Presentation given at a workshop for NFAIS in April 2013.
Page 1 – Introduction
Thank you again for the opportunity to speak all of you today. As some of you, know I also spoke last month at the annual NFAIS meeting here in Philadelphia and on that occasion I spoke how I see the immediate future for education publishing. Some of that presentation remains in what I am going to speak about today but I was also asked to speak about some of the current divestiture and acquisition activity.
For anyone interested, I have posted the presentation from the annual meeting on slideshare and I believe it is also available on the NFAIS site.
Our industry has a multitude of facets but is generally is broken down into three segments: Trade publishing, academic and scholarly publishing and professional or information publishing. I routinely tell people that it is always good to remember that our industry really isn’t that big in revenue terms. It has also not been a particularly dynamic industry over the past 600 years or so. As we go further into the 21st century, both of those characterizations are increasingly debatable and I am going to lead with that in a minute.
Page 2 – Change:
It will be obvious to everyone here that everything is changing in publishing today. By ‘everything’, I mean all the underlying drivers and assumptions about how our industry is defined and how it works.
We fight to find solutions for growth – even stability - and our natural tendency is to seek an emphatic view of the future. Which of course is near impossible. The task is made harder as change comes faster and faster and more unanticipated scenarios occur than any of us have ever had to deal with. MOOCs could destroy education, GOOGLE becomes a database owner and Netflix produces and sells serialized stories. These and many other disruptors like them keep all of us awake at night. Or perhaps we dream of being a disruptor just once.
Focus on the customer is critical of course but these days not always in the way you may think. The publishers I note in this presentation spend significantly to understand theirs but some savvy publishers are also looking at the customers in other industries for insight into how they can deliver their content and services. One publisher in particular notes their current strategy is the direct result of 2 years of intense research into their customers’ needs and requirements. Another, references consumer websites as an inspiration for their delivery platform development.
Page 3 – Change leads to Opportunity
As I go through my comments I want to look at the business from a macro perspective and challenge the statement I made earlier about the size of the industry. Then I will attempt to communicate how I believe publishers are reinventing themselves to compete on a different level and in a very different context than their most recent history.
This is not the business many of us grew up with. To paraphrase a comment attributed to John Ingram: “it’s not our fathers’ business anymore”
Page 4 – What is this business?
First, two basic questions: What business is this and how big is it? Perhaps obvious questions on the surface but as with many things in recent times the questions are beginning to generate new definitions.
Any item sold, described, broadcast, advertised and even printed is dependent on information published in some form.
How about databases, data sets from experiments, market research, polling information, transaction data and usage information? We should include information in company files describing products, diagrams, plans, documents, records, and more. Much of this material that used to remain private or hard to access is becoming accessible but not however, necessarily readily available.
In my opinion, all companies are publishers in some fashion and their ‘published material’ is of increasing importance to them. The good news for traditional publishers (all of us) is that most of these companies outside our industry aren’t particularly good at publishing or distribution. As more continues to be published, we as publishers are presented with significant new opportunities to help these content producers achieve their goals.
Publishing is in the process of being redefined as traditional barriers to publication and distribution collapse for everyone from individuals to corporations. There’s immense opportunity in that process for companies with expertise.
Page 5 – $500Mm?
This leads me to my second question: how big.
All that ‘published material’ has market value but is not accurately counted by anyone. Perhaps it can’t be. If you agree our market size is larger than we recognize then we should also have more opportunity than we might otherwise believe.
Through the 1990’s the US market was estimated around $25-28Billion. The Book Industry Study Groups ‘under the radar’ report estimated the market to be worth many billions more. The ‘non-publishers’ BISG counted ranged from Mattel a major toy manufacturer to individuals delivering monthly real estate seminars at their local Holiday Inn. Currently, the US market is generally thought to be worth around $35bill. Give or take.
Page 6 – Ask Pearson
The question of how big, is also increasingly complicated by how some publishers are redefining themselves. There is a school of thought in business education that says if you find yourself tapped out of a market – then redefine the boundaries. I’ve a good example of this later but this chart from Pearson’s annual report is interesting because they don’t measure themselves against ‘publishers’ exclusively. This is chart tells you everything you need to know about Pearson’s business strategy. And by the way, just the revenues on this page add to $32bill
Page 7 – Content platforms are the future
I’ve am very interested in the concept of content delivery ‘platforms’ which aggregate, serve and engage users around specific types of activity. And this is a concept I discussed at the conference earlier in the year when thinking about education publishing. I will use the example of Lexis Nexus in this presentation to show how they have used the platform construct to radically redefine their competitive marketplace. Delivery platforms aren’t a new idea and professional and information publishers have done a lot of work with the concept over the past ten – fifteen years. It is still true however that many content owners and publishers have trouble with the idea that their traditional product – books, journals, etc. – must be extensible to include applications, source data, user data, third-party content and “functionality”.
Page 8 – A bigger boat
Looking back on 2012 for a minute: We saw a slowdown in the growth rate of eBook unit sales; indications of a possibly significant substitution of tablets for eBook readers; a reconfirmation in several examples of a lack of enthusiasm by students for eBook based learning; a major strategic publishing merger destined to create a trade publishing goliath; and the sale of one of the big three education companies.
I think we will see more of the same in 2013 and 14.
Page 9 – Where to look
The expectation that the big trade houses would consolidate has persisted for at least five years: In fact, it is more surprising that the Random House/Penguin deal didn’t happen sooner, and now that it has, it’s a foregone conclusion that there will be another trade merger announced in the next few months, involving some combination of Harpercollins, Simon & Schuster and Hachette. Perhaps all three will combine which would equal the deal announced last year in scale and significance. But that’s unlikely. One publisher will almost certainly end up the “odd one out” and it will be interesting to see which it is and what they do next.
Page 10 – Bringing gifts
On the education front, there has been widespread speculation that some merger of Cengage and McGraw-Hill Education will take place this year, since the two companies may end up with a common owner. If they do, there may not be a full combination in the short term but some trading of assets may take place immediately to rationalize the respective businesses with deeper integration to come, perhaps, in 2014-2015. Ultimately, 2013 may bring more significant change in the trade and educational landscape than we’ve seen in many recent years. There will be a lot of focus on the big trade merger and, the industry’s other players will have to fight aggressively not to lose any advantage. “Bigger will be better” when it comes to applying economies of scale in a business whose underlying business model is changing radically. In education, we may be paying attention to McGraw-Hill and Cengage but Pearson, as the market leader, is likely to embark on even more aggressive strategies this year. Under its new CEO, and with the divestiture of Penguin and possible sale of the FT Group, the company has forcefully declared education to be its focus. In summary, a fairly active last 12 months with indications that there is more to come.
Page 11 – Change is coming
Just to return to the concept of changing circumstances, I think it is important to note that each segment of the publishing industry is clearly at a different stage in their evolution as they migrate to electronic based publishing. Based on their different starting points, I see a different set of key imperatives for each segment as they continue their evolution.
Hardest to predict is the information segment because the business in many respects is already so advanced. They will continue to integrate content and technology and offer customers more flexibility in how they gain access to these integrated products via software as a service, application providers, outsource partners and embedded content.
Interestingly, the changes in the amount of content to be curated, managed, organized etc. may hit this segment hardest. While this segment is the most sophisticated of all publishing segment publishers they will still find it difficult to keep on top of the data explosion and provide meaningful actionable data for their users. In order to cope you will start to see publishers open up their platforms so that third parties can build applications on top of the publisher owned data, the use of taxonomies, and ontology’s will be increasingly important and probably the employment of content curators – perhaps librarians – or more accurately one part curator one part mentor who will curate and guide users in the use of the technology available to them.
Education publishers are following the lead of the information publishers in expanding their value chain to serve more educational segments and in the process they become solutions providers rather than textbook publishers. These publishers will also increasingly offer custom content creation for consumers/students, administrators, academics and state systems. The education segment will begin to catch up to the level of sophistication that the information publishers continue to exhibit.
Trade will generate the most attention but change will be slow. All major publishers are currently reevaluating their value chain and redefining what it means to be a publisher. For example, they are changing their workflows to rely more on xml and changing their author contracts. How their activities evolve will be interesting to watch but don’t expect much. Trade publishers will also continue to experiment with direct to consumer models and will develop subscription products.
Page 12 – 2600+ transactions in the last six months
Across the industry deal growth continues apace across all publishing segments but is now broader in scope than ever before. Deals reflected here cover software, content, services, people/talent, outsource service bureaus, and process providers such as financial transaction providers. A business deal in the publishing industry can now mean almost anything. Represented here are deals for seed money in the low thousands for startups to multi-million dollar deals for investment and acquisition.
Investment money is flowing to new companies seeking to take advantage of a business in transition which is why private-equity investment in education – for example - is rapidly increasing year on year from $100 million in 2007 to nearly $400 million last year. What is happening in education is very exciting. The manner in which teaching is delivered, how content is created and how success is measured are all under stress. A primary enabler of this change is technology, and specifically, the Web – which will be obvious to most of us here. A lot of the deal activity is related to education.
The scene is very vibrant – some say it is almost too frothy.
Page 13 – Corporate dev 101
To segue slightly and to think about the merger activity, the justification for a merger is often presented as an opportunity to save cost and expense, apply economies of scale and/or gain access to a new market. At this point, expense and efficiency gains are more likely to be the primary drivers in both the McGraw-Hill and Random House Penguin cases. Let’s look at three quick examples.
Page 14 – Why Random Penguin?
Each publisher will reduce headcount, facilities, distribution and other areas in order to deliver the same total quantity of titles. They will be able to apply their investment over a larger number of products particularly important as they take full advantage of the move to digital. In all publishing segments the value chain is compacting, making it far easier for content producers/authors to reach consumers directly. This in turn, is changing the financial model on which publishing is based. The functional areas where publishers added margin in order to make a profit – overhead, distribution, marketing & sales--are becoming less important (though not unimportant). The implications of these changes for publishing houses in the context of the transition to digital have been clear for many years, but addressing how their businesses must change to cope with them is nowhere near complete in the larger houses in both trade and educational publishing. Smaller, more nimble trade publishing companies like Hay House and SourceBooks have travelled much further down this path.
Page 15 – Innovation is still on the fringe
Most of the innovation and change in publishing is happening on the edges of the publishing industry. In trade in particular, it seems that we’ve entered a period of stasis as publishing transforms itself. By the end of 2011, it seemed to me that many publishers had absorbed the implications of their transition to electronic content delivery and have developed collectively tunnel vision in addressing the practical implications of this transition. (That’s not the same thing as saying they have solved their problems.) While traditional publishers take a break, we see a lot of new start-ups and investments being made in companies offering many new ideas from serialization platforms, custom magazine like platforms and many other niche offerings.
Page 16 – Trade publishing is a mess
This was a quote taken from an interview I did during a consulting project recently. In context, the opinion was that innovation and new thinking doesn’t go very deep and is concentrated at the top of the organizational pyramid.
Most medium and small publishers are really no-where when it comes to understanding how to operate in an e-Content world. In my various engagements over the past three years it hasn’t been unusual to come across publishers who have their content on fewer than three eBook retailer sites. Some have no eBook strategy. This lack of knowledge and experience has another more insidious impact in that some of these less informed publishers are particularly reactionary on the negatives with respect to e-Content and the issue of piracy.
Page 17 – McGraw Hill Divestiture
Looking at the MGH divesture the similarities to the Cengage deal that took Thomson Learning out of what is now Thomson Reuters are obvious. One segment of MGH was growing rapidly and had far better margins and the education segment was on the cusp of a significant market change requiring new investment, management, significant risk and perhaps a loss of market dominance. At Thomson, the seeds of their strategic decision to divest was long apparent while at MGH the divestiture seems to have been conducted under duress due to intense shareholder pressure. That said, now that MGH is out from under the corporate parent one thing they probably will not have to deal with is the crushing debt that Cengage appears to suffer. MGH may be better positioned to make the investments and take the risks than Cengage and without Wall Street reporting requirements that may have dogged their performance over the years.
Page 18 – Education faster than expected
Education has been rapidly digitizing content, building digital workflows and creating ‘born digital’ educational materials for the past five or six years. Pearson in particular has had success here with their My Labs series.
As their markets mature, College has become more accepting of the migration to electronic but experiments with E-readers have largely failed both because of functionality and because of content ownership. That said, there are a lot of new initiatives in higher ed and K-12 that depend on electronic delivery of content and these will grow in popularity in the short term.
Education publishers are following the path of information publishers in building content and service platforms that broaden the publishers offering beyond simply content. Several of the larger publishers now provide course and school administration software, student assessment products, schools and learning institutions and other similar companies that expand their market. With a services model for example, publishers are able to offer numerous options from ‘build your own textbook’ functionality to testing and remediation tools.
Page 19 – What do you mean there’s a test?
Assessment and adaptive learning tools also garner significant attention but so far mostly in K-12. While K-12 hogs the limelight at the moment, it is my belief that assessment in higher ed. will eventually be bigger than anything we will see in K-12 because only through assessment and adaptive learning will we be able to bridge the gap between higher education and industry. Assessment in higher ed. will be used to evaluate and test a student’s mastery of what they learned in college as a basic criteria for the career they want to start. As students navigate through college they and their faculty will be able to monitor performance and remediate where needed. The basis of their ‘assessments’ will be more closely tied to their career objectives. Adaptive learning tools will also enable students to see how their approach and behavior impacts their ability to learn. In the old world, students have to wait to be graded but it is conceivable that these new tools will lead students to take more responsibility for their own education, empowering them to ensure success. There should be little surprise that assessment will be used for career advancement in more fundamental ways and to support education programs for people already advanced in their careers. There are already many examples of community colleges collaborating with local businesses to produce workers for them, and new companies, like UniversityNow, are developing cost-effective degree programs correlated to industry and business requirements. There will be many more.
Page 20 – Google buys ITA software
There are many examples of acquisitions being made in the professional and information space. Thomson Reuters which I alluded to earlier is a case in point. Google’s purchase of ITA is an interesting one since it shows that competitive challenges can sometimes appear to come from nowhere. ITA is a very sizable business providing B2B data and services to the travel industry. Google wants to improve their user experience since they know many people search Google looking for travel information. Suddenly the landscape has changed fundamentally for any other company in this space and for the customers of ITA who had B2C sites and businesses dependent on ITA content.
Because professional publishing is more advanced in many ways from the other publishing segments the boundaries of their businesses are no longer clear cut and they become susceptible to unconventional competitive threats. Of course the opposite could also be true.
Page 21 – Driving M/A Activity
Here are just a few of the acquisitions you may have heard of over the past year. I’ve made a characterization as to the primary motivation for the deal and you can see I think motivations can be highly varied. Buying products is an obvious motivation but in a start-up culture we are also seeing many acquisitions for talent. This would be for the immediate work a team may be doing but also for the cultural change new innovative talent may bring to a staid older company. Newer companies can also build something of value in much shorter time frames. For example, on the tutor.com acquisition an executive noted that tutor.com had done the hard part in building a network of high quality tutors ready to help students improve their learning across the US. The acquirer recognizes they can’t do this to the same degree of effectiveness.
Page 22 – To name a few
Page 23 – What’s the platform Kenneth?
I’d like to discuss how all publishers are likely to evolve over time as many professional publishers already have in their development of a platform approach to customer engagement.
Educational publishing as a segment is currently implementing their version. Pearson began their adoption of the theory ten years ago.
Page 24 – A successful platform
In education generally, all education-content companies are only at the beginning of their transition from content providers to embedded content and services providers. Professional information publishers such as Bloomberg, Thomson and Elsevier have long been able to provide aggregated content and services at the point of need and education publishers will be doing the same thing in the not-too-distant future. At the Consumer Electronics Show in January, McGraw-Hill made some interesting announcements about product development investments they have been making which presage how this “services approach” may take shape. But it is still early days. We will see an aggregation model emerge in education, where content ‘platforms’ deliver content and services based on a different financial model than the current retail or ‘student buys the book’ model. Publishers are being pushed by some important customers: Initiatives underway in California, Minnesota and Indiana for example show that experimentation is starting to happen with more frequency and publishers are being challenged to think differently about their market.
Page 25 – Platforms network transitions
What platforms do is ‘normalize’ a set of behaviors that occur when people/customers communicate and transact information, goods and services. As the platform attracts more users – presumably because they create value for the user – the cost of providing the platform becomes cheaper.
Page 26 – Lexis Nexis
I would like to run through one example to show how Lexis Nexus approached their product development around platforms. LN spent 2 years understanding the workflows, needs and requirements of their customers and implemented their solutions accordingly. Customer insight is very important and LN made it the center of their development activity; however, sometimes looking beyond your current customer base can also be instructive.
Page 27 – Trailblazers help
This was a quote taken from the keynote presentation at last year’s SIIA education summit in San Francisco and it was almost an off-hand comment. The insight is important in that we can become too embedded in our natural market when our customers are exposed to many more influences. If your interaction with your customer via your website isn’t as intuitive or easy as Google then you may be in for a struggle because this may be what many of your users expect.
Page 28 – 4x Market size
The context of the LN development effort is also instructive. Remember I suggested redefining the boundaries of your market? As a total solutions provider, LN has redefined the marketplace in which they operate.
1972: They operated in a print market worth $2bn
1990: A legal research market: $7Bn
2004: A Legal Research and Tools Market: $12bn
2008 As a ‘total solutions provider’ their market is worth $48B
How did this happen? It is not because their market has suddenly exploded; rather, they now offer services and solutions to a much wider segment of the legal industry.
I don’t think there is anyone in this room who wouldn’t want to see their market opportunity quadruple from $1mm to $4mm or $10mm to $40mm. At least I hope not. Anyway you cut it that represents a massive change in expectations and opportunity. Remember my market size estimate and perhaps it starts to look more reasonable if LN thinks the value of their legal publishing market to be $48B
Page 29 - Lexis Nexis model
In practical terms this is how LN views their market. Each of the practice areas across the top of the chart are supported by the content, applications, databases, etc. below. The company started with significant content but has aggregated companies with particular content (recently public records) and purchased solutions providers that support their client’s requirements. LN supports all levels of the legal community from small office, to large partnership to corporate counsel.
To their customers they provide a range of products including specific legal content, business & client news, accounting and practice management software and even social networking.
Page 30 – Education model
What would the LN model look like in education? Pearson is already there - years ahead of their market. In the coming years, with the influx of PE into this market we will see a ‘race’ develop as the larger players build models similar to one I described at LN. Cengage didn’t get off to a particularly good start in this respect but MGH will do better.
Pearson has consolidated content: K-12, college and distance learning. They have acquired educational material developers, assessment & testing companies, remediation tools, course management tools and school administrative management products. These acquisitions include traditional content but importantly software and services application providers. Pearson – an educational publisher – also owns a chain of schools.
Page 31 – Another look at Pearson
Pearson operates in a market segment significantly larger than the one they operated in five years ago. And this chart tells the story. Here they see themselves competing with for-profit educational companies, traditional education companies and other media companies. As I said before, all you need to know about Pearson’s strategy is documented on this chart.
They also have a complete offering just as LN has for corporate attorney. Pearson is in a position to say to schools and colleges we have all this content but we can also do far more to help you manage your institution more effectively.
Page 32 – The innovators
Opportunities for innovators will continue to emerge in all segments However, many of the niche or narrow solutions currently on offer--whether they be assessment, content-delivery or search tools-- will ‘run out of market-space’ as these solutions become embedded in, subsumed by and/or offered as an attribute of the platform solution.
Page 33 – Competition from Customers
Over the past 18 months, the higher education establishment has been rocked by the development of these Massive Open Online Courses or MOOCs. And I almost feel compelled to mention them here.
So compelling are the opportunities to launch MOOC-based ‘institutions’ that high-profile faculty have quit their boring professorships and started new companies delivering MOOCs. Even big-name traditional schools have banded together (like a Big East or PAC10 for MOOCs). You will have heard of these companies with names like Coursera, EdX and Udacity.
On the content side, the textbook still reigns; however, faculty are seeking more choice and power over the course materials they assign their students and, increasingly are looking for custom solutions from their primary textbook publisher. Permissions revenues – for individual chapters and journal articles – are growing faster than overall textbook revenues, signaling that faculty are making more specific content choices for assignments. Custom textbook publishing is also growing faster than the overall education market as the largest publishers have upped their game by being able to provide tailored products to their customers.
Where MOOCs begin to produce their own content and some already are – or they use open resource content – the implications for traditional textbook publishers could be profound.
Page 34 – It was all about Access not Content.
The rapid rise of the MOOC suggests big opportunities when education can be ‘freed-up’ outside the constraints of the traditional model. In simple terms, what MOOCs address is the disparity between supply and demand. Stanford can only accept so many students; but on the Web, all bets are off. To give you perspective, some of the early classes registered over 150,000 students. In one Stanford MOOC, of the top ten students who completed the class, none were full-time “Stanford” students. Not only could Stanford not address this audience but when they did some of the students performed better than the ‘real’ Stanford students. The reason many elite schools jumped so quickly on the MOOC band wagon and formed the companies I mentioned earlier is that they know they must be positioned to leverage their ‘brands’ on a global scale. They don’t want to be locked out of markets serving China, the Middle East and India, which represent vast new student populations they can suddenly reach effectively. It is very early days yet for the MOOC movement and there are some particular issues that need to be addressed including the revenue model, accreditation, certification/degree granting, cheating and security. But since this movement, as we know it now, is less than 24 months old, some latitude is due in addressing what don’t appear to be insurmountable problems.
Page 35 – Your new customer experience
Adoption of all or some of the elements of the publishing platform approach result a more comprehensive experience for your customers. When generated from a clear understanding of the needs and requirements of your customer base your position as a publisher is solidified. Utility is maximized. User stats support customer objectives and new product development.
Page 36 – What Happens Next?
In summary publishing is undergoing tremendous change but that’s really not the headline. What is different is that our markets are different, customers may be competitors, partners and suppliers, cheap innovation can destroy a key market or channel, expensive innovation can fail and big beefy competitors can enter our traditional market without warning. Some publishers are adapting but in my experience working with many types of publishers over the past five years I believe that there will be a very small cadre of successful publishers that will emerge from what we know of the traditional publishing market. The remaining content producers – trade publishers, academic and education publishers, professional publishers etc. will be forced to align themselves with intermediaries in order to gain access to customers. For the vast majority of content owners I don’t believe they will be able to compete for access and innovation like companies like Pearson, Random Penguin, McGraw-Hill and Google are able to. Innovation around the fringes will continue but as these companies become successful they will either be bought by larger companies or their functionality or unique offering will be embedded into a platform offer.
In closing my comments from the speech I made earlier this year, I see the platform approach I’ve described as looking increasingly like an operating system for users and over time that’s what users will expect. Supplying the equivalent of the print button in that environment will not represent a sustainable business model. On the other hand supplying the breadth of functionality of the operating system won’t be attainable for most.