In a conversation with Randy Pennington he pointed out that in my post textbooks vs. education technology – clash of paradigms I alluded to the financial paradigms but didn’t address them directly.
Textbook Publishers – Their financial model depends on winning large adoption contracts that yeild a high volume of sales in the first 2-3 years of an a adoption cycle and then vitually nothing for the out years other than replacement copies. It is a very transaction oriented business and because the 50 states are on different schedules it can lead to significant fluctuations in revenues year over year. For example, with both California and Texas looking at Math in 2007 the next couple of years are going to be huge for the winners of those adoptions – followed by a trough.
Education Tech – One of the more interesting trends in the ed tech market is the move to subscription based products. Transitioning from a transaction model to a subscription model smoothes out revenues, lowers the up-front cost for the customer, provides an ongoing revenue stream to finance product maintenance and upgrades, and allows for a company to know where 50%+ of revenues are coming from at the start of a year. It does a lot of wonderful things for a company – in the long run.
But – making this transition is tough because there is a short-term financial hit in first 2-3 years. At the same deal volume a subscription model will initially generate much less revenue than a transaction model. After 3-4 years a company is at breakeven between the two and then starts to pull ahead with subscriptions.
As technology assumes a larger role in the product mix for textbook companies this presents a real challenge for them. Until recently all the major textbook publishers have been public companies and this kind of revenue disruption would be very difficult to introduce without being pummeled by the markets. It will be interesting to watch the Riverdeep/Houghton merger to see what they do with their disparate pricing models.
It is entirely possible that we could see a Negroponte Switch in the education market in the next 5-10 years. More on that in a later post.
The prior article in this series is available here.