MediaWeek (Vol 14, No 9) Pearson vs. Chegg Legal Issues, Bookstore eBook Sales + More

Legal Experts On Pearson V. Chegg And Why It Could Be A Huge Deal (Forbes)

The essence of Pearson’s legal claim is that Chegg is engaging in “massive” violation of copyrights held by Pearson because Chegg has published, and sold, answers to the tests and practice questions Pearson has in its textbooks. Pearson argues that the questions and answers belong to it and it should be able to decide when and how they are used.

If Pearson prevails, it could damage not only Chegg’s business model but the enterprises of several other companies that sell answers to academic questions written by text publishers, professors or professional licensing bodies. Those companies include illicit cheating services, file sharing companies that sell access to tests and answers, as well as the respectable tutoring and test preparation companies.

With More Bookstores Open, Soaring E-books Sales Fall Back to Earth, NPD Says

“With brick-and-mortar stores closed last year, e-books were simply easier to buy than print books,” said Kristen McLean, books industry analyst for NPD. “The digital format allowed for frictionless, virus-free purchasing. Now that bookstores are open again, we expect full-year 2021 e-book volume to fall below 2020 levels, with the caveat that supply-chain disruption could cause another lift, if key books are unavailable during the holidays. Regardless, the e-book format will definitely remain a vital ongoing part of the U.S. book market — and a key format for certain categories.”

How Students Fought a Book Ban and Won, for Now (NYTimes)

But what began as an effort to raise awareness somehow ended with all of the materials on the list being banned from classrooms by the district’s school board in a little-noticed vote last November. Some parents in the district, which draws about 5,000 students from suburban townships surrounding the more diverse city of York, had objected to materials that they feared could be used to make white children feel guilty about their race or “indoctrinate” students.

The debate came to a head with the return to in-person classes at the start of the current school year. The Sept. 1 article in The York Dispatch quoted teachers who were aghast at an email from the high school’s principal listing the forbidden materials.

Spotify for readers: How tech is inventing better ways to read the internet (Protocol)

After all, what does Spotify do? It takes a corpus of stuff (music) and finds endless new ways to show it to users. Users can save the stuff they know they like (a library), explore things curated by other users (playlists) or turn to the app's machine-learning tools for ultra-personalized recommendations (Discover Weekly and the like).

So now imagine a reading app. You can save all the articles, tweet threads, PDFs and Wikipedia pages you want into your library. You can follow other users to see what they're saving, or check out what a curator thinks you might be into. The more you read, the more the app begins to understand that you like celebrity profiles, you're learning a lot about NFTs right now, you worship at the altar of Paul Graham and you'll read anything anyone writes about "The Bachelorette." Now, every time you open the app, it's like a magazine made just for you.

Watch my PodCast on Business Transformation (Link)

Business Transformation and Technology Improvement – podcast with Michael Cairns Michael Cairns is the CEO and founder of Information Media Partners, a business strategy consulting firm. With a wide career span in publishing and information products, services, and B2B categories, Michael has held executive roles at several publishing companies including Macmillan, Berlitz, and R.R. Bowker.

How to remember more of what you read (MarieClaire)

After three decades in the tech world, former Cisco CTO Padmasree Warrior—a self-proclaimed “obsessive reader” as a child—has turned a new page in her career journey. In July 2021, she founded Fable, a social reading platform. According to Warrior, complaints about reading often fall into three categories: People don’t know what to read, they don’t have time to read, or they want to read with other people. Unlike existing platforms that try to focus on just one of those pain points, Fable seeks to tackle all three. 

*****

Publishing Technology Software Report:

A fully revised version of my Publishing Technology Software and Services Report will be formally published on September 15. To complete this report we identified more than 200 software and services companies popular with publishers and conducted in-depth interviews with more than 31 of the most relevant companies. We also spoke with customers to apply their views and opinions about the market and these suppliers.

MediaWeek (Vol 14, No 8) Pearson Sues Chegg, B&N goes COVID Book Crazy, UK Copyright, Open Access Policies + More

Pearson plc is suing Chegg for Copyright Infringement over test packs. (CourtListener)

As part of Pearson’s focus on pedagogy, Pearson and its authors devote significant creative effort to develop effective, imaginative, and engaging questions to include in the textbooks it publishes. Pearson’s end-of-chapter questions are strategically designed and carefully calibrated to reinforce key concepts taught in the textbooks, test students’ comprehension of these issues, enhance students’ problem-solving skills, and, ultimately, improve students’ understanding of the subject matter. Pearson’s textbooks can contain hundreds or thousands of end-of-chapter questions. These end-of-chapter questions form core components of the teaching materials contained in Pearson textbooks and are frequently hallmarks of Pearson titles. As such, the availability, quality, and utility of these questions are often important considerations when educators select which textbooks to adopt for their courses.

Barnes & Noble has done well during COVID.  News reports suggest double digit growth unseen 'since before Amazon (NYPost)

Industrywide, US sales of books are up 12 percent so far this year through August compared to the same period a year ago —  and up 20 percent from 2019 over the same time period, according NPD Group, a market research company. CEO James Daunt says B&N sales have risen 6 percent since 2019.Jon Enoch Photography

“Double-digit growth in books has not happened since Amazon came along,” Barnes & Noble Chief Executive James Daunt told The Post in an interview. 

Those kinds of numbers are encouraging for Elliott, a fund known for taking big positions in public companies and agitating for change: In this case, it bought B&N whole as a fixer-upper. A source familiar with the matter says Elliott is about halfway through its plan that would eventually spin the bookseller back onto the public markets — or sell it to another private buyer.

Guardian Opinion on proposed changes to UK copyright law: 

It might sound like good news for book lovers too, but only in the short term. While books might become a bit cheaper, the long-term loss for readers has the potential to far overshadow the gain. “The loss of revenue will make publishers more risk-averse and close down access for new work,” Hilary Mantel has warned, with knock-on effects including cramping the innovation that feeds our film and TV industries.

Researchers and publishers respond to new UK open-access policy (Physics World)

IOP Publishing, which publishes Physics World, broadly welcomes the UKRI’s new open-access policy, which it says “aligns with our mis­sion to expand physics globally”. However, it thinks that the require­ment for researchers to deposit the final version of a manuscript in a repository under no embargo will be “harmful to the significant OA pro­gress already made”. “This approach cannot form the basis for an econom­ically viable publishing model for physics journals seeking to maintain the highest standards of peer review and publication.”

That view is echoed by the Inter­national Association of Scientific, Technical, and Medical Publishers (STM), which says it is “deeply con­cerned” that the UKRI policy gives equivalent status to the “subscrip­tion-tied accepted manuscript and the full OA publication of the version of record”. This, the STM says, could “jeopardize the continued progress of the open-access publishing tran­sition by enabling an entirely unsus­tainable route”. The STM urges the UKRI board to “carefully consider these issues”.

 An App called Libby (New Yorker)

The sudden shift to e-books had enormous practical and financial implications, not only for OverDrive but for public libraries across the country. Libraries can buy print books in bulk from any seller that they choose, and, thanks to a legal principle called the first-sale doctrine, they have the right to lend those books to any number of readers free of charge. But the first-sale doctrine does not apply to digital content. For the most part, publishers do not sell their e-books or audiobooks to libraries—they sell digital distribution rights to third-party venders, such as OverDrive, and people like Steve Potash sell lending rights to libraries. These rights often have an expiration date, and they make library e-books “a lot more expensive, in general, than print books,” Michelle Jeske, who oversees Denver’s public-library system, told me. Digital content gives publishers more power over prices, because it allows them to treat libraries differently than they treat other kinds of buyers. Last year, the Denver Public Library increased its digital checkouts by more than sixty per cent, to 2.3 million, and spent about a third of its collections budget on digital content, up from twenty per cent the year before.

 Wuthering fights! Will this priceless book collection be preserved or broken up at auction? (Stephan Fry -Airmail)

The story in brief: over their lifetimes, a pair of childless, mid–19th century North Country millowner brothers named William and Alfred Law assembled, with knowledge and discernment, a private collection of books and manuscripts. This library passed to successive descendants for a century, neither supplemented, catalogued, nor open to visitation by academics or enthusiasts—save on a few occasions which served only to enhance the legend of the collection’s existence. And now the entirety is for sale at Sotheby’s in London.

Very little is known about the Laws, but their taste and judgment give the lie to that snooty stereotype—vented if not invented by Dickens in Hard Times—of the hard-nosed industrialist for whom art and books are nowt but fancy folderols for fops and fools.

Barnes & Noble Education Financial Results (Edgar)

•  Versus same period last year: Revenues up $40mm and Net Income flat on higher selling and admin costs
  

 Houghton Mifflin Harcourt Financial results (Edgar)

• Revenues up 30% for same quarter in 2020
• Significant improvement in Net Income
• Gain on sale of trade business $218mm 

Wiley Financial Results (Edgar)

 

 

Publishing Technology Report 2021 - Insight into software and services companies supporting publishers and content owners. 

Pearson 1Q Report and Other Higher Ed Publishers show Positive Results

Pearson plc under new CEO Andy Bird posted 'encouraging' results for the 1Q with revenue up 5% versus last year. The company notes the disruption from COVID has been longer than expected but that their outlook is positive based on these 1Q results. As with all Higher Ed publishers the company is laser focused on reporting online/digital revenues and the improved mix between legacy products and models to new products. Some bullets from their press release:

• Encouraging start to the year despite challenging market conditions, with underlying revenue growth of 5% reflecting good progress as we reposition Pearson for sustainable growth with a strong direct to consumer focus.
• Global Online Learning up 25%,with strong growth in Virtual Schools due to enrollment growth in the current school year in Partner Schools as well as in US district partnerships; modest growth in OPM due to ongoing impact of discontinued programs.
• Global Assessment down 2%, as strong recovery in Professional Certification and US Clinical Assessment was more than offset by US School Assessment, where revenue was down significantly due to the challenging comparative and reuse of material from cancelled exams 

Other higher ed publishers are also showing encouraging results led by McGraw Hill which looks like it is going through a significant reinvention. The company has not released detailed year end numbers but yesterday they did release an overview on their performance.  Some bullets from this presentation:

• 58% increase in their "Inclusive Access" program which provides day one content for all enrolled students. This business represents $167mm in revenue
• The mix between print and digital is now 28%/72% which shows a 10point decline year over year. Obviously not only a market trend but a strategic imperative for the company to move more revenue to digital
• The company saw double digit growth in digital billings to $1B with EBITDA of $440mm

Cengage reported their 9mth numbers back in Feb and will not report full year until June. Total revenues were down 10% however net income is significantly better at $60mm

Wiley's education business has also struggled over the most recent past while the rest of the business expand both revenue and profit. For the 9mths reported in March publishing revenue was down 4% but EBITDA was slightly higher up 2% (although additional business units also fed that number). 

MediaWeek Report (Vol 13, No 16): Big Mergers - Simon & Schuster, S&P Global, Copyrights & Libraries, Pearson

Bertelsmann buying Simon & Schuster.

No doubt you've read about this acquisition and here are some of the articles.  Many are taking 'it's the Amazon problem' approach:

In The Atlantic: The merger isn't the gravest danger to the business.

NYTimes: The biggest publisher is about to get bigger

The Economist: A biblio-behemoth 

The New Republic: Heading towards monopolistic singularity

In other big media merger news:

WSJ - S&P Global agrees to buy IHS Markit for $44Billion combing two of the largest data suppliers to wall street firms.

Also Benzinga - The merger of the two companies will create a financial data behemoth.

I'm sure that's fine. 

According to Fortune a new copyright champion has arrived from the Internet Archive.  Are publishers on board with this I ask?

For Bailey, the debate is personal. Growing up in an artistic family of modest means on Long Island, she never encountered the Internet until arriving at Brown University in 1995. There, Bailey made friends with a circle of creative types thrilled by the culture and community they discovered on web, from the music-sharing bazaar Napster to blogging platform LiveJournal.

"The Internet seemed like this amazing new thing to distribute knowledge and information," she recalls.

After college, Bailey landed in the midst of New York's cultural elite with a job as an executive assistant to a creative director at magazine giant Conde Naste. But she soon became disillusioned, concluding the publishing industry prioritized money over artistic ideals.

 (Yes, Nast is incorrectly spelled).

Speaking of Random House, here is a good obit of Harold Evans - The Economist

People looked pityingly on him now. That was unbearable, so he left for the United States and a teaching job. His second wife, Tina Brown, soon joined him as editor of Vanity Fair, and he too took up the pen again, editing US News & World Report and founding Condé Nast Traveller before becoming, in 1990, president of Random House. There the copy on his desk was by Gore Vidal and Norman Mailer, William Styron and Richard Nixon, as well as the businessmen, artists and poets he added to the list. The glittering Manhattan literary scene revolved around their garden brownstone, enjoyably so. America performed its reinventing magic, and in 1993 he became a citizen. Yet the country’s deepest effect on him had happened years before, when he visited on a Harkness fellowship in 1956. He was already in love with newspapers; with the smell of printer’s ink, and with Hollywood’s depiction of brave small-town newspapermen standing up to crooks. Papers in America might be slackly edited and poorly designed, but they showed a crusading desire for openness that was still rare in Britain.

Bookstores are struggling but rich folk are buying first editions (Bloomberg)

The market for extremely rare books has been healthy for years, dealers say, but quantifying its ups and downs is difficult, because “if you’re talking about a book with many comparables over time, you’ve missed the top of the market,” says Darren Sutherland, a specialist in Bonham’s rare books department in New York.

“It’s so anecdotal,” agrees Christina Geiger, the head of the books and manuscripts department at Christie’s New York. “Everything depends on the quality of the material.” 

Still, consensus among dealers is that the overall market has sustained itself even as the rest of retail has been thrown into turmoil, and that the peak of the market has soared past many participants’ expectations.

UK University staff urge probe into e-book pricing 'scandal' (BBC)

"It's a scandal. It's public money," she said. "Students are shocked when I tell them just how much it costs to get them their texts.

"People just assume we can get books for the prices they see on Amazon and Kindle. It just doesn't work like that for universities.

"The academic publishing business model is broken, and as you can see from the number of people who have signed the letter we think it is time for an investigation," she said.

Lectures are increasingly having to be designed around what texts are available and affordable, not what is best for learning, Ms Anderson said.

Pearson Creates New Direct-to-Consumer Division (Pearson)

Pearson, the world's leading learning company, today announces the creation of a new direct-to-consumer division as it looks to further strengthen its focus on building a direct relationship with learners around the world.

The new division will be co-led by two senior executives: Ishantha Lokuge joined Pearson from Shutterfly last year and now steps up to the role of Chief Global Product Officer and co-President, Direct-to-Consumer.

 As always, more in my flipboard magazine.

Pearson Trading Announcement for 2017 and Outlook for 2018

From their market press release:

Full year results at the upper end of guidance, good strategic progress

We will announce full year results on 23 February 2018, but we are today providing an update on trading to the end of 2017 and guidance for 2018.

Preliminary expectations for full year 2017 results

• At guidance exchange rates¹ adjusted operating profit of c.£600m-605m is at the upper end of our October 2017 guidance range of £576m-£606m. At average effective exchange rates in 2017² we expect to report adjusted operating profit around £570m-575m and adjusted earnings per share of 53.5p-54.5p.
• Adjusted earnings per share is above the October 2017 guidance range of 49p-52p reflecting an improved tax rate of around 11%, due to the further favourable outcome of certain historical tax issues, and after a net interest charge of approximately £80m.
• Total underlying revenues declined 2%, in line with the performance in the nine-months, due to a decline of 4% in North America partly offset by stabilisation in Core and Growth.
• Sales in US higher education courseware were down 3% on an underlying basis, in line with the lower end of our revised guidance range, due to the continuation of trends seen in the first nine-months combined with cautious buying behaviour from our channel partners in the fourth quarter.
• Strong balance sheet with closing net debt at 31 December 2017 now expected to be around £0.5bn (2016: £1.1bn) due to good cash generation and proceeds from disposals.
• Returned £153m of capital (repurchasing 22m shares) to 31 December 2017 via the £300m share buyback announced on 17 October 2017. The remaining shares will be repurchased before 26 April 2018.

Simplification and efficiency

• We continued to make progress on the simplification of our portfolio and on our actions to increase efficiency in 2017:
  • We completed the sales of Global Education (GEDU) and a 22% stake in Penguin Random House and announced that we had signed an agreement to sell Wall Street English (WSE).
  • In late December Pearson also agreed the sale of our 44.75% equity stake in our Mexican online university partnership, Utel. The transaction is expected to close in the first half of 2018, subject to regulatory approval being obtained.
  • Our efficiency programme is on track to deliver £300m of annualised cost savings by 2020. Restructuring costs in 2017 were around £80m, slightly higher than our guided £70m, reflecting faster progress made during the year. Total restructuring costs are expected to be in line with guidance of £300m across 2017-2019, with £90m in 2018.

Digital transformation and tactical actions

• During the year we continued to make good progress with our digital transformation and grew US higher education digital courseware revenue by approximately 9%.
• We continue to focus on Direct Digital Access, Pearson’s inclusive access offering, signing 210 new institutions in 2017.
• We’ve reduced the rental price of 2,000 ebook titles and have seen revenues rise by 22% during the year. Furthermore, we have seen success with the start of our print rental pilot and are now adding more than 90 additional titles in 2018.

2018 outlook

• The base for 2018 guidance is our expected 2017 adjusted operating profit of £570m-£575m less the full year impacts of disposals made in 2017 (£45m) and less favourable exchange rates at 31 December 2017³ (£25m).
• We expect growth from that base and are giving guidance for 2018 adjusted operating profit of between £520m and £560m.
• In addition to FX and disposals, this guidance also reflects the benefits of our restructuring programme and ongoing challenges in US higher education courseware.
• In our US higher education courseware business, we expect revenues to be flat to down mid-single digit percent due to the similar underlying pressures seen in the last two years from lower college enrolments, increased use of Open Educational Resources and attrition from growth in the secondary market driven by print rental, partially offset by growth in digital revenues, benefits from our tactical actions and a continued normalisation of channel returns behaviour.
• This guidance is based on our existing portfolio as at 31 December 2017⁴ a 2018 net interest charge of c.£45m, a tax rate of 20% and exchange rates on 31 December 2017. We expect adjusted earnings per share of 49p to 53p.

Pearson Annual Results

Pearson released their annual results back in February.  Here are the highlights and also their annual report which includes details about their future business strategy.  Since the release, share prices have remained flat and at long-time lows.

From their press release:

Pearson, the world’s learning company, is announcing its preliminary full year results for 2016, following its 18 January trading statement. Key headlines include:

• 2016 operating profit and eps slightly better than January 2017 guidance. Strong 2016 cash conversion
  • Sales of £4,552m declined 8% in underlying terms. Good growth in Pearson VUE, US Virtual Schools Online Program Management and Wall Street English in China was more than offset by expected declines in US and UK student assessment and US school courseware, and a much worse than expected decline in North American higher education courseware, as detailed in our 18 January trading statement.
    
  • Deferred revenue was broadly level in underlying terms and is now 18% of our revenues (2015: 16.5%).
    
  • Adjusted operating profit of £635m was down 21% in underlying terms due to weaker revenues, the partial reinstatement of incentives and other operational factors, partially offset by cost savings from the restructuring plan announced in January 2016, a larger contribution from Penguin Random House, helped in part by modest one-off benefits from the integration programme, and a return to profit in our Growth segment.
    
  • Adjusted earnings per share fell 16% to 58.8p reflecting weaker operating results, higher interest and a higher tax rate of 16.5%, offset by the strength of the US Dollar and other currencies against Sterling.
    
  • Operating cash flow increased 52% benefitting from tight working capital control, lower cash incentive payments and the weakness of Sterling. Our cash conversion increased to 104% (2015: 60%).
    
  • Net debt increased to £1,092m (2015: £654m) reflecting the strengthening of the US Dollar relative to Sterling and restructuring costs.
    
  • Digital & services revenues now make up 68% of our total revenues (2015: 65%). We have made good progress in simplifying our technology platforms and seen strong growth in key digital products Revel, iLit, Q-Interactive, Connections Education and global wins in Online Program Management.
  •  
• 2016 statutory results and goodwill impairment: Statutory loss for the year of £2,335m included an impairment of goodwill of £2,548m. This impairment charge is consistent with the challenging market conditions which we disclosed in January, and which resulted in an outlook for profit which is approximately £180m lower than previously anticipated.
  
• 2016 restructuring program: Our 2016 restructuring program was delivered in full, reducing our cost base exiting 2016 by £425m at a cost of £338m. Adjusting for the impact of currency our plan delivered slightly higher benefits at a slightly lower cost than planned.
  
• 2017 guidance, strategic actions to accelerate digital, simplify the portfolio and preserve financial flexibility
  • 2017 outlook in line with 18 January trading statement: Our guidance range is for operating profit in 2017 of £570m to £630m, adjusted earnings per share of 48.5p to 55.5p and cash conversion in excess of 90%. This is based on our existing portfolio, a 2017 net interest charge of £74m, a tax rate of approximately 20%, and exchange rates on 31 December 2016.
  • Trading in early 2017: Our early trading is in line with expectations. The phasing in our North American higher education courseware business in 2017 will show a benefit from returns normalising in the first half, whilst the underlying market pressures we have described will impact gross sales primarily in the second half.
  • Higher education courseware strategic actions: On 18 January we announced a series of actions, accelerating our work to simplify our product technology platform and enhancing our courseware service capabilities with £50m of additional investment, reducing eBook rental prices and launching our own print rental program piloting with an initial group of 50 titles made available through Pearson’s approved rental partners. We have reduced prices for eBook rental across 2,000 titles, have made good progress on our print rental program and are today announcing details of the first wave of new digital products with greater personalisation, enhanced engagement and cognitive tutoring.
  • Simplifying Pearson
    • Penguin Random House: With the integration of Penguin Random House complete, and with greater industry-wide stability on digital terms, we have issued an exit notice regarding our 47% stake in Penguin Random House to our JV partner Bertelsmann, in the contractual window, with a view to selling our stake or recapitalising the business and extracting a dividend. We will use proceeds from this action to maintain a strong balance sheet; invest in our business; and return excess capital to shareholders whilst retaining a solid investment grade credit rating. Our guidance assumes ownership of our stake in PRH for all of 2017.
    • Direct Delivery: We will continue to reduce our exposure to large scale direct delivery services and focus on more scalable online, virtual, and blended services, across our portfolio. We are today announcing that Pearson has initiated processes to explore a potential partnership for our English language learning business Wall Street English (WSE) and the possible sale of our English test preparation business Global Education (GEDU). These processes are at an early stage and there is no certainty that they will lead to transactions. In 2016, these businesses contributed £253m of revenues and £3m of adjusted operating income. Our guidance assumes ownership of both for all of 2017.
    • Efficiency: We continue to manage our costs tightly. We will take further actions to improve the overall efficiency of the company and continue to realign our cost base to reflect the changing needs of our markets. We will update on our plans through the year.
  • Preserving financial flexibility
    • Debt repayment: To ensure efficient use of the cash balances we held at 31 December 2016, we are today announcing that we will trigger the early repayment option on our $550m 6.25% Global Dollar bonds 2018.
    • Rebasing the dividend: As already communicated in January, we intend to recommend a final dividend of 34p for an overall 2016 dividend of 52p in line with our guidance, but as a result of the factors above we intend to rebase our dividend from 2017 onwards.

Pearson Annual Results: Revenue and profit off 2%. Profit growth expected '17, '18

From their press release:

PEARSON 2015 PRELIMINARY RESULTS (UNAUDITED)

Pearson, the world's learning company, is announcing its preliminary full year results for 2015 which builds on its 21 January trading statement.  Key headlines include:

·   2015 results in line with guidance:

o  Sales of £4,468m declined 2% in underlying terms. Good growth in Pearson VUE, Connections Education and Wall Street English in China was more than offset by declines in US Higher Education, UK Qualifications and South Africa.

o   Deferred revenues grew 8% in underlying terms.

o   Adjusted operating profit of £723m was down 2% in underlying terms due to revenue mix and an operating loss in our Growth segment partly offset by Penguin Random House.

o   Adjusted earnings per share grew 5% to 70.3p reflecting lower interest and a lower tax rate of 15.5%, due to the agreement of historical tax positions and the associated release of accrued interest on tax provisions.

o   Operating cash flow decreased 33% as a result of challenging trading, disposals and increased US higher education textbook returns partly offset by an increased dividend payment from Penguin Random House.

·   2015 statutory results: Statutory profit for the year of £823m was affected by two significant items: pre-tax gains on the disposal of the Financial Times, The Economist Group and PowerSchool of £1,214m; and an impairment of goodwill and intangibles of £849m, primarily reflecting challenging market conditions in our Growth and North American businesses.

·   Simplification and growth: As announced in January, we are taking further action to simplify our business, reduce our costs and position ourselves for growth in our major markets. We will complete the majority of these actions by mid-year and incur implementation costs of approximately £320m in 2016 and expect to generate annualised savings of approximately £350m, with approximately £250m of these savings in 2016 and a further £100m of these savings in 2017. We have already implemented a number of associated actions since the announcement of the programme in January. 

·   2018 goals: With the full benefits of our restructuring programme, the launch of new products, and stability returning to US college enrolments and the UK qualifications market by the end of 2017, we expect adjusted operating profit to be at or above £800m in 2018.

·   Sustaining the dividend: We are proposing a final dividend of 34p, level with last year, resulting in a 2% increase in the overall 2015 dividend to 52p.  Pearson plans to hold its dividend at this 2015 level while it rebuilds cover, reflecting the Board's confidence in the medium term outlook. 

·   2016 outlook: In 2016, we expect to report adjusted operating profit and adjusted earnings per share before the costs of restructuring of between £580m and £620m and between 50p and 55p, respectively, with the in-year benefits from restructuring offset by the loss of operating profit from disposals made in 2015, ongoing challenging conditions in our largest markets, the reinstatement of the employee incentive pool and other operational factors. We are excluding the one-off cost of this major restructuring to better reflect the underlying earnings potential of the business. Operating profit after restructuring charges is expected to be in the £260m to £300m range.

·   Strategy: We have world-class capabilities in educational courseware and assessment, based on a strong portfolio of products and services, powered by learning technology. Our strategy of combining these core capabilities with related services that enable our partners to scale online, reaching more people and ensuring better learning outcomes, will provide Pearson with a larger market opportunity, a sharper focus on the fastest-growing education markets and stronger financial returns.

Pearson Reorganizes their Business Operations: Will Ethridge to Leave

Pearson announced a significant change in the way their business is organized and perhaps the most interesting aspect of this reorganization is that the FT Group will be subsumed into their new "Professional"
business unit together with English Language learning and their electronic testing business.  The conclusion could be this is a catch-all for units the new executive management no longer has confidence in.  That speculation could be counter minded given the level of acquisitions and investment the company has recently made in language learning and testing.  Time will tell but it is hard to understand the inclusion of the FT in that collection.

As the following press release notes the changes will be implemented in 2014 so much can change between then and now.

From their press release:

Pearson, the world’s leading learning company, is today announcing a new organization structure and the appointment of a new leadership team. The changes are designed to accelerate Pearson’s push into digital learning, education services and emerging markets, which the company views as significant growth opportunities.

Under the new structure, Pearson will organize around three global lines of business – School, Higher Education and Professional – and three geographic market categories – North America, Growth and Core.

The leaders of these businesses will be:

• School - Doug Kubach
• Higher Education - Tim Bozik
• Professional - John Ridding
• North America - Don Kilburn
• Growth markets - Tamara Minick-Scokalo
• Core markets - Rod Bristow

Global lines of business will have primary responsibility for strategy and product development, while geographies have primary responsibility for customer relationships, sales, marketing and product delivery.

In addition, Genevieve Shore, currently Pearson chief information officer, will take on a new role as chief product and marketing officer.
The changes will take effect on 1 January 2014 and, to provide investors with greater insight into business trends and performance, Pearson intends to report its sales and profits by both lines of business and geography from 2014.
As a result of the new organization structure, Will Ethridge (currently chief executive of Pearson North America) will step down from his role and from the Pearson plc Board on 31 December 2013. He will continue to work for Pearson in an advisory capacity.
Glen Moreno, chairman, said: “North American Education has been a powerhouse for Pearson for many years and Will has been at the heart of its success. He has developed a strong team of executives and ensured they are ready to take on these new responsibilities. We thank him for his significant contribution to Pearson as a leader and board director.”

Pearson CFO Robin Freestone at Deutsche Bank Media Conference

Robin Freestone was interviewed in front of analysts at the Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference earlier this month.

Full transcript from Seekingalpha

Some summary notes:


There are two mega trends impacting global education and they are very different:

• Developed World:
• Governments under pressure
• No more money to spend on education
• Student results not reflecting the amounts already spent on education
• Fear losing education preeminence to developing nations
• Belief need to improve 'productivity'
• Developing World
• Less state based - more private education: Brazil/India 15% privately educated students
• Growing middle class will spend on education
• Every year 100mm people join middle class and spending increases $1trillon

"Now if you look at what we're doing in developed markets, therefore, it's about efficacy. It's about trying to improve the outcomes with less money. And in the developing markets, it's about direct-to-consumer, where we're selling educational resources and actually education itself through our own colleges or through other people's colleges to that global middle-class"

Books:

• Still selling them and will be for a long time to come but not growth market
• Bundles and opening schools

"And so our cost base still reflects the old organization, if you like, to an extent, and we've got too many people, I'm afraid, who are designing beautiful books, ready to put them into the market and too few people designing software and running schools"

What's happening in the US market?

• Always counter-cyclical: enrollments into college go down when the economy gets better.  More students go into jobs.  Enrollments contracted 2% last year and will do so in 2013
• Less and less will we be selling books:  Selling better results: 

"In other words, rather than selling a product, a book, and saying "good luck with it, we think it's a wonderful book," but actually we really don't know whether it's really better than anybody else's book. What we're now going to be saying is, "we want you to get better examination grades. We've got a range of stuff here, mostly software, that will help you do that. And we're here with you to try and get your examination grades up, and if you implement it in this way, we can show you other customers who got that effect," and that's exactly what we're now trying offer into the market"

On the changing economics of their business:

• Software at gross margin is a very nice business:  After break-even there is a "sizable margin improvement" and cash positions are far better.

"Anything involving books, frankly, from a working capital perspective is truly horrible. And when I first joined the company in 2004, we had a working capital to sales ratio of over 30%. And last year, excluding Penguin, it was 11%. And I think we are now seeing our way through a situation in a few years time when the working capital to sales ratio will be negative, where there wont be any, which is I think a nice place to be. Inventory fell 7% last year"

• Want digital products and services to be over 70% of turnover by 2015: currently 56%
• Experimenting with new models:
• Brazil: Don't own real estate but supply educational resources for entire school: Pearson Inside Model
• Margin profile is pretty strong
• Current US book industry is zero sum game:

"If we can sell a book, which means that McGraw don't sell a book or Cengage don't sell a book or Houghton Mifflin don't sell a book, that's kind of victory. So it's a bit of a binary situation in that arena. When you get into the software arena, there's much more scope for our software to work with other people's software and to act in a sort of more collaborative way"

Corporate Development:

• GBP 500 million to spend on right targets
• Spent GBP 760 million in 2012 
• No change in philosophy. It's very much about digital products, 
• Opportunities anywhere in the world. Software in Hobart, Australia and in Oslo and the West Coast of America

Full transcript at SeekingAlpha

Pearson Reports Financial Results

From their press release:

Pearson accelerates global education strategy:
Restructuring and investment in digital, services and emerging markets for faster growth, larger market opportunity and greater impact on learning outcomes 

Financial highlights*

• Sales up 5% at CER to £6.1bn (with digital and services businesses contributing 50% of sales)
• Adjusted operating profit 1% higher at £936m
• Adjusted EPS of 84.2p (86.5p in 2011)
• Operating cash flow of £788m (£983m in 2011)
• Return on invested capital of 9.1% (9.1% in 2011)
• Dividend raised 7% to 45.0p.

Market conditions and industry change  

Market conditions generally weak in developed world and for print publishing businesses; generally strong in emerging economies and for digital and services businesses.  Continuing structural change in education funding, retail channels, consumer behaviour and content business models.  Considerable growth opportunity in education driven by rapidly-growing global middle class, adoption of learning technologies, the connection between education and career prospects and increasing consumer spend, especially in emerging economies.  

Strong competitive performance

• North American Education revenues up 2% in a year when US School and Higher Education publishing revenues declined by 10% for the industry as a whole.
• International Education revenues up 13% with emerging market revenues up 25%.
• FT Group revenues up 4% with the Financial Times’ total paid print and online circulation up to 602,000; digital subscriptions exceed print circulation for the first time.
• Penguin revenues up 1%, with strong publishing performance and eBooks now 17% of sales.
• Accelerated shift to digital & services and to fast-growing economies
• Pearson announces gross restructuring costs of approximately £150m in 2013 (£100m net of cost savings achieved in the year), focused on:

1. significantly accelerating the shift of Pearson’s education businesses towards fast-growing economies and digital and services businesses;
2. separating Penguin activities from Pearson central services and operations in preparation for the merger of Penguin and Random House.

Restructuring expected to generate annual cost savings of approximately £100m in 2014.
In 2014, £100m of cost savings to be reinvested in organic development of fast-growing education markets and categories and further restructuring, including the Penguin Random House integration. 

From 2015, restructuring programme expected to produce faster growth, improving margins and stronger cash generation. 

Outlook

Pearson expects tough trading conditions and structural industry change to continue in 2013.
Excluding restructuring costs and including Penguin for the full year, Pearson expects to achieve 2013 operating profit and adjusted EPS broadly level with 2012.

Investor presentation slides (pdf)

Also,

Pearson's Penguin Must Participate in E-Book Fixing Trial (Businessweek)
Pearson Launches EdTech Incubator for Startups (Mashable)
Pearson CEO says Financial Times is not for sale (FT)
Pearson Plans Shake-Up (WSJ)
EU to decide on Bertelsmann, Pearson publisher deal by April 5 (4Traders)

Pearson's Blue Sky Project

At lunch with a media banker several weeks ago, she had me thinking differently about the proliferation of aggregated content platforms such as Deepdyve, Credo Reference and others (particularly in medical).  In education, there's a rush for content going on and big incumbent education companies such as Blackboard and Pearson are starting to take notice. While these companies are big and retain influence they may not find it easy to establish agreements with partner publishers and content providers unless they can prove mutual benefit and trust. It could be a long process which is why my banker friend suggested there is a lot of M&A activity in this area where the decision point is on the buy versus make side of the analysis.

I was reminded of this conversation by Monday's Pearson announcement of Project Blue Sky which will allow faculty to search for and include open resource collection content into a custom Pearson textbook.

From their website:

Project Blue Sky allows instructors to search, select, and seamlessly integrate Open Educational Resources with Pearson learning materials. Using text, video, simulations, Power Point and more, instructors can create the digital course materials that are just right for their courses and their students. Pearson’s Project Blue Sky is powered by Gooru Learning, a search engine for learning materials.

Noting that there is so much open source content out there that it is impossible to ignore, the inclusion of this content became an imperative according to Don Kilburn, vice chairman of Pearson's higher ed division. To my mind this may be a slight smoke screen; after all, what took them so long?  Secondly, it seems only logical that they would be planning to add more content from more publishers to expand the universe of content available to their faculty users. Adding content beyond the Pearson materials will expand the options available to faculty, and faculty are already seeking easy access to multiple publishers content and don't want to be force-fed "off the shelf" products that diminish their ability to teach their class the way they want.  Their ability to build their own learning products is in process and inevitable and publishers and education providers like Pearson understand this.  That's what Project Blue sky is about.  Take a look at their video.

The inclusion of Gooru in this effort is also interesting since it suggests that indexing, collating, organizing and presenting open resource and publisher content is no easy get. Even Google is listed as a partner of Gooru. Either this implies the effort was too great even for a company like Pearson or they wanted to get out quickly into a market they feel they should dominate. Perhaps both issues are at play here.

Pearson and other large education publishers have direct relationships with the faculty who buy their books via their large sales forces.  What they don't want to see happen is something like the Amazon experience where a faculty member defaults all their activity to a common provider of both content and their user experience.  Imagine if a faculty member could go to one site to select and build their course content using content from every source available mimicking their current trade book experience.  Once they tried that there would be no going back which is the scenario the incumbent education publishers want to avoid - unless they are that platform that is.

Penguin & Random House Merge

News on Sunday that News Corp were considering a look at Penguin suggested that the dealings could get exciting but with this morning's announcement of a merger that will combine Random House and Penguin in a new structure makes clear these discussions were already well advanced. As The Guardian notes the new business will b 53% owned by Random House and Pearson will retain a 47% interest. The management team will be lead by Random House CEO Marcus Dohle. The combined company will have sales in excess of $3billion although this is likely to be subject to some competition scrutiny over the next several months as the deal is reviewed by authorities in the US and Europe. From their press release:

Bertelsmann will nominate five directors to the Board of Penguin Random House and Pearson will nominate four. John Makinson, currently chairman and chief executive of Penguin, will be chairman of Penguin Random House and Markus Dohle, currently chief executive of Random House, will be its chief executive.

In reviewing the long-term trends and considerable change affecting the consumer publishing industry, Pearson and Bertelsmann both concluded that the publishing and commercial success of Penguin and Random House can best be sustained and enhanced through a partnership with another major international publishing house. They believe that the combined organisation will have a stronger platform and greater resources to invest in rich content, new digital publishing models and high-growth emerging markets. The organisation will generate synergies from shared resources such as warehousing, distribution, printing and central functions. Pearson and Bertelsmann intend that the combined organisation’s level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses.

The two companies believe that the combination will create a highly successful new organisation, both creatively and commercially, with the breadth and investment capacity to deliver significant benefits. Readers will have access to a wider and more diverse range of frontlist and backlist content in multiple print and digital formats. Authors will gain a greater depth and breadth of service, from traditional frontlist publishing to innovative self-publishing, on a global basis. Employees of the new organisation will be part of the world’s first truly global consumer publishing company, committed to sustained editorial excellence and long-term investment in a rich diversity of content. And shareholders will benefit from participating in the consolidation of the consumer publishing industry without having to deploy additional capital.

Interestingly, with Pearson's big acquisition of EmbanetCompass (for $650mm in cash) earlier this month the company also said that they would be somewhat limited in the amount they could spend on future acquisitions given the size of the EmbanetCompass deal. The Random House deal does not appear to improve that situation and the press release specifies that neither party may sell their shareholding in the combined business for three years.

Finally, this is the big Trade House deal we've been waiting five years for. Will there be another?

Pearson's Future of Education - No Longer Traditional

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.