Chegg's Textbook Renting Business Needs More Red Bull, Taylor Swift

Chegg's warehouse in Shepherdsville, Ky. Photograph by John Sommers II/Bloomberg

Pop quiz: Is renting college textbooks a good business?

a) Yes

b) No

c) It depends. What else is on offer?

Answering “b” will get partial credit, though the correct choice is “c,” according to a quick cram-session of the initial public offering paperwork filed this week by Chegg, a young, California-based company trying to raise up to $150 million.

On its face, the concept is a no-brainer, at least to anyone who remembers forking out three-figures for a dead-tree tome that, more often than not, was barely cracked by the end of the semester. But the list of players in the textbook game is long and lengthening. Libraries, used bookstores and EBay have long been options for spendthrift students.

Recently, Barnes & Noble started renting textbooks. The proliferation of e-books adds a further issue to the market because they can be distributed much more cheaply and are a lot easier to lug around campus. Then there are the authors who tweak their textbooks just enough each year to make old versions obsolete.

Chegg scrambled to offer e-books, but it has struggled to turn a profit and doesn’t seem to be getting much closer to one. In the past two years, its losses have grown by an annual average of one-third, while its revenue increased at an annual rate of only 20 percent. That’s not the kind of data that garners “A”s from analysts or encourages investors to take a flyer on what Chegg calls an “evolving and unproven” business model.

So why does Chegg believe it can sell stock to the masses? Free Red Bull.

Big brands such as energy drink makers pay handsomely for access to the students Chegg serves with its textbooks. For Chegg, a customer lasts only a few years; to a consumer-goods brand, each college kid offers a chance to lock in a lifetime buying habit.

Last year, Chegg had 5 million students cruising its website, 3.7 million of which ordered its books and services. It also served 40 percent of college-bound seniors, a prime target of those who market colleges.

Chegg cleverly aims to be a “one-stop destination for critical student needs” and it’s making progress on that front. It is now getting one in five dollars from activities not tied to its textbooks. In the first half of the year, Chegg garnered marketing dollars from 800 colleges and had advertising contracts 17 consumer brands, including Adobe, Hulu, Intuit, Microsoft, American Express, and Wrigley. It even put together a free-concert promotion with Taylor Swift.

Here’s how Chief Executive Officer Dan Rosensweig pitched the company to investors in Chegg’s recent filing:

Our education system has evolved bureaucratically to conform to the needs of institutions, faculty, publishers and funders. Now, it’s time to put students first—to organize around the needs of each student as the consumer of education.

“Consumer” is the key word there. What do students need as much or more than textbooks? Energy drinks, gum, makeup, Taylor Swift tunes, and so forth. The list goes on. Chegg may make it in college, but only if it gets its head out of the books more often.

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