The Education Business Blog

Is it just me or is everyone else sick of getting "wishing you a merry christmas" emails flooding their inboxes?

I know, I know - we're all hella busy and this is the time of year we are supposed to reconnect, so sending an on-line card or email seems like a quick solution.

But it reeks of insincerity. And its spam. So stop - pretty please?

Say what you will about the post office but the physical act of writing something - even your name - and applying a stamp forced people to put some kind of filter on who they sent holiday cards to. Now we are all a wrist flick away from a list of 600 people you "care" about.

If you really care about me stop cluttering my in-box with holiday flavored spam. Just so you know - these emails are kill-on-sight for me - I don't even open them.

Social Media Meets the Holidays

Good social media is personal, sincere, and conversational. These on-line cards don't meet any one of these criteria. It is an old broadcast mentality hijacking the new technology.

Normally the Curmudgeon doesn't make suggestions - he just gripes and the world moves on ignoring the muttering figure in the corner with the askew elf hat and a fistful of cookies.

• Take the same minute you would have to write a physical card and send a personal note to those you truly care about. Ask them a question - start a conversation that will last into the new year. Write from the heart.
• Go on to Facebook and scribble on the walls of your real friends (you know - the ones who would help you move on an hot August Saturday).
• Pick up the phone and call already.

Oh - and to all my friends out there - Happy Holidays. I mean it - really.

At PCI we are putting the finishing touches on our 2010 budget. The Stimulus funds are creating a particular challenge as we look out over the next 12-24 months. On the one hand there should be plenty of new money in the market next year. On the other, despite ARRA an additional 9 states are sliding into California like crises as the housing slump begins to affect tax receipts.

There are two core questions companies need to answer as they think about priorities for the coming year.

• Timing - when will the funds flow?
• Volume - how much of the stimulus will be available for instructional materials?

1. When will stimulus dollars flow for instructional materials?

By December 11th 2009 less than 40.1% of the stimulus funds have been committed, and much less than that in some specific funds (e.g. Special Ed is only 12.3% spent). Since funds have to be obligated by this coming fall and spent by the fall of 2011 that probably signals a wave of orders in next summer's buying season.

But wait! It has taken three years. but tax receipts are finally catching up to the housing slump. Since 34% of education funding comes from property taxes (Richard Sims, NEA) this is going to mean that moving forward more ARRA funds are going to supplant state funding. Depending on a particular state's reliance on property taxes and how hard they have been hit by the Great Recession we will see a wide variety of state level differences.

[click to see a state level report of ARRA spending]

This affect is going to be felt broadly. Texas, which has not been hit particularly hard by the slump, is facing a shortfall and is planning budget cuts. Florida on the other hand is in full blown crisis mode (along with NJ, IL, WI, and several others). You will need to look at where your pockets of strength are to gauge the impact on your particular business.

We expect the spring to be tight - Superintendents will sit on any funds they have until they know their new allocations from the legislatures. Once this issue has been resolved the summer will be extremely busy.

% of Spending by Month

For publishers this kind of curve presents a particular budgeting challenge. The investments you need to make in staffing, inventory, and marketing to maximize your returns during the summer need to be made during the spring when the outcome will be in doubt. It would be easy to bet wrong in either direction - either holding back and letting competitors reap more than their fair share or overspending and being left with your own ugly budget cuts in the waning months of the year.

2. How much of the stimulus will be spent on instructional materials?

If the curve above represents when the funds will flow what about the amplitude? Just how much growth will ARRA mean for Education Publishers? I've speculated before that about 4%-5% of the stimulus will be spent on instructional materials. Normally materials are about 1%-2% of education funding but because there are so many restrictions on how ARRA funds can be spent we expect a slightly higher amount to flow to materials. They are a relatively quick and non-controversial investment in most cases.

This would mean an incremental $4-$5 billion in the publishing and materials markets. Since the funding sources that will go for materials have the most money left the big bump is still ahead of us. Title 1 has 78% left, IDEA has 88% left, and Ed Tech has 98% left [link]. By contrast only 1% of the construction money is still available.

This will be spread over 2010 and 2011 but odds are that about 60% of the balance will be spent in 2010. Roughly, that could translate into an incremental $2.6 billion available to publishers this coming year. Wow.

The chart below presents an interesting view of a company doing $10m in revenues pre-stimulus. Note that in both scenarios (flat and up 20%) the revenues will be below a normal year through May. For the first four months to equal a normal year's revenues annual sales would have to be up 50% over a normal year.

Revenue Projection by Month

Education Publishers will have to be tracking their sales pipeline very closely to see what the summer is going to look like - otherwise you run the risk of making cuts or holding back on inventory that could hurt in the summer months. If you have not instituted one yet or if yours is lax - time to batten down the hatches there.

Conclusion

This is going to be a very unusual year in a market that is used to a high degree of predictability. Mileage by state will vary widely - so dig deep in your planning scenarios to project the impact in your areas of geographic strength.

Plan for the best, expect the worst, and watch all your leading indicators very closely.

The tribe gathered, bad coffee was drunk, stale muffins were eaten, and we shared insights and guesses about where education technology and publishing are headed in era of tight budgets and ARRA munificence. It was a typical first week of December in New York.

Here is the first of my overviews of what happened during the week. Subsequently I'll dig into the AEP CEO Roundtable, the MDR Christmas Party, and the AEP Hall of Fame Breakfast.

SIIA Education Technology Business Forum - Tuesday Dec. 1

International

The panel on International Opportunities discussed the trends outside of the US market - the growth of mobile phones as a platform, the demand for professional development to make sure existing investments are being used, and that no one (not even Pearson) can do go international on your own - partnerships are essential.

One point that was almost a throw away at the end but which is critical for companies just starting down the international path - translation is not localization. The management tools, images, and examples all need to be culturally appropriate.

Funniest moment - when Steve Dowling from Pearson was asked how companies smaller than Pearson can take advantage of international opportunities he deadpanned "We'll make you an offer..."

Investment

A second panel "Where are the Investment Dollars?" struggled to answer this question. Short answer - they are not there - come back next year. George Cigale, the moderator, jested in earnest that given what we heard from the investment professionals on the panel that it would be easier to raise $5 million through revenue tied to ARRA than to try to raise capital.

Investors see Education as the last inefficient media market and want to invest in companies that are going to create disruptive innovation. Incumbents who are trying to accommodate the current system need not apply.

Also - if you have already done all the hard work of building a product and proving that the business model works they would be interested in possibly, maybe, looking at it. Next year.

Part of the reason for this hesitance is that while the Stimulus is creating unprecedented opportunities for education companies, it is making valuations problematic since investors rightly see current performance as unsustainable.

My humble suggestion is that until investor groups demonstrate a willingness to actually take some risks alongside entrepreneurs that we stop inviting them to this event. We are like a battered spouse, always hoping they will love us next year if we just try harder. There are many examples of small education companies who have found alternative paths to capitalization - those are the examples we need to be elevating to the podium.

Fundamentally education can be an extremely profitable market with intense long term loyalty. The problem for most investors is that it is all about a mountain of slow nickels rather than a small pile of quick dollars.

We are the proverbial turtle and most investors have the patience of a gerbil. One good outcome (hopefully) of the current downturn is that it will wring some of the quick-buck-at-any-cost mentality out of the investor community. A return to fundamentals will greatly help education.

Post Stimulus Outlook

This panel tackled the question of what a post stimulus market will look like. Richard Sims, Chief Economist for the NEA, shared a frank and rather brutal analysis of what lies ahead for education budgets. The punch line - while real estate started to tank in 2006 it wasn't until 2009 that actual tax receipts started to suffer at the state and local level. There is a three year lag in the funding flow. This matters because 38.5% of education spending comes from real estate taxes.

If the market bottoms out next summer we have 3-4 years of declining state budgets ahead of us. There are 9 additional states who will find themselves in California's shoes in 2010 including NJ. FL, and IL. He projected that it will be somewhere between 2018 and 2020 that we return to 2006 levels of funding. Get used to it.

He was also not as concerned with the debt we are running up - but only if we spend it on things that generate growth in the long term. Debt financing is a common model for companies - and the US has shown before that it can also work for countries.

Companies have to be focused more than ever on the parts of their solutions that help districts be more efficient and that deliver savings over traditional ways of doing things.

Obama's Education Technology Policy

Karen Cator, the new head of Education Technology at the USDOE, spoke about the plan they are assembling to drive technology usage in schools. I'll write in more detail about this later but the bottom line is that the tech plan will focus on enabling the four assurances included in ARRA. They intend to use the bully pulpit to make sure that our tech dollars are going for useful items rather than flashy products that gather dust.

Summary

I came away from the day inspired by the entrepreneurs that are working hard to build interesting businesses in the education market. I also came away chastened by the pessimism of the investment community and hard realities of our economic situation.

Those of us in the business need to get up every morning willing to make a difference in children's lives and focused on doing it in an efficient and sustainable manner.

Technorati Tags: AEP Hall of Fame, Association of Education Publishers, CEO Roundtable, Ed TEch Business Forum, ETBF

The education publishing tribe's annual gathering is in New York this week. Today kicks off with the SIIA Ed Tech Business Forum (sold out) at the Princeton Club followed by the AEP CEO Roundtable (2 seats left) and the MDR/Peter Li Christmas Party tomorrow (by invitation), and the AEP Hall of Fame Breakfast on Thursday.

This annual trek is an important part of the culture of our industry and if you have not participated I encourage you to make time next year. I love me some social media - but there is no replacement for looking people in the eye, handshakes, and hugs for old friends. 95% of communication is non-verbal after all.

Over the next few days I'll be putting up a few posts about the events this week. My intention is not to provide general reporting, but to drill in on a few things I find interesting. We'll see how that goes.

New York in early December is a special place. The air is crisp and clear, the store windows are all dressed for show, and the expectation of Christmas hangs in the air. Make your hotel reservations early and stay to see the tree lighted!

Technorati Tags: Association of Education Publishers, CEO Roundtable, Ed TEch Business Forum, ETBF, MDR, New York, AEP Hall of Fame