In the US, Suzie co-ed may be looking at graduating with over $100k in tuition debt and, it’s even true that her younger brother is going to end up with considerably more since tuition rises inexorably each year. Seen in this context, it may be hard to understand why publishers get beaten up each year over the $4,000 that a student may spend on educational content over the course of their four years in College. Despite being asked to spend just 4% of their educational ‘budget’ on content, students (and to some extent their parents) frequently voice their opposition to the high price of textbooks and often gain the attention of media and government. Publishers may be excused for wondering ‘why us’ when the cost of tuition continues to grow year over year but the annual value of the textbook market has remained stagnant at approximately $7.5billion. Why textbooks are viewed this way is hard to define: Perhaps the student pays for their textbooks out of their own pocket versus tuition paid by parents or, the utility of the textbooks assigned by professors is questioned when they are not used in full or, the shortened shelf life of textbooks means students can’t resell their books. Maybe all of the above and other reasons as well.
For publishers the dissatisfaction is problematic but they may not actually care too much about the student even though it is the student that makes the purchase. Their customer is the faculty member. After all, the professor is often making an annuity-like decision to select one textbook over another and that decision can often stand for several years meaning recurring revenue for the publisher. Increasingly the institution where the faculty teaches is also important and, while the professor remains vital publishers may be increasingly interested in the $100K spent for tuition.
A number of years ago, I made a presentation at theFrankfurt Bookfair Supply Chain Interests Group where I used the example of Reed Elsevier to show how a business could realign its’ business to compete in a much larger market where the opportunities were potentially significantly greater. Jack Welsh ex-CEO of General Electric, (when not suggesting conspiracy theories) used to challenge his executives to look beyond their traditional markets to expand their opportunities to grow revenue. As Reed evidenced, it may better to be a smaller player in a $40billion market than to dominate a $100million market. Strategically redefining your business can’t be done easily but becomes the driver in business planning and over a defined period a business can move itself into one with significantly more opportunity.
At a conference earlier this year, when the student spending numbers were discussed it occurred to me that fighting over an annual spend of $1,000 per student versus an opportunity to grab some of the $25K spent per year would be a strategic win for a publisher. With the education market expanding – both in pricing and market penetration – and traditional the textbook market flat, where else could a publisher go? A strategic rethink and change in direction may appear beyond comprehension for the average book publisher but this is what business strategy is all about. When we were defining Bowker’s business in 2001/2 we could have stayed in low-margin, low-growth metadata management for libraries and struggled. Instead the company moved into high-margin, high-growth transaction businesses and market intelligence for publishers and we were able to grow the company. Strategically for Bowker, this transition was logical but was only achieved by stabilizing the legacy business and making a series of strategic acquisitions.
In publishing, there is a more impressive example in the manner in which Pearson looks to be rethinking how they define their educational market. Pearson has long been the leader in education publishing both in K-12 and Higher Ed since the big acquisitions from Simon & Schuster in the late 1990s. Indeed in recent interviews, Majorie Scardino the outgoing CEO of Pearson, recalled realizing education was the growth vehicle for Pearson soon after she became CEO 15 years ago. During her tenure, the company realigned their operations, redefined their market, invested in content transformation and made many strategic acquisitions thereby broadly expanding the content and services customers in k-12 and higher ed can now purchase (and license) from Pearson. One only need look at the chart below from their recent annual report to recognize how fundamental has the change in market approach been for Pearson.
|Pearson PLC Annual Report: Competitors|
The companies we in the ‘publishing’ market would consider their historical competitors – McGraw Hill, Cengage, HMH – are only bit players in comparison with Apollo, Benesse, Kaplan and others. Pearson is not only a content producer but they are also (via a series of key acquisitions) a distribution point for educational learning on par with Kaplan and the University of Phoenix. Pearson recently won a contract to deliver “Cal State Online” for the California State University System (CSU) which will enable the delivery of a selection of undergraduate degree and professional master’s programs. In competing to deliver this solution for CSU it is unlikely that Pearson was competing with their ‘traditional’ publisher competitors.
Other publishers may be starting to take notice and John Wiley’s recently announced acquisition of an educational provider is evidence of this attention. Yet, Pearson looks to have a significant head start and looking at this chart it’s interesting to speculate what the impact of mergers and acquisitions may have on these players over the next few years. It seems logical that for some the fastest way to catch up to Pearson would be to merge with someone else. For example, Kaplan doesn’t have much owned content but wide market penetration; whereas, Cengage is a content developer focused on traditional education delivery. This type of strategic combination may make sense as these players begin to re-think their markets.
An interesting aspect of the discussion about Scardino’s departure has been focused on what Pearson’s new CEO may divest as though divesture at Pearson is something new. That’s not the case, as Pearson has divested many businesses over the past ten years. Whether the company divests the Financial Times or Penguin seems far less interesting to me in contrast to what their education business can become over the next five years. Leveraging what is increasingly a content platform for creation and delivery looks far more interesting and compelling for Pearson in my view and is a direct result of how they re-thought their market to go beyond the parameters of the traditional publishing market. Looking at the chart from their annual report, all educational companies are going to struggle to keep up.