The Education Business Blog

Over the past couple of decades education publishing has been characterized by waves of consolidation into a handful of giant conglomerates. This is a typical pattern in an industry as products commoditize.

If products are effectively interchangeable (commodities) competitors gain competitive advantage through industrial scale cost management (economies of scale). Bigger warehouses, off-shoring production, distribution networks built on fleets of professional salespeople, and access to capital drove smaller players into the arms of Pearson, McGraw-Hill, Houghton Mifflin (Harcourt), and Scholastic.

We can see that they became huge - but what were the market forces that drove them to do this?

To understand how things are changing we first need to see how the current structure came to be. I believe standards and accountability were the primary causes.

Impact of Standards - Commoditization

As publishers all wrote to the standards for the same 3 states (CA, FL, TX) the books became interchangeable. I've worked for two of them - but take the logo off and I couldn't tell you a Harcourt book from a Pearson tome. Since prices are relatively inelastic (states after all set the budget in advance) companies competed via the “free with order” (FWO) giveaways rather than through the core products.

This meant that the company with the lowest cost basis could afford to give the most away and increase their odds of winning the race. It also meant they needed a lot of stuff to give away. They got big to reduce costs and bought a lot of supplemental print and tech to differentiate themselves around the edges.

Impact of Accountability - Distribution Footprint

At the same time NCLB brought a new level of accountability across the chain of command in school districts. The result was a move to district level decision making. With their job on the line an Assistant Superintendent for Instruction is going to want control over the purchases that Teachers and Principals used to make.

Selling at the district level is a completely different game than going classroom to classroom. Reps who used to swing by a school and stuff mailboxes with catalogs were being asked to sit down with Superintendents and engage in solution selling. Companies that relied on teacher networks or direct mail found themselves losing share to companies that could sell at the high end.

This also played to the scale the larger publishers operated under. They already had national sales infrastructures with a broad pool of talent to insure coverage anywhere opportunity beckoned. Because they were already playing the adoption game at the state and district level they were able to leverage this presence into other segments (technology, supplemental materials, etc.).

As long as a relatively stable basal textbook business was the heart of the industry this model perpetuated itself.

Adoption Interurptus - Rot at the Core

The textbook adoption market is no longer stable - the patient has an irregular heartbeat. California and Florida have delayed or simply cancelled major adoptions. Texas is opening the process up to technology based products, and many other states are experimenting with ditching the whole structure.

The complex network that these massive companies built around themselves is crumbling. This is why I used the rather uncharitable metaphor of large dinosaurs last week. Their ecosystem is suffering multiple shocks and in biology when that happens the big beasts go first.

Next – we look at the impact of digitization, globalization, and the attention economy on the competitive landscape in education. Hint – the big guys have problems with all three.
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Big Textbook Publishers = Dinosaurs?

PCI takes Halloween very seriously - but in a fun way.

Basically it is an additional holiday since we have a big party over lunch including a street parade. Competition in the pumpkin carving and costume contests is fierce.

In the picture below you can see my meeting with one of the judges.

So if you are trying to reach us tomorrow (Friday the 29th) we will be MIA.

Without getting too analytical, events like this form the heart of the culture here. It reflects the joy our founders took in building this business and is anticipated every year.

How does your company let their hair down and have fun?

An understatement - education publishing is changing.

Heck, publishing writ large (trade books, music, movies, news, etc.) is shifting in dramatic and unpredictable ways. Textbooks are one of the last little corners of the intellectual property world to enter this new era.

Today's post is a teaser for a longer piece I'm going to publish in the next few days. Mark Sumner's "The Evolution of Everything" got me thinking about our industry in biological terms as we enter this era of rapid change.

I believe that two forces, one blindingly obvious and one subtle, are causing an huge shift in the source of value and differentiation in the instructional materials market.

First - the analog to digital transition is upon us and will shuffle the deck the same way it has in music, television, and the news business.

Second - we are also seeing a quieter revolution in buying behavior as a deluge of information swamps inboxes. In the attention economy time is more important than money. The value of expertise is increasing at the same rate as the flow of information.

These forces indicate that the primary value drivers of our industry, which has witnessed several waves of consolidation, are going to reverse direction - more value creation will be found in smaller entities in the coming years. I address the first issue today.

In Epochal Shifts Big Dies, Small Survives

Why were some dinosaurs so big?

"Big animals pack around a big gut, and big guts on average are more efficient at extracting nutrition from food. As sauropods expanded their diet to include less and less nutritious sources, they needed to pack around bigger and bigger stomachs—a kind of arms race of limited calories and vitamins as these creatures attempted to nab every source of food possible." Mark Sumner - The Evolution of Everything

Sound familiar?

For the past several decades the big education publishers have been building their businesses on a base of scale efficiencies. Ever bigger warehouses, vast conglomerations of imprints, printing in Asia, and political influence that only employing tens of thousands can earn. At Harcourt Achieve we had over 27,000 SKU's - and that was before it was merged with Great Source.

"The end of the Cretaceous was a nasty time. Lots, and lots, and lots of things died off that weren’t dinosaurs. Overall, about half of all genera and three-quarters of all species failed to make it from one side to the other, from one period to the next.

There was no single characteristic that seems to have been a good predictor of surviving past that ugly line of iridium enhanced clay in the geologic record, but there was certainly one that was a good indicator of not making it: large size. Many small animals died at that time, but every land animal bigger than a standard poodle was a goner." Mark Sumner - The Evolution of Everything

The reason is straightforward - any large organism lives at the center of a complicated web of dependencies that build up slowly over a long time. Fatal disruption of an interdependent network like this can come from any node. Smaller organisms can be more nimble at finding niches in what remains - and will grow into tomorrow's giants.

Summary

If the biological metaphor holds the changes we will experience in publishing over the next several years will play to the advantage of small to mid-sized companies at the expense of the major publishers.

I don't believe this will be an era of extinction - just that the conditions of rapid and disruptive change will create more opportunities for smaller more nimble companies. The big guys will survive - but like TV or music their share of the business will shrink.

In my next post I will explore the impact of the attention economy, why this is happening, and some ruminations on how it will play out.

Related Blog Posts

The Web Broke the Big Publishers Business Model (coming)
Information Overload
Getting the Units Right
Instructional Monocultures

50% of the men did not wear neck ties at this year's Frankfurt Book Fair. Traditional publishers are struggling with appropriate responses to digital transformation and aping the casual style of Silicon Valley seems to be popular. Interesting fact - if you wear a suit without a tie you still look like a Book Rep.

This sartorial mis-match of rhetoric and reality summed up a lot of what I observed. Publishers are saying all the right things, but they haven’t quite figured out how to do them.

Educational Publishing Leaders

The Education Publishing Pavilion had a CEO Roundtable on Wednesday. Houghton Mifflin Harcourt, McGraw-Hill, and Pearson all had delegates on the panel (50% tieless). Many fine things were said about the market transition in education (globalization, technology, accountability, etc). But where it mattered the most - what the big 3 are going to DO about these trends - it wasn't particularly illuminating. My crack after the talk was that they are going to differentiate in the same way.

Snark aside there were several interesting take aways from the panel.

• Pearson spent more in 2009 in product development than they have ever spent (no insight on how much of this is in education or if it has been sustained in 2010). Still - given market dynamics this reflects a very aggressive stance on their part, which is a good sign for the de-facto industry leader.
• HMH has created a $100m internal innovation fund (Pearson did something similar in 2005). This should help spur new ideas after 2-3 years of turmoil and layoffs as the various parts of the organization were consolidated during the recession.
• McGraw-Hill is focused on deep localization as they globalize - they recognize that what China wants is quite different than requirements in Australia. Some markets are radically different - 70% of education publishing in India is local (as in regional not national).
• All publishers are struggling with creating a new paradigm for digital content. Requiring ISBN's for technology products is kind of silly - and yet from a systems standpoint they can't do anything else - yet. This also applies to the culture of the sales side - book reps don't have a good track record with technology and tech reps are going to need a compelling tech vision to sign on.
• They resent that LMS providers have built a $500m business in content (well, at least one of them resents it...). There is a sense that the proliferation of systems is going to have to end - we need some standards so that content can be interoperable.
• Expect to see more alliances with technology platform providers like Microsoft, Oracle, and Apple. I think this applies to publishers of all sizes, but it is a real shift for the big guys who have had a go-it-alone ethos. Time will tell if the clashing paradigms can be reconciled.

The panel did agree that some of the biggest challenges they face are cultural (internal). Moving from print to technology is difficult in the best of circumstances. They do appear to be hiring more executives from outside the industry which will help, but it will take a sustained commitment to new and uncomfortable ways of doing things for it to work. Otherwise the host will reject the transplant.

Serious Games - Going Dutch

Another aspect of the Book Fair that I love is getting exposed to trends from elsewhere. One topic close to my heart is gaming and Holland had a big presence in the Education Hot Spot focused on edugames.

Mijn Naam ist Haas is a captivating "game" for young children where they co-create the game (draw a line and it becomes the road Haas walks on, draw in the sky and clouds and birds appear, etc). It is a great redefinition of a side-scroller that draws the learner into the world. The Dutch Government supported it with a $640k euro grant.

Another interesting looking game was a project management simulator built around the pyramids. Companies are using it to expose people to best practices. I couldn't see if salt and beer were the currencies of choice.

Expect to see the Dutch moving many of their games into English in the coming couple of years. For US developers this may also be an interesting market to branch into.

Also - none of the Dutch men wore ties, and some even wore (gasp) jeans.

Holy Cow It Is A Big Show

You shouldn't rely on any one report back from this event - it is simply too huge for anyone to really wrap their arms around it. It saw a few things and drew some conclusions but my perspective isn't definitive.

Globalization is real and moving in both directions across a wide variety of education niches.

I made good contacts in Europe, the Middle East, Southeast Asia, and Oceania. Most of the other vendors I spoke with in the Education Hot Spot or in the American Collective had similar results.

I have gotten a great deal out of attending this conference the last two years. When I was consulting my practice went global - mostly foreign publishers entering the US market seeking expertise. Now that I'm on the other side I'm pushing global as offense and defense against the unknown.

If you are still focused on just your own country you are limiting your growth at a time when we are all challenged to find new markets. You are also setting up the risk that an outside entrant will steal your share. You must be present to win so show up next year!