; it’s a sticky relationship between students and their campus, which is why we see those bookstores as an important player and partner, rather than competition.
Who sets the prices?
We do. Its out platform and our prices, though those campus bookstores can choose to have students pick up their rental books on site, so that they’ll get the foot traffic.
I’m just curious: what do you make of the argument of entrepreneur-investor Ben Horowitz, who was blogging earlier this year about the merits of raising a bunch of money in the race to win a market?
If you look at the history of successful companies, it’s the exact opposite. If you’re not hungry, you’re not focused, and you don’t execute well. It’s human nature. When you don’t have to have discipline, you don’t have it. And you so badly don’t have it, you don’t even know what your focus is.
Chegg is doing a partnership with Dr. Pepper and it’s branding it’s orange box, and it’s doing so many things that it’s confusing. In an early stage in such a big market, your partners are going to ask: what’s your core competency? Well, Chegg is saying to all these warehousing companies: “we’re better than you in warehousing.” To wholesalers, they’re arguing that: “we’re better than you.” These people are looking at Chegg and thinking: these people don’t even know the demand picture. I hear from numerous sources that Chegg has already had to liquidate some of its inventory positions for pennies on the dollar.
What did you think of Chegg’s campaign, telling students to give their school bookstores the bird?
Well, at the end of the day, the university has the primary relationship with the student. It helps no one by telling the student that their university is trying to screw them. That they have whole advertising department working on these ads just reminds me of what’s wrong with their model.
