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In January 2001 as the dot com boom burst online education site wwwrrr.com went out of business overnight, literally. Coverage tended to focus on the employees – who ultimately filed a class action lawsuit for back pay and 401k contributions.

Lost in that ugly coverage was the blunt reality for teachers and schools that the new era of on-line content had a very dark side. Teachers who were relying on wwwrrr’s materials on January 9th were left with absolutely nothing on January 10th. They had no warning.

When schools buy a textbook they own the thing. If the vendor stops offering the book the school still has the thing. With cloud-based solutions schools are buying a license to a service. If the vendor stops offering the service it evaporates. Teachers rightly want some assurance that if they integrate a useful solution into their lesson plans that they can use it for several years.

There are enormous benefits associated with cloud-based materials (see below*). As the wwwrrr story illustrates there are significant hurdles to overcome as well.

The trick is to find a business model that insures products will be supported and sustained over the long haul. At the heart of this challenge is the question of how cloud-based instructional materials are priced. As we transition from physical textbooks to digital content we need a pricing model that is fair to everyone.

Pricing for cloud-based instructional materials will probably not look like the enterprise or personal SaaS markets because there are some unique structural issues that have to be reckoned with.

This post examines the market forces that are driving an emerging standard for SaaS pricing in education.

Production & Maintenance

As soon as textbooks are at the press the product becomes inert which is one of the big knocks on them. The benefit is that a book can be useful in and of itself decades after it was published. There is no ongoing maintenance.

Software is more like a living organism that has to survive in a larger ecosystem. OS revisions, bug squashing, content updates, and new hardware platforms make ongoing maintenance an imperative. Software evolves as the platform evolves, sometimes on a daily basis.**

This means that publishers have to dedicate teams to the product after it is released, and those people need to be fairly compensated for the work they do. There is a need for an ongoing revenue stream to support this vital work.

Enter Subscription Pricing

The obvious solution to this problem is to sell the software as a service (SaaS) on a subscription.

Software as a Service (SaaS)pricing models are well-established in the corporate and personal software spaces. SalesforceEvernote  Netflix  and Google  have proven and accepted business models. In the education space, the Student Information Systems (SIS) market has gelled around standard subscription practices. SaaS instructional materials remain a laggard. The transition from the old adoption model for textbooks to something better adapted to digital content is very much in motion.

Investors are pushing hard for subscription models – they like the predictability of a steady stream of income. Since subscriptions cost less on an annual basis than a purchase it takes longer to spin up to profitability, but performance is much more sustainable over the long haul. Thus VCs and Private Equity investors place a valuation premium on this model.

The obvious result has been a slew of subscription-based educational software startups over the last several years.

Spiky Funding & Market Cadence

Subscriptions in schools run smack into the uncertain nature of school funding, particularly for materials purchases. There is no guarantee from year to year that a given funding source will be available.

The market solved this for print by doing adoptions on a scheduled refresh cycle (usually 5-7 years) for each subject area. Funds are specifically (categorically) set aside for this purpose. A big burst of funding over 18-24 months buys all the books, and then a small residual fund is available for replacing damaged or missing books through the tail of the adoption.

This funding structure is very unfriendly model for subscription-based products because the funding is so spiky.

That said, the cadence of switching core materials every 5-7 years makes a lot of sense for teachers. It usually takes them a couple of years to master a new set of materials, which they can then leverage into another 3-5 years of practice without having to completely start anew.***

Additionally, all the review and approval mechanisms are tuned to this cadence at the state, school board, and teacher level. There will be significant institutional inertia to something like an ongoing or even annual cycle for new materials. Educators are pressed enough for time already.

Think of the 5-7 year materials cycle as the QWERTY keyboard of purchasing. It will survive long after its original purpose has been obviated by new technology because the switching costs are so high and it still solves the basic problem.

An Education-Specific Solution

What appears to be emerging is the ability to pre-pay subscriptions over a set of years that mimics the traditional adoption cycle. This maintains the cadence that everyone is familiar and comfortable with, without presupposing the funds will be available through the full cycle. Schools can buy a single year if they just want to try something out, but the best pricing options are all at some level of multi-year commitment. There is no doubt that schools are buying a subscription-based service not a physical product, but the purchase cycle mirrors the older product purchase model.

From the vendor perspective cash flow will look very similar to today, but revenue recognition on the income statement will take a big hit in the initial years (subscriptions have to be recognized over the life of the subscription). Dollars you collect today won’t be recognized for up to six years and will sit in an unearned income bucket on the balance sheet.

Investors should plan on revising their analyses of financial statements to account for these shifts. I expect to see a much higher emphasis on cash flow than EBIDTA in this new world.

Vendors should be careful about managing cash to make sure the resources for maintenance are available through the life of the contract. This isn’t a windfall for them. Even though the cash is in the bank they should budget to the income statement.

A multi-year subscription requires a level of trust that the vendor will be around through the full term. This will play to the advantage of larger companies and those with well-established brands.

I expect this model will emerge as the dominant pricing structure over the next 2-3 years. That will be a good thing for teachers, students, and vendors. It will help fuel a new generation of innovative solutions.

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*Using the cloud solves a wide range of problems schools face when deploying instructional software.

A quick review:
Installation and maintenance evaporate – this is a massive headache for thinly stretched School District IT staff.

  • Software is no longer hardware dependent, well-crafted solutions run on older computers and the latest tablets.
  • User authentication is based on where the user is, not what machine they are using.

From the vendor’s perspective many of these benefits have a mirror image.

  • Minimal set up makes it easier to trial and implement new solutions, reducing transactional friction.
  • It is possible to paint a path forward to tablets when they are still a small fraction of the market.
  • With web-based authentication, it becomes easier to see what is getting used   (i.e. what is valued in the classroom).  Do.  More.  Of.  That.

The forces of change are all lined up behind this shift.

** This by the way is one of the primary filters educators should be use to evaluate OER solutions. All software needs a clearly sustainable source of funds for product maintenance. Unsupported solutions have a high risk of becoming unexpectedly obsolete in the middle of a school year because something in the larger ecosystem has shifted.

*** This is based on the the teacher’s own learning curve. In the textbook world it is understood that student outcomes do not improve in the first year as the teacher adapts the new tools to their unique needs and style. Typically benefits start to emerge in the second year and are not fully established until the third year. SaaS, with a one year subscription cycle, asks teachers to make a renewal decision based on their own challenges from year one. The obvious result is lower renewal rates. This isn’t a new problem,  the pattern is familiar from print. But the ability to walk away from the digital materials after one year means they don’t have enough time to generate meaningful improvements.

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My mother sent me this little bit of inspiration.  Inspiration to focus on what is important, what gives our lives meaning, what we should be thankful for.

OPOL

What are you going to do today?

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Texas has been a vocal holdout on adopting Common Core State Standards (CCSS) since the beginning.  Last week all 14 publishers who submitted high school biology textbooks for adoption in TX ignored the state’s demand to include creationism.  I believe these two news items are directly related and reflect a huge shift in the market dynamics for instructional materials in the United States.
 

Partisans think the creationism kerfuffle is because the publishers are taking a principled stand for scientific accuracy or, conversely, because they are elitist liberals.  In some cases these may have been factors in publishers’ decisions.  That said, I think it is much simpler and can be explained by following the money.  For the publishers this was a business decision, not a political stand.

 

This is the clearest example to date of how CCSS is going to reshape who gets to dictate the overall  structure and content of instructional materials.  The hypothesis I floated in 2010 - that the combined market power of smaller states could steal the march on the big 3 (TX, CA, FL) – appears to be  happening.

 

CCSS is influencing every decision publishers make about prioritizing investments in new products.  The fact that this is a biology textbook, while CCSS only covers RLA and Math, only reinforces my point.  RLA and Math account for roughly 70% of overall materials purchases so publishers won’t take any risks that jeopardize their position in those subject areas with the center of power in the market.

 

A couple of charts make this point more clearly than words can.

 

This first chart shows the market pre-CCSS.  There were 50 individual markets and the states that had formal adoption processes had almost all the power to dictate what got written and when.  When big states committed to purchasing large amounts of a single subject area in a specific year it made sense for publishers to hit those dates with fresh product.

 

This chart shows the top 10 adoption states, and you can see that even within this group California and Texas dominated (click to enlarge).  CA, TX, and FL* all represented the biggest buckets and lowest hanging fruit for sales.  Everyone else got warmed over, slightly tweaked versions of materials created for the big 3.
Chart - Top Adoption States
This second chart shows the new market structure with all the CCSS states, Texas, and the other 3 holdouts (AK, NE, VA).  I don’t think the shift could be any clearer.  Instead of worrying about offending the panjandrums in TX publishers now have a very different equation.  Note the shift in the scale on the Y Axis in particular.
Chart Materials Post CCSS
This is what publishers see today when they evaluate how to prioritize development decisions.

 

Somebody in California clearly got the memo because they are actively investing in taking the lead within the CCSS states.  The recently released budget includes $1.2 billion in one time funds for implementation of CCSS in 2014-2015 to cover training, materials, and other preparedness.  This will get publishers undivided attention and will be the engine that pulls the CCSS train.

 

Texas will not become irrelevant, but it will lose its power over publishers that allowed its instructional decisions to reverberate nationally.  The internal politics of the state are not conducive to adopting CCSS so I don’t anticipate this trend will change over the next several years.

 

The state has every right to make this decision and they appear to be willing to live with the consequences to maintain their individualism.  It remains a large market – $1.3 billion annually in instructional materials – they also spend slightly more than the average state on materials – $274/student in TX vs. $261/student nationally.  For those reasons it won’t fade away completely.

 

But if I were employed at one of the large outposts education publishers have built in Austin, San Antonio, and Dallas I’d be looking over my shoulder as the bigs consolidate offices into New York, Boston, and Chicago.  Or I’d research real estate in Sacramento.

 

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*Florida has also been a powerhouse despite being smaller than CA and TX largely because it is organized along just a few very large county wide districts.
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“During the gold rush its a good time to be in the pick and shovel business.”  Mark Twain

There are large amounts of capital flowing into the education publishing market today.  It appears we are experiencing a small gold rush as savvy technology investors bet that the digital transition in education will yield significant returns to those doing the disrupting.

Some basic facts:

  • VC investment in education in 2012 was 4x 2002
  • Most of the growth has been since 2010
  • 50% of that investment has been in K12
  • The split is roughly 50/50 between platforms and content

In the spirit of Mark Twain’s famous quote about Samuel Brannan I’ve asked a range of experts to say who is panning for gold and who is in the shovel business in today’s education market.

Funny thing that – no one can answer the question right now because it isn’t clear.

golden_shovel

Platforms Rule

Most VC’s invest in “first mover platform plays that disrupt the market.”   Everyone wants to be in the educational version of Twitter or Facebook   One could say that the gold rush is in platform technologies like Amplify  EdmodoGoogleAmazon, and others.  Heck, even Pearson is coming out with a platform for OER content.  There are dozens of well funded companies with strong visions for being the one education platform to rule them all.

Content Rules

But – a platform without content is useless.  In this scenario the quality content providers would be the dry goods retailers, providing the platforms the content that brings purpose (and traffic) to the tools.  Let the platforms slug it out for market share (someone WILL get rich there) but make sure your content is everywhere so that when the winner emerges, dusty and battered, in 4-5 years you are along for the ride.

On the other hand….

The content side of the business is in the midst of massive disruption right now as the value of large commodity content libraries plummets in the face of digital distribution.  The economics of that business traditionally assumed that you owned a printing press and a warehouse network to create and move the physical goods around (this was the old “platform”).

In this scenario the platform companies are shovel and pick purveyors, giving content publishers a quick solution to reaching critical mass with on-line versions of their products.

For decades publishers gave the stuff that can populate the platforms away as “free with order” deal sweeteners on adoptions.  Now OER providers are telling the world that schools don’t need to pay for content, content wants to be free.  There is a value perception crisis on the content side of the world.

Maybe Neither…

My pet theory (“awww isn’t it cute, does it bite?”) is that professional development and on-line teaching have  the potential to emerge as big winners here.  Schools don’t set out to buy a platform or content – what they genuinely want is better instruction.  Platforms and content are just means to that end.  Professional development and networks of high quality on-line teachers on the other had are directly connected to the mission and goals of educators.

Players to watch in this space include TeachscapePresence Learning, and even the Bigs.

Conclusion

The average fund expects their better performing investments to cash out in 4-5 years.  Since this trend began in earnest in 2010 we only have a couple more years before they start passing serious judgement on this newest wave of activity.  Chegg just did a $150m IPO.

It will be interesting to watch and learn.  It will be even more interesting to be in the middle of this titanic struggle for dominance in the market.

Next stop – Disruption Junction.

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Frank has a great post over on Geekwire that does a great job of explaining why Dumbo Drops of tech don’t work in schools.

IMG_0650

The question he didn’t completely address is why do people keep making this mistake?

One explanation is that a massive initiative that “attacks” a “problem” is far sexier than a thoughtful program to incrementally improve classroom practice. Don’t forget that many Superintendents are politicians. These things get headlines.

Another perspective is that our school systems are so resistant to change that some kind of shock to the system is required to make incremental changes. Technology is often seen as a magic bullet that by its very presence will force changes. Frank does a nice of touching on why that is usually a false hope.

Arne Duncan has been leading the charge on digital textbooks. I’ll leave the whole “digital textbook” concept for another day. There are far far better ways to use technology in the classroom than aping the form and structure of textbooks. Its like putting plays on TV, mildly interesting but not an optimal use of the medium.

A year ago I penned four questions for Secretary Duncan that in many ways echo Frank’s sentiments. We don’t have better answers today than we did then. The questions are:

1. Funding. Where is the legislation that will provide a minimum of $65 billion over the next 10 years to launch and sustain this effort?

2. Evidence. Given the costs, where is the evidence that this investment will be worth it?

3. Market behavior. Current purchasing patterns show that educators believe a blend of digital and print is best – will this be valued or dismissed?

4. Quality. Transitioning 54 million students to digital textbooks in two years is a moon shot – how do we maintain the quality of learning resources in the mad dash to get it done in that timeframe?

Full post is here.

Bubble bursting time. The call a year ago was to move 54 million students to digital textbooks in two years. We have a year left and according the stats I’ve seen only 2.7 million students have access to a tablet device. We are 50% through the time period and 95% off the end goal.

Of course Congress could always appropriate the funds to make this happen pronto. Um, right.

Barring that perhaps we ought to be looking at a more measured approach.

Related Post: Apple’s iPad Textbooks Cost 5X More Than Print

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Vicki Bigham and I did a show with Larry Jacobs on Education Talk Radio this morning about EdNET.  We had some fun bantering about the conference and trends in the industry.  I got a chance to brag on the Packers and shared that I own an actual stinking badge (see below).

Enjoy:

stinking_badge

stinking_badge

 

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Yesterday, in a discussion about on-line opposition to certain ideas, a lawyer employed this term and I was quietly charmed. I’ve been engaging in wanton and irresponsible bloggery since 2007.

I combines several powerful base words into one all inclusive and deliciously snide put down:

Blogging (obviously)
Buggery
Doggerel
Logorrhea

So, to all of you who disagree with me on-line by committing bloggery, may the heat of a thousand suns melt your keyboards. To the rest of you, keep on blogging.

20130919-080738.jpg

Posted in: Culture
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One of the hard lessons I’ve learned over my career is that anything worth doing needs to be done several times before you can evaluate it.  The Experience Curve as a concept has been with us since 1885, yet many are still unaware of this common sense insight on how people learn and what it means for management decisions.

Here are a couple of examples, one from observing schools adopt new curriculum materials and one from my experience as a CEO.  Both are relevant to education companies.

New Curriculum Materials

It is common knowledge that it takes 3 years before you can really judge the results of a new textbook/app/activity etc in the classroom.  The reason is fairly straightforward and has nothing to do with the students’ learning curve.  It has everything to do with the teacher’s experience with the tools.  They need to master the new materials themselves and adapt them to their mix of talents.

The problem is that many schools and external observers don’t want to wait that long for results.  So they jump to conclusions far too quickly about whether or not something is working.  Anyone who is seriously attempting to drive change in the school world should study the experience curve and set their expectations accordingly.

Patience and persistence will pay off for those willing to put the time in.  If I’m funding a three year efficacy study I’d much rather look at the teacher’s effectiveness than at the student outcomes (since they rarely have the same students for 3 years).

Corporate Strategy

In business anything worth doing has to be done multiple times before the organization can benefit from it.  With small things (e.g. a new payroll process) people seem to intuitively grasp and accept this.  ”We’re just working the kinks out” & “give us a couple of cycles” are all phrases tossed around to express this idea.

The challenge seems to come at the strategic level.  Here, because the risks are so much higher, there seems to be an unrealistic push to get it exactly right the first time.

Take, for example, acquisitions.  Many smaller companies approach an acquisition as a one time deal – an attractive target is for sale and they jump on it.  The real question that ought to be asked is “are acquisitions a general strategy we are going to employ?” If not, I’d suggest taking a pass on the deal.  If you don’t have the resources to do multiple purchases and the stomach to stumble a bit on the first couple you should not go down that path in the first place.  No one is magically immune from the Experience Curve (although statistically some will appear to be).

Summary

When you are looking at big strategic decisions factor this in by insisting on answers to the following questions:

  1. Are we willing to do this many times until we get it right?
  2. If the answer to “1″ is yes, then do we have the money and bandwidth to do it multiple times?
  3. How are we going to track how we are improving over successive cycles and how can we consciously incorporate what we learn each time?

In both schools and corporations this is a fundamental governance and leadership issue that doesn’t get nearly the respect it should.

You’d think we’d learn….

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Merge sign

The Association of Educational Publishers (AEP) and the Association of American Publishers School Division (AAP) announced their intent to merge last week. I’m currently the Board President at AEP. As one of the principals in the deal I thought it would be useful to share my perspective on why we are combining forces.

Why does an association exist?
It helps to start with a quick review of why professional and trade associations exist. Speaking only for myself, these four issues form the core of why I have invested time in several associations over the past 20+ years.
  • Associations water networks of influence. By providing a neutral ground where industry leaders can meet associations provide for idea diffusion, business development, evaluation of issues of common concern, and expanded professional relationships.
  • Associations advance the policy positions of a group with shared interests. An industry that is subject to the shifting policy positions of government needs to track those changes and have a platform for making our voice heard in the discussion.
  • Associations provide professional development for industry specific needs. Educational publishing has some quirks. As new people enter the industry or advance within companies formal training programs accelerate their effectiveness.
  • Associations advocate standards of professional practice – They do this indirectly through awards and recognition programs that validate the best work going on in the space. They also do this directly through participating in the development of standards.
In the spirit of “if you don’t like the news go out and make some of your own” I think having a seat the table for these issues is important for companies and individuals. If you are not engaged in your association you are missing significant opportunities to leverage your company’s position in the market.
While these benefits of associations are relatively timeless the specific way they are instantiated needs to map to an ever changing world.

What Has Changed?

In the past 5 years the educational materials market has shifted dramatically. Three trends in particular have driven this change.
  1. The shift to digital content, driven by tablets and LMS platforms. This is affecting virtually everything about how educational publishers are structured and is reshaping product development, distribution, patterns of competition, and investment priorities. Our professional networks and professional development need to follow suit.
  2. The emergence of Open Educational Resources (OER) as a viable option. The shifts that digital libraries and user generated content have caused in other IP based markets are now reshaping the educational publishing landscape. OER itself is a positive addition to the mix (many publishers are embracing OER). However, in the face of “free” content the old distinctions between basal and supplemental are relatively unimportant. We need a voice for high quality, professionally produced, pro-grade tools that save teachers time and save schools money.
  3. Purchasing processes are merging. It used to be that schools purchased digital content very differently than print content. They also took very different approaches to buying core programs vs. supplemental materials. Now schools demand that all programs have digital components and they are looking to address the needs of all learners with core and supplemental resources at the same time. In other words, the rationale for distinct professional associations that supported core vs. supplemental or digital vs. print have evaporated.
On top of these long term macro trends we have the short term impact of the the economic crisis and its concomitant impact on school budgets and priorities. This is accelerating changes in the buying process that would normally have taken much longer. States are moving away from highly structured basal textbook adoption processes to create new opportunities for more modern content (digital, subscription, blended, etc.).
This is a great thing for innovation and is creating room for new entrants in the industry. Our associations need to be a welcome home for these new players by reflecting the needs of the new market.
Why AAP and AEP?
In this changed world the educational materials industry needs to be able to speak clearly about how these changes can be effectively implemented. While Publishers have been adapting internally (e.g. Pearson’s reorganization last week) our trade associations are still organized around old models of industry structure.
The old structure reflected the following distinctions between vendors.
  • Basal vs. Supplemental. As a general rule AAP was largely seen as representing the large basal publishers while AEP concentrated on the supplemental space. The changing purchasing patterns are eliminating this distinction.
  • Large vs. Medium/Small. AAP has historicaly been the domain of the largest publishing houses. AEP was scrappier and focused more on the needs of the mid-market and smaller companies. In a rapidly evolving market with uncertain outcomes getting all the innovators together makes good sense. The large companies can deploy at scale and the small guys can iterate innovations rapidly. Many companies were members of both associations, but often to address the needs of different parts of their organization (see Basal v Supplemental in particular).
  • Print vs. Technology. Since schools themselves had different decision making processes for buying books vs. tech it made sense to have separate associations. AAP tended to be more print focused, AEP was a blend of print and digital, others focus solely on digital. Since schools now demand blended materials this distinction is no longer relevant in policy. This is also creating an urgent professional development need, one of the central challenges publishers face is blending the radically different paradigms of print vs. technology development.
To sum up, old patterns of organizing ourselves are no longer relevant. What is of paramount importance going forward is an association that can provide a voice for high quality, professionally produced, blended instructional resources and tools. This lies at the heart of the merger.
What is Next?
The high level details of the merger can be found in the announcement.
Next week at the Context in Content Conference (jointly sponsored by AEP and AAP) we’ll have multiple opportunities to dive deeper into the specifics. Tom Allen, AAP’s President and CEO will address the conference first thing on Monday June 3rd and we’ll hold a vote of the AEP membership on this on the morning of Tuesday June 4th.
Attendance for the conference continues to increase year over year, and if you are not already planning on being in DC next week I encourage you to try and make it. You will learn a lot, make valuable new connections, and have a voice in how the industry moves forward.