The Education Business Blog

Is the instructional materials market in the tank? I've spoken with people at a dozen companies who are all seeing the same thing - since November 1st a moderately down market has dropped like a stone. A senior executive at one of the big 4 publishers flatly stated that this was the worst he'd seen it in 35 years. I'm inclined to agree.

Since this appears to be an industry wide phenomena how should companies react? That depends on whether you think this is a temporary stall or a permanent realignment of funding for materials. How you see that depends on whether you focus on the supplemental or basal market.

For the supplemental market the evidence points towards a stall - at least so far. Low sales numbers don't match the funding availability, there is no evidence that a huge amount of funding has been pulled from the market all of a sudden, What we do have is an abundance of uncertainty which is prompting districts to sit on the funds they have.

On the basal side it is another story. In general states are stalling, canceling, and opening up their adoptions as a means of responding to budget shortfalls. Given the long wave nature of adoptions even stalling is more than a temporary problem for the large publishers. The large publishers have reacted accordingly with McGraw-Hill laying off over 500 people and HMH a smaller number. It appears that the brunt of those layoffs occurred in adoption states. States also appear to be using the crisis as an opportunity to reform adoption rules in ways that open them up to new media and competitors (technology).

As a general rule a down market for basal materials means an up market for supplemental as schools fill gaps and extend the range of the basal programs. In this market the best we can hope for is probably level funding for supplemental, which given the dismal numbers on the basal side amounts to the same thing. As the old joke says "I don't have to outrun the bear, I just have to outrun you…"

The current market is a noxious intersection of several trends.

1. Stimulus - Everyone was expecting a cooling in the market when the stimulus program came to an end in September. Then the Feds announced that they would grant extensions through next September to pretty much anyone who applied. Prudent districts will sit on these funds until next summer when they have more information about all funding sources. Technically this isn't bad news - but it doesn't help us right now.

We may also be experiencing a "stimulus hangover" similar to a sales dip in the car market after a huge round of incentive driven purchases.

2. Adoptions - While state tax receipts have stabilized and even started a very slow crawl back they are still too low to fund essential services. Witness California cutting $1 billion from K12 and Higher education. Numerous states have cancelled or postponed adoptions and there is some evidence that this whole market mechanism is unravelling before our eyes. Since many districts don't know when they will be able to buy core materials they are husbanding their available funds for a much broader array of products than in the past - competition is more intense.

3. Technology - The success of blended print/technology products is upending the traditional buying processes in districts. This is the result of new regulations on the adoptions that are moving along that allow districts to purchase in many media rather than requiring a book. New product evaluation procedures need to bring both textbook purchasing and technology experts together. This is taking some time to figure out and gumming things up.

4. Waivers - The Department of Education has created uncertainty about accountability requirements by moving ahead with the waiver process. This is really a result of Congress's inability to pass a reauthorization of ESEA (NCLB). Something had to be done.. The new guidance districts are getting from the feds is often in conflict with existing regulations at the state level - until this is resolved districts won't be comfortable releasing funds they already have.

5. Budget - The Super Committee failure at the end of October aligns almost perfectly with the stall. Correlation isn't causation, but in this case a good argument can be made that uncertainty about the availability of federal funds cascaded through the decision making processes under way at districts. As of the end of December the new budget actually increases Title 1 and IDEA. This was too late to help with December sales but should free up Title 1funds in particular in the new year.

6. Rescissions - As part of the DOE applying the existing rules in a tight budget they are getting stricter with states about rules and regulations. This has resulted in some states seeing rescissions of already allocated funds. These are not large amounts - 1-1.5% in average. But for cash strapped states who can't make up the difference it is creating a huge problem. Until people at the district level have certainty on the funds they can spend they will wait.

Decisions Decisions

So what should companies do? Do you take short term actions to tide you through a couple more months of uncertainty or do you plan for a different future? Market mavens are counseling a wait and see attitude - expecting that once the budget issues are resolved in the next 6-8 weeks that the funding levels will be pretty close to flat. They are urging supplemental publishers to refrain from doing anything drastic until we have more information.

From the outside the layoffs at McGraw-Hill and HMH are linked primarily to the cratering adoption market and teeing up new investment in technology solutions. There may be some correlation to the short term dip, but they appear to be strategic moves addressing longer term trends. In other words they probably are not harbingers of what smaller companies should be considering.

In the end every company will have to make their own informed decision and accept the consequences. Get out there and talk to some customers, consult the folks who track funding, look at your product pipeline, and match your response to your findings. There will be no "right answer."

eBooks, iPads, and the Kindle are changing the fundamental structure of the publishing industry. From a strategic perspective they are having the largest impact on the development and pricing of products. In other words it is affecting the "what" deeply. The "how" has not changed all that much, regardless of whether you are selling print and/or technology.

There are four fundamental strategies for a growing a company in the K12 sector because even in the best of times K12 is (mostly) a zero sum game. In 2008 I wrote a post about this competitive dynamic:

In normal times education budgets grow at 2%-5% a year. Most start-ups or new products need to grow at a huge multiple of that - 30% to 300% or even more. Mathematically in order for you to grow someone else is must lose out.

We are most definitely not living in "normal times" these days. Any growth strategy in today's market is fighting gravity as school budgets are expected to fall next year after the stimulus has expired.

K12 Growth Strategies

How does a company go about "stealing" share from other players in the market? Below we look at innovation, distribution, acquisition, and diversification.

1. Innovation - This is the most obvious - if you build a better product people will flock to you while ignoring the tired offerings of your competitors.

The best example in the market today is interactive white boards which are now in over 60% of classrooms (70% is considered market saturation for most technologies). This has mostly happened over the last 5 years.

Since this platform is now ubiquitous a new innovation frontier is content for these devices like Saddleback's excellent math programs.

PCI published our award winning PCI Reading Program - the first research based comprehensive program for intellectually disabled students in decades. It is designed for today's Special Ed population, including a much higher number of students with autism. Tellingly it is a combination of print and software. This product line has seen explosive growth in a rough market.

Success requires a clear vision of market needs and how to apply new tools to those needs in an economically efficient way. Easy to say, really hard to do.

2. Distribution - Distribution is the achilles heel of all K12 start ups. If you have something innovative making more people aware of your innovative solution will drive new business. The problem is that there are 3.8 million teachers in the US and they are bombarded with marketing messages. Cutting through that clutter at that scale takes time and money.

The largest publishers have actually contracted their distribution networks in the last five years. They collapsed their supplemental teams into their core basal teams with the predictable result that the supplemental business has shrunk. There is a fair debate on how much of this shrinkage is falling demand on the customers' side and how much is publisher neglect. What is clear is that the publishers' actions have fueled the fire at some level.

This has created opportunities for mid-market players with niche distribution networks to fill the gaps at both ends - with their own products and as distributors for larger and smaller players. As I noted last fall:

"...[in the attention economy] access to expertise becomes very valuable and companies that can help their customers make informed, relevant, and effective decisions will thrive."

An investor once asked me what it took to build a distribution network in K12. My answer was most definitely not what he wanted to hear - 10 years and a lot of patience. Most new companies don't think in that kind of time frame but the survivors will all tell you that the trick was a long term bloody minded dedication to the challenge. There is no quick fix here.

3. Acquisition - Between starts ups innovating new learning technologies and mature mid-market companies seeking exits Education is a target rich environment for those seeking acquisitions.

The core challenge has more to do with investor expectations for returns on capital and the speed at which the education market moves. Due to the stickiness of education solutions once they are adopted they pay out nicely over a long period of time. Put another way - the payoff is there in this market but most investors are not patient enough to earn it.

Right now the larger publishers seem to be sitting this out but people looking to enter the market - like News Corp - are active. Private Equity groups are circling as well but many probably see education as a low risk hedge rather than a core investment. The VCs are quite active - but they are investing in small innovative start ups.

One of the more interesting plays may be marrying the playbook of the PE and VC camps. Leverage the distribution muscle of an established player than can reach across the market with the disruptive innovations coming from the smaller players through creative acquisitions. Culturally and operationally there are significant challenges in this approach, but the payoff if done correctly is a dramatic reduction in the time to market for innovations at a time of disruptive change.

4. Diversification - Another approach is branching into new markets. There are opportunities in corporate learning, education systems in other countries, tutoring, trade publishing, home schoolers, etc. for publishers who currently sell just to schools.

This mistake that may company's make is underestimating both the changes in product design and the distribution challenges associated with moving into other markets.

Does your box say "program" instead of "programme"? At a minimum you will need a new box if not a complete page review and spelling update for the guts of your program if you want to sell it in the UK or Australia. Are you ready for the rough and tumble of trade publishing or corporate learning?

Moving into new markets requires sustained discipline as you learn the rules of the road and a willingness to invest over a long haul. If you are looking for a quick hit don't waste your time on this approach.

Summary

If you are thinking about how to grow your business (rather than just holding on in tough times) then some combination of the four approaches outlined above is where you will probably end up. Your vision, access to capital, and discipline will determine what the right mix is for your company.

I've probably missed some obvious alternative to the four core growth strategies outlined above. Feel free to drop me an email or comment and we'll update the list.

Distilling the range of policy positions on our current economic malaise is a huge challenge, but fortunately Rortybomb is up to the task. I recommend his post - A Topological Mapping of Explanations and Policy Solutions to Our Weak Economy.

Not only does he provide spiffy venn diagrams that distill people's positions he also provides extremely useful links to articles that lay out those positions.

As a business leader I recommend this post for those wanting to dig deeper on what the road ahead might look like for our organizations.

As an education publisher I recommend it for those seeking outstanding examples of web articles that would be useful in the classroom. While he has strong opinions he isn't afraid to provide a platform for those with other opinions to put their best foot forward. This one post could serve as the foundation for 2-3 weeks of a high school econ class.

As a citizen I just want what Jessica Hagy outlined in her inimitable way over at Indexed

I just wish DC would get on with their job.
.

In an age of information overload Librarians are the pilots who can help us quickly navigate to what is meaningful.

Said differently - librarian's rock and they make a huge difference in schools. Here is a video made by a school for a library aid who got laid off due to the budget crisis. Think this "saving" won't make a big difference in the education of these children?

Watch the video.

Yes - she is my lovely wife. She will find new work, but this work resonated with her soul and she was damn good at it. Thousands of young learners are better off because they crossed paths with her.

She and thousands of other educators who were dedicated and loved by their students will not be there in the fall when school reopens.

Think about that the next time someone bashes teachers to make political hay.

I'm surprised we haven't seen more of this.

Notice to All Banker Types from a Teacher

Also too:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Crisis in Dairyland - For Richer and Poorer - Teachers and Wall Street
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

The hypocrisy is staggering. Bail out banks with trillions of taxpayer dollars - "bonuses are contracts and you can't touch them." Banks drive economy into the ditch and cause funding crisis for schools - "teachers are overpaid and coddled so unwind teacher contracts to solve the problem." Sociopaths is the most charitable term I can think of to describe the people making these arguments.

My take from another angle on this subject from the middle of the healthcare debate:

Pre-Existing Ignorance - Healthcare vs. Education

OPOL

Education spending patterns have been abnormal for several years. Publishing used to follow very predictable patterns - no more.

Between the Great Recession and ARRA Stimulus funds we have been living in an era of seesaw budgets for three years. Since education spending lags the general economy by up to 3 years this will continue until at least 2014.

I can remember entire decades where budget flows were so steady that you could predict the entire year within +/- 10% after the first three months. In 2008, 2009, and 2010 the first half of each year told you very little about the second half.

Let us review.

2007 - This was generally a normal year but the slowdown began to appear in the summer when property values began to decline. District Administrators could see the writing on the wall for state and local budgets that depended on property assessments and started to pull back discretionary spending.

2008 - The first of half of the year was slow but relatively normal. As the economy tanked the market dropped off a cliff in the second part of the year. The uncertainty of the election contributed - which Districts harboring funds to make sure they had enough to meet payrolls.

2009 - This year started like 2008 ended, but with the ARRA stimulus there was hope in the air. By September the market flipped to a boomtown through the end of the year as ARRA kicked in.

2010 - Stimulus spending continued to fuel unseasonably high purchases right through the summer months. In the fall the market began to stutter - one month up, one month down. The elections and the uncertainty about the role the Federal Government is going to play in backstopping State and Local budget shortfalls has got many Districts sitting on their hands again - just like 2007 and 2008.

2011 Prediction

So what will 2011 look like? The honest answer is "who the hell knows?" But that has never prevented me from having an opinion.

The big story this year will be the disaster in State budgets. Since over 50% of all spending on education nationally (and more depending on the specific state) comes from this source the crisis here will have a significant impact on education spending no matter what happens at the Federal level. Every penny of stimulus will help - but I don't see a scenario where the Feds can cover the shortfall - palliative care is all we will get.

January to to May - the market will look more like the second half of 2008, with schools and districts conserving funds as the Feds and States sort out who is going to pay for what. A government shutdown over the debt ceiling or other partisan wrangling in DC would exacerbate this further, particularly if the threat of recisions are in the air (which they are).

June-September - Barring changes to ARRA the remaining funds have to be spent by mid-September. Educators will scramble to make sure they maximize their access to these funds before they expire leading to a boomlet in instructional materials. One option on the table is extending the spending deadline - which may actually be a good thing for publishers if Districts get another year to spread the funds over.

This presents a unique challenge to publishers who will need inventory and staff to supply the boomlet. Sustaining this commitment through the first few months of the year will require some fortitude and more attention paid to the pipeline than to actual bookings.

October-December - Free fall. Post stimulus and deep into state budget crises I expect spending in these months to fall to late 2008 levels. Districts will be struggling to meet payrolls and funding for other resources will be very very tight.

Summary

The politicians are in an unenviable position. On the one hand the money really isn't there - particularly at the state and local level where balanced budgets are the law. On the other hand a child's need to learn isn't linked to the economic cycle - and in fact the forces driving the realignment of our economy call for a more educated workforce.

Short changing education helps balance out of whack budgets - but it also puts us as a competitive disadvantage on the world stage. How this question is resolved in the next 2 years will be THE central factor in how the instructional materials market evolves. The ESEA reauthorization will be the pivot point for this national conversation.

As always - getting involved in legislative affairs is one of the best investments a publisher can make. Even if you don't have an impact on actual legislation staying in the loop on what is coming out of the budget sausage maker will give you a leg up on the market.

Update - See this New York Times article for details on how this is playing out in Illinois. ht Tim McHugh at Saddleback.

Congress finally passed some support for state budgets to make sure there are enough teachers as school opens.

Kind of "yay." We accomplished this by planning to cut food stamps starting in 2014.

This comic succinctly captures the essence of our national experience since the summer of 2007 when all this kicked into gear. (ht balloon-juice)

Want to bet she is a teacher?

Don't miss the warning label.

Cheers!

Guest blogger Mike Baum of Sophia Consulting shares his insights on ISTE 2010.

By Mike Baum

In the old Road Runner cartoons, there’s always a point where the slavering coyote, relentlessly and enthusiastically pursuing his dinner, runs off a cliff. But he hangs in mid-air momentarily, falling only when he realizes there’s no longer anything supporting his feet. Walking the floor of ISTE (nee NECC) last week, I thought I heard “beep beep” from time to time.

On the surface it was a very good show. Attendance down a couple thousand from last year, but you expect Denver to draw smaller crowds than D.C. About 200 fewer exhibitors but that’s par for the course right now – and still one of education’s biggest show floors. No one I talked to missed the Elvis impersonator from 2009, either.

Attendees had money to spend. Visitors to the booth of one of my clients often opened the conversation with needs for fall, grants they expected, budgets they still had to allocate. That’s one of the things that make ISTE today such a must-attend for technology companies – unlike a few years ago, a high percentage of attendees are really shopping. And they’re looking for educational solutions, not just gadgets or wiring.

If there was a “buzz” at this show it might be “the year of mobile.” Vendors, sessions, and corridor conversations focused on ways to use iPods, iPads, phones, and even older tech like netbooks, to put applications in kids’ hands more quickly, more interactively, at lower cost. Software vendors are being challenged to make their content run on just any platform teachers have or want to use. The “21st Century Classroom” – all interactive, all the time – fits this paradigm just fine and was also all over the show, with whiteboards, projectors, panels, and student responders, which have proliferated like crocuses in springtime.

All very good, and a genuine trend – but how far can tech buyers run with it before they realize they’ve run out of cliff? ARRA money will only go so far. At her presentation on the future of federal funding, ISTE lobbyist Hilary Goldmann put a brave face on it but had to admit that this time, E2T2 may really be dead. While it could be 2011 or 2012 before our contentious Congress finally agrees on a new ESEA, dedicated tech funding has fewer and fewer defenders. ISTE is trying again to get momentum behind the ATTAIN Act (Achievement Through Technology and Innovation) but the current administration seems focused on other priorities, and the public mood is starting to swing against finding new things to spend money on.

And state budgets will keep reeling for some time from the effects of unemployment and housing-price declines. My airplane reading right now includes the weighty and depressing This Time is Different by economists Reinhart and Rogoff (the title is intentionally ironic). Their historical data indicate that it takes five and six years respectively for jobs and housing to start recovering from major financial calamities. Figuring from 2007 or 2008, take your pick, at that rate it will be 2012 or 2013 before we see improvements, and there’s always a time lag before state tax collections and disbursements reflect the economy. A couple weeks ago I was interviewing the tech director of one of our large urban districts and asked his opinion about the funding outlook. “Things won’t improve till about 2015,” he replied. At the time I thought he was a pessimist. Now I think maybe he’s a prophet.

So should tech companies just go into hibernation for the next five years? Not necessarily. Maybe it will be a good thing to have tech funding merged with school-improvement and professional development initiatives. It could keep us focused on why we’re all in this business in the first place.

Recession or recovery, this country will go on spending about half a trillion dollars on K-12 schools per year. If schools are going to spend some of that money on handhelds or clickers or anything else, it will be because they produce results when teachers really know how to use them effectively. If administrators are ever going to get less twitchy about letting kids use as mobile educational devices the cellphones two-thirds of them now carry (the figure rises to 70-85% when you get past age 11), it will because the educational uses are plain, proven, and easily implementable by teachers who mostly aren’t techies.

Among the educators walking the mile-high floors at ISTE, I saw a lot of principals and other non-tech people looking for solutions. Not “solutions” in the tech sense – solutions to problems with educational achievement. Are we providing the research, the real-classroom models, the teacher training they need? And are we making it plain to them how it works for them? If not, the Road Runner of technology growth in society may just keep streaking along ahead of us while we look around and find the ground under our feet has disappeared.

Mike Baum
Principal
Sophia Consulting LLC
mhbaum (at) gmail

Mike’s education blog:
http://mhbaumk12.wordpress.com/

Yesterday the minority in the Senate ended the chances that the Extender's Bill would pass the Senate. While 57 Senators - a clear majority - wanted to do the right thing a determined minority used procedural votes to force mass layoffs of teachers, firefighters, and police across the country (300,000-500,000).

There are rumors that the two sides are still talking - but most analysts say that any action will likely take place after the Summer Recess in mid-Fall.

It isn't just education that is affected. Over a million people will be dropped from unemployment rolls. As a side benefit Hedge Fund Managers get to keep paying taxes on their multi-million dollar bonuses at a rate (15%) lower than most of the formerly employed teachers and cops (25%).

There is no way this is good news for the economy - none.

They may blather about other stuff - but that is the real effect of yesterday's vote. Don't forget that.

States and Local Governments (SLG) are facing $300 billion in budget shortfalls this coming year. Unlike the Federal Government they can not run deficits. They pay their bills or they go bankrupt (which cities like San Diego are actively considering). The only solutions to this problem is a Keynesian infusion of support from the Feds or mass layoffs and drastic spending cuts.

Keep in mind that 80% of education spending is for staff. The only way to address a significant shortfall in school budgets is to lay off lots and lots of teachers. Schools will cut the other stuff - but there is only so much they can do with that other 20%.

The impact on education will be long term and devastating. The children in the system now will bear the brunt of these cuts in the form of increased class sizes, shortened school hours, and over burdened teachers. This is the choice that was made in the Senate yesterday.

In crisis management mode simply keeping the lights on will be the priority - not reform. We'll continue to hear lots of bombast about global competitiveness, but when an entire state (HI) is considering a 4 day school week that rings a little hollow. If schools are facing a choice between laying off even more teachers or delaying materials purchases another year or two that is an easy choice from their perspective.

The political calculus appears to be aimed at the elections in November. I guess the theory is that if the economy is wrecked even further than it already is then the minority party will benefit from voter unhappiness. Sadly, as political bets go it will probably work.

I know. to many of you this is a harsh indictment. Given the history I don't see any other conclusion. Lets take a look at the two primary reasons given for voting against the bill.

"It wasn't bipartisan"

Hard work and real compromises went into crafting something the minority could support. The original $200 billion deficit financed proposal was cut in half to $110 billion, and to ally concerns of the minority only $30 billion of that was deficit financed. No one denies there is a crisis, there just appears to be one party determined to do nothing about it even when they are included.

We can't forget that a solid majority of 57 supported the bill. It is only the procedural votes - which are not Constitutionally defined - that require super majorities. If you want to see where requirements for super majorities on budget issues will take us just look to California. Feel better?

When this post on bipartisanship in the current political climate was written in February I thought it was over the top:

Imagine trying to negotiate an agreement on dinner plans with your date, and you suggest Italian and she states her preference would be a meal of tire rims and anthrax. If you can figure out a way to split the difference there and find a meal you will both enjoy, you can probably figure out how bipartisanship is going to work the next few years.

In the wake of this vote the analogy is eerily prescient.

"OMFG The Deficit!"

Yes the deficit is a concern. But it has been a concern for 30 years and according to most credible economists we are not in any danger there. If we were in danger the bond markets would be sending a clear signal - they are not.

I have a hard time with lectures about fiscal responsibility from the folks who supported $1 trillion in off the books deficit financed wars. Or $700 billion in TARP money for the Wall Street. Or the Airline bailout after 9/11. Yet when it comes to $30 billion in deficits to support teachers and kids it is "the end of America as we know it." Sigh.

What these clowns should understand (and probably do) is that State and Local Government funding lags the general economy by 3 years. It takes this long for economic swings to be reflected in tax receipts and budgets - particularly property taxes which fund a huge amount of education spending.

That means that we are just entering the worst phase of the recession from local government's perspective. While the general economy may be picking up - SLG needs the ongoing support of the Feds for a year or two more.

Where to from here?

July will tell the tale for school budgets. Normally it is our busiest month of the year. We will see if it signals a pullback to keep what funds schools do have in reserve while States sort out funding priorities in the crisis. That will take some time, meanwhile all our business could suffer.

Is it the end of the world? No - billions will still be spent on education. But decisions will take longer, new initiatives will be fewer and farther between, and genuine reform will be put off for another day. Marginal suppliers will go under, others will have to scale back and hold on. The learning opportunities of a generation will suffer.

As an industry we should not forget this vote. It directly affects our customers in an extraordinarily negative way and it does so for pure political gain. There is no argument that can be sustained about good governance in opposing this bill.

Note: The opinions expressed here are my own.

Are trade shows rising from the dead? Last week at CEC and this week at IRA attendance was up dramatically from last year. CEC went from 5,200 attendees to over 6,500. IRA was somewhere north of 12,000 depending who you believe.

Activity on the show floors was strong and sessions were oversubscribed.

Vendors I spoke with said their lead flow exceeded their goals and that they were having productive and valuable conversations. One company even had to FeEx in catalogs after they ran out at end of the first day. Attendees were not tire kickers but buyers looking for solutions.

Despite this I am skeptical that this is a sustained revival in show traffic. My sense is that this is a short term bubble driven largely by the stimulus. School districts can't put ARRA money towards long term projects so sending teachers and administrators to shows for professional development is a good investment. If I'm right this will last through next year's shows - then attendance will fall off again in 2012.

Several people I talked to also noted that Nashville and Chicago are better draws than Seattle and Minneapolis and that may also factor into the equation.

IRA - Intervention Central

I only had a couple of hours to walk the IRA floor yesterday - but that was all I needed. The show floor was subdued compared to prior years. The big companies were mostly there, but the footprint was smaller and a good 1/3 of the hall was empty space. Those who did show up ditched the rock star lighting and troops of dancers.

What stood out was the focus on intervention and remediation. While basal programs were there they were not the focus the way they have been in prior years. This is probably due to the collapse of the adoption market in the last 18 months - the focus has shifted to Title 1 and IDEA rather than state categorical funds.

Another industry veteran noted that despite the clamor for more technology from schools the paucity of software was surprising. It was still largely a book fair.

Going Forward

We probably won't be adjusting our trade show plans in terms of space or shows but we will probably send more materials and perhaps staff up a bit to handle the traffic. The analysis from the popular post on trade shows vs. web marketing still holds.

When Secretary of Education Arne Duncan made room in his schedule on short notice to keynote the Council for Exceptional Children’s annual convention in Nashville this week it sent a clear message that students with special needs will be front and center in policy decisions from the Obama Administration.

The biggest message was his presence. It left no doubt about how seriously Obama and he feel about improving the lives of students with disabilities. This was welcome because much of the work they have done in this area so far has not been particularly visible.

He laid out a vision for the Administration’s education legislative priorities and the central role that serving people with disabilities will play in ESEA (aka NCLB). The linkages between ESEA and IDEA that were created during the era of No Child Left Behind (NCLB) will also be strengthened and improved.

What follows is a recap of the talk and some thoughts on what this means for the SPED community.

Special Education Is The Civil Rights Issue of Our Generation

He opened by observing that Obama and he believe every child deserves a world-class education. While almost everyone says this, a gap still exists between our aspirations and reality. Subtle prejudices and roadblocks still get in the way of people with special needs.

Most of the talk teed up the idea that we have a historic opportunity to full this promise for all students with the upcoming ESEA and IDEA reauthorizations.

The argument was initially framed around global competitiveness. America simply does not have expendable students if we are going to prosper in an increasingly globalized world.

But he closed this part of the speech by saying that serving students isn’t just about economics. It is a moral issue. In fact he called it “the civil rights issue of our generation.”

He hammered this point home by talking about how the civil rights battles of the 60’s for racial equality paved the way for IDEA in the mid-seventies for people with disabilities. He made a strong statement about how he and Obama are committed to making this promise a reality.

Personally I really appreciated his stand on the role of education in helping people live more fulfilling lives – regardless of the economics. I’m weary of every education policy discussion devolving into how schools are job readiness factories. Of course they are – but they are so much more than that.

Progress Not Perfection

Next he focused on what is working. We have made great strides in the 35 years since IDEA was enacted in making sure a disability shouldn’t stop any child from attending school and pursuing a career.

Students with special needs are no longer turned away at the door, housed in broom closets, or bused to a distant site. Today the 6 million students served by IDEA spend 80% of their time in inclusion classrooms and 95% are in a neighborhood schools.

He told a couple of heartwarming stories of students with special needs learning alongside their peers, eating lunch with them, making friends with them, and demonstrating real leadership in their schools. That society is willing to make this investment sends the message that disabilities alone do not define our work or our worth as human beings. Disabilities are not destiny.

He labeled all these successes are civil rights victories.

First Stop – Enforcement

Duncan at this point pointed out that will all the progress we still have not fulfilled the full promise of IDEA. The data shows us we are getting better – but we must get better faster.

By just about every measure students with disabilities are better educated than just a generation ago. The graduation rate, post secondary enrollment rate, and employment opportunities are increasing but they are all still too low. Students are leaving schools without the skills and knowledge they need to succeed.

The Obama Administration intends to work with schools, districts, and states to enforce existing laws. While this was a relatively passing remark it does mark a change in emphasis from prior administrations. Generally speaking enforcement of existing statutes has gotten short shrift over the past couple of decades (the IRS audit budget was cut dramatically while the economy grew).

For publishers who help districts meet their obligations under IDEA and ADA a renewed emphasis on enforcement means your customers will be open to solutions that help them meet both the spirit and the letter of the law.

ESEA Reauthorization Linked To IDEA

Making ESEA a building block for the subsequent IDEA reauthorization isn’t a new concept. Better integration began with NCLB. But it appears that Obama intends to create a much tighter link between the two, in fact Duncan specifically called it “one seamless approach.”

The administration also isn’t going to scrap NCLB. They want to build on what worked, but fix the things that didn’t. Much of this has been reported elsewhere.

What hasn’t gotten much press is that Special Education will be included in ALL aspects of ESEA. This is great news for the community of educators, professionals, parents, and publishers who serve this population. I believe part of why Duncan was willing to make the time to be in Nashville was simply to drive this point home.

There were three areas that he specifically called out with regard to Special Education – accountability, assessment, and teacher quality.

Accountability

SPED will fully participate in ESEA’s accountability systems. NCLB did this right by requiring the participation of all students. This highlighted achievement gaps and forced districts to address populations that were underserved.

But NCLB’s assessment regime had a central flaw - it failed to measure and reward growth. From Duncan’s perspective we shouldn’t label solid progress towards goals as failure. "It is wrong, inaccurate, and demoralizing." A school that progresses from 2 grade levels behind to 1 level behind has NOT failed – but under NCLB it has been labeled as such. He quipped that “NCLB has 50 ways to fail, very few to succeed.”

The new accountability system will be based mostly on student growth and will recognize schools that show meaningful gains. The law will continue to require teaching students with disabilities and schools will also have to improve the performance of the highest achieving students. The focus on subpopulations isn’t going away.

The vast majority of schools will also have more flexibility to implement locally designed ideas to reach the benchmarks. He believes the best ideas come from the local level.

This does not mean that schools with chronic gaps and poor performance get a pass. The school closure in Central Falls RI in February makes clear that Obama backs strong measures where needed.

In an interesting twist this accountability will also escalate to the district level. District level gaps in progress may not be apparent at the school level.

Assessment Grant Competition

In order for this to happen Duncan recognizes that states will have to significantly improve existing assessments – we must move beyond filling the bubble tests.

In the ESEA blueprint and Race to the Top (RTTT) they are putting investments in building the next generation of assessments. He specifically cited including technology to measure a range of skills that have been difficult to measure.

I think more importantly there will be an emphasis on formative assessments which provide real time feedback to improve teaching and learning.

Assessment reform is especially important for special education. The majority of SPED students take the regular state tests and a few can take alternate assessments. Building assessments that are both accessible and deliver meaningful information requires specialized expertise. The DOE will run a competition to improve special education testing tools.

Students with low incidence disabilities require the same quality of assessments but the development of those tools doesn’t make commercial sense given the size of the sub-groups. It makes enormous educational and civil rights sense – so we were pleased to see the government step in to make this possible. We were also excited to see that it will be run as a competition – allowing multiple approaches which will dramatically increase our odds of finding what works.

Teacher Quality

The last area he talked about is recognizing “the uniquely transformative power of good teachers.” The Obama Administration is investing $4 billion in recruiting, training, and retaining teachers. They are going to have a specific focus on high needs areas - which includes SPED.

This is great news because the turnover in Special Ed is so high. The maturity and classroom judgment that come from experience are at a real premium. Recruiting and rewarding teachers who choose this path is something everyone in the special needs community should celebrate.

Saving Education Jobs – Foundation for Reform

A final point. Secretary Duncan echoed his remarks to Congress last week about the pending catastrophe in teacher employment due to plunging state budgets. He made the point that education reform and saving education jobs go hand in hand. At this time we cannot afford to take a step backwards.

I commented on this last week and strongly encourage publishers to get involved in supporting this effort with whatever influence you have or can create in Washington.

Conclusion

It was really nice to see the Administration make a concerted effort to reach out to the professionals who serve students with special needs. It sent a strong message that the progress we have made in recently will not be lost, and in fact should be accelerated as education policy evolves in the next several years.

Watch the excerpts from the speech below:

Federal ARRA stimulus funding has been keeping schools around the country on life support for the past year. Despite significant layoffs around the country it headed off catastrophe in many states. That era is coming to an end later this year or early next year.

It was heartening to see Secretary Duncan take up the cause in a statement issued today. Unless Congress acts and provides a second round the deteriorating tax climate at the state and local level is going to cause massive disruption to the education system in 2011 and beyond.

“We are gravely concerned that the kind of state and local budget threats our schools face today will put our hard-earned reforms at risk,” he stated. “Every day brings reports of layoffs, program cuts, class time reductions, and class size increases.”

Potentially hundreds of thousands of educators and other personnel could be laid off if action is not taken quickly to help states and districts cover shortfalls...Literally, tens of millions of students will experience budget cuts in one way or another.” Moreover, schools, districts and states that are working so hard to improve—will see their reforms undermined by these budget problems.

The Secretary urged members to consider another round of emergency support for America’s schools, similar to the aid provided to states through the American Recovery and Reinvestment Act (ARRA). “If we do not help avert this state and local budget crisis,” he warned, “we could impede reform and fail another generation of children.” (emphasis added)

Richard Sims, Chief Economist at the NEA, has spoken clearly on the connection between property values and state and local tax receipts. It takes three years for the funding impact from a change in home values to affect school budgets. In other words - we are just starting to see the most serious impact from the decline that started in 2007. If prices bottom out this summer - which is iffy given a potential wave of foreclosures ahead due to ARMs resetting - it will be 2014 before budgets START to recover.

States can not engage in deficit spending and will balance their budgets on the back of massive teacher layoffs, school closures, etc. In most states education is the single biggest line item and accounts for 50% of the budget. While it is always the last thing Governors want to cut they simply won't have an option in the years to come.

The only cavalry that can save the day here is the Federal Government stepping in with additional deficit spending to prop up education budgets.

• Is the political will there to step and engage in additional deficit spending?
• Will advocates for privatization use this as a political opportunity to destroy public education? Many of these folks are also strongly anti-deficit.
• Will reform efforts be set back decades by draconian cuts?

These are not idle questions as we head into 2011-2014.

This battle will largely be fought in the next 12 months and those of us who serve schools should get shoulder to shoulder with any educational association we have a stake in supporting. Join in this fight!

Seth Godin makes a critical point for instructional materials.

The platforms are changing all around us. Mobile phones, iPad, Kindle, Android, white boards, Moodle, etc.

Are you paying attention?

I refer you to four part series about technology substitution in the textbook publishing industry. Don't write the changes we are seeing off to temporary market fluctuations. By the time you notice the real trend it will be half over and you have little chance of catching up as the change accelerates.

The economic meltdown is only adding gasoline to a fire that was already going. The tighter funds get the more motivation our customers have to seek efficient alternatives to print.

How much of your development budget are you spending on R&D? The temptation in a down market is to hunker down and focus on low risk projects. I suggest that if you are not spending at least 10% of your development funds on cutting edge projects you are at a high risk of being irrelevant by the time the education market turns in 2014.

The economy has already had a huge impact on education budgets. But if you think it is bad now wait until the ARRA stimulus goes away. This chart tells the whole story.

Bright Green - Over 30%
Olive Green - 20-30%
Dark Green - Under 20%
White - Surplus

Nine States have deficits of over 30%, and this groups includes powerhouses like California, New York, Illinois, and New Jersey. Only Montana and North Dakota are not in deficit.

This is being driving by two factors. First, the sharp decline in property values is finally catching up to tax receipts. There is a three year lag in this mechanic. IF housing prices bottom out this coming summer as predicted that means we have three years from then before real estate taxes stop falling. 2013.

The second factor is the sour economic situation and the unemployment that goes along with it. The impact here is already moderating as these numbers turn. Unemployment has a relatively immediate impact on state incomes - as payroll taxes fall so do sales taxes while unemployment benefits soar. But it also bounces back faster when things improve.

Impact on School Budgets - No Posse Coming

This crisis is going to have a long term impact on education and the companies that serve this market. The Stimulus dollars have moderated the situation this year (and next). But, after 2011 the Feds are not coming to the rescue.

Investing in education is a high priority for the administration and makes sense in a downturn - but don't let that stop congress from sitting on their hands. Anyone who looks at DC right now and thinks there is political will to spend more is fooling themselves.

In comments please discuss how you think districts will react to this new reality.

I've written other posts on the choices districts face in this situation. See:

Government Spending on Children
Budgeting for Stimulus (company view)
SIIA Ed Tech Business Forum
Horrible News on Education Employment
Holy Crap What is a Major Crisis?
Life on the Tip of the ARRA Spear
Will ARRA Funds be used for Change or Propping up the Status Quo?
History, Poetry, Hope, and Fear

And much more on the Economy and Education Tab

FETC 2010 provided an opportunity to assess the health of the Education Technology market. In today's guest blog my friend Mike Baum shares his take on the highlights and lowlights of this year's trade show

By Mike Baum

Coming to Orlando from Wisconsin in January, I expect warmer weather. I didn’t expect 50 degrees to be greeted as a warming trend. And when I saw the conference center adjacent to my hotel was hosting a national beekeeping convention with the alarming title “Keeping the Hive Alive,” I began to watch out for falling metaphors.

Traffic Report

The Florida Education Technology Conference (FETC) 2010 wasn’t all bad news by any means, but true optimists had their work cut out. Attendance and traffic, while possibly higher than last year’s debacle, were light and sporadic. Exhibitors by one account were down by 100, with absentees divided between business casualties of 2008-09 and firms keeping powder dry for ISTE (nee NECC) in July and possibly TCEA next month.

At least one long-time major exhibitor has permanently downgraded FETC to a “regional show” vs. the must-attend national show it once was. Companies still seem to consider FETC an important “announcement show” – more in a moment – but that’s due less to real significance and more to just the calendar, like the New Hampshire primary used to be.

Attendees

Booth visitors were mostly classroom teachers, some school administrators; of the few district people I encountered, most were IT with focus on the “T” – not engaged in curriculum decisions. Some shoppers, few buyers, at least at this moment.

To some extent this was to be expected: continued weak economy, a state whose budgetary problems are in the top 10 or 15, still early in the decision-making year. And as Lee’s last entry of 2009 noted, spending is likely to come even later this year than usual, nationwide. One bad swallow does not the Heimlich Maneuver make. Still, I think one can reasonably draw some conclusions – both negative and positive.

Implications

Negative: with apologies to my beekeeping friends, the buzz is over, at least for a while. One presenter at the show pointed out that we’ve come off a decade of education spending at 2X GDP growth, and that’s over. Much of that money came from rising property taxes driven by the real-estate bubble. The splash from that burst bubble is likely to dampen ed budgets for the next 2-3 years.

Tech spending may be further retarded by success: technology is ubiquitous in society and pretty plentiful in schools, so it’s not a question anymore of adding technology so much as what you do with what you’ve got, to really impact educational outcomes.

Vendors also have an increasing amount of “good free” to compete with – perhaps a dozen FETC sessions touted free resources from everyone from district or state consortiums (Florida especially is rife with them) to our friends at Google. So we all will have to come up with compelling educational reasons to make incremental or replacement purchases, at least for some time yet.

Positive: life goes on, technology is here to stay, and even if the market is stagnant there’s always gain in market share. NetTrekker formally announced expansion of their popular safe-search and web resource platform to the U.K. Discovery Education announced plans to enter the next Florida adoption head to head with traditional textbooks, as they did successfully in Oregon. Online delivery of content isn’t a panacea, but where it provides schools with a clear advantage it will sell. Expect pushback from the traditional publishers, of course, but historically they have trouble really focusing on ed tech.

What To Do?

The key, I believe, is finding fertile spots – I hate to call them “niches” – where technology makes it easier to do things educators want to or must do in light of larger trends. Such as?

Professional development – increased demand for “job-embedded” PD, which has to be largely online-enabled.

Writing – several people have pointed out that kids are actually writing more than ever before, between texting, blogs, and social networking – and if those messages are often short and cryptic, well, so is haiku.

Assessment – isn’t going away, must be delivered in short, teacher-friendly bursts to be really effective in improving outcomes.

Games – to many, a four-letter word, but increasing research (as presented by Lee at a fascinating session) shows they can demonstrate real educational outcomes if properly designed.

Targeted applications that help individualize, improve academic learning time, increase motivation.

Up here in the frozen north we know that a hard freeze is necessary every so often – kills mosquitoes, and many seeds actually require one to germinate in the spring. Maybe that’s an encouragement while we’re working to keep the hive alive.

Mike Baum
Principal
Sophia Consulting LLC
mhbaum@gmail.com

Mike is a business growth consultant specializing in K-12 marketing and product strategies. Former CEO of Renaissance Learning, he has 15 years of experience in the education market and over 25 years of helping companies become bigger companies.

While we hash out what ARRA Stimulus funds mean for education there are larger issues at play in how we allocate public spending on children.

The New York Times has a good piece today that links to several good resources on this topic.

In a nutshell - 2.2% of GDP declining to 1.9% by 2019.

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

Education jobs fell for the first time since 1959 while enrollments were increasing. There were only three other years in the past 50 years where education employment shrank - and all of them were during periods of declining enrollment as the baby boom petered out.

Business Week has the details.

The decline was -0.9%, or 121,000 jobs lost. It is also the biggest drop by a wide margin in both percentage and actual jobs (the previous record was 1981 where it was down -0.4% or 29,000 jobs).

The data doesn't show the breakout between Higher Education and K12 but my hunch is that the data above is masking a much bigger drop in K12 employment. As people lose jobs they flock back to higher education. This means an increase in employment in that sector. I've heard stories from Professors of enrollments increasing 100% in some departments.

Books Sales Take An Even Bigger Hit

Anecdotally the Higher Ed divisions of the major publishers are busy and doing well - particularly in the area of e-books. K12 Basal publishers are feeling the pinch big time and the supplemental market is hit or miss.

Looking at the textbook sales data from AAP we know that K12 sales through July were down -27.6% from 2008 - with the bulk of the pain being felt on the Basal Textbook side. Higher Education sales were down by -19% - and much of this is due to substitution of e-books which has a significantly higher usage rate at Universities.

As I noted a couple of weeks ago the stimulus dollars are reaching some sectors and I suspect that employment - like instructional materials budgets - is up in these submarkets. IDEA and Title 1 are the most notable areas.

A Ray of Sunshine

The scenario isn't all gloom and doom - although if you are teacher with low seniority or a basal sales rep it isn't cheery. Less than 15% of the first wave of the stimulus dollars for education have been encumbered. With 85% yet to come and signs of life across the market we can expect to see some healthy recovery in the next 12 months.

Hopefully for the students we serve this will mean more teachers and high quality materials that support their learning.

My last post on the difficulty of educational reform got me thinking about that other massive system we are trying to reform - healthcare. One way to understand the healthcare system is to compare it to education - where we have had universal single payer access for over 100 years.

In that vein - what would education look like if if it were run like the healthcare system? By transporting our healthcare practices to another environment we can strip away the patina of familiarity and acceptance and see some of the insanity in our system in a harsher light.

Well meaning people can disagree strongly on the specifics of what is needed (and they do). I found as I wrote this that I had to examine my own pre-conceived notions. For example - state funding for education creates some of the same problems the system of private monopolies in medical insurance forces us to wrestle with. The public option in healthcare is the mirror image of charter schools in education - both aim to open up competition and provide alternatives.
There is more than enough idiocy go around here - in what follows we don't spare Doctors/Teachers, Patients/Students/Parents, Politicians, Insurance Companies, and Lawyers.

THE SYSTEM

• We would spend twice as much as any other industrialized country on education and our results would put us at the bottom of the list in learning outcomes. Despite this, many would go around touting that we have the best education system in the world, providing walking talking evidence that we need a better educational system.
• Most people before the age of 65 would not qualify for public education. It would ALL be private schools funded by insurance largely paid for by employers. Parents out of work? See you at the mall kid.
• 18%, or 9.7 million kids, would not qualify for schooling. Enrollment would require evidence of Education Insurance. The uneducated would be encouraged to pull themselves up by their bootstraps by trust fund pundits in the media. Most would have no clue what a bootstrap is (pundits or illiterates).
• Pre-existing ignorance would bar you from receiving affordable education insurance. Failure on any test, quiz, or paper - ever - would be cause for termination of coverage if not disclosed in advance. Students would routinely be subject to recision for ignorance of their own ignorance. This would make sense to people.
• 60% of all bankruptcies would be due to Learning Disabilities and Special Education needs. 60% of these people would have Education Insurance when they discovered their child needed special attention. In order to qualify for subsidized care you would need to go bankrupt, lose your home, or get divorced.
• For uncovered people any learning needs would be covered by intensive personal tutoring provided at "Emergency Learning Rooms." Services in these facilities would cost 10x what regular classroom instruction costs and would be passed on to the insured population as part of their premiums.
• Hordes of 4 year olds getting socialized government education would show up at congressional town halls and throw tantrums about keeping government out of their socialized education....
• While taxes were cut by $1,500 a family per year over the past 10 years private education costs would have risen by over $5,000 per family - a net increase of $3,500. Public subsidized education, which would be a net savings to the average family, would be popular with over 70% of the people. Despite its popularity politicians would refuse to consider it. The profits of their major donors in the education industry would be a higher priority for them.
• Schools would be overflowing with supplies. No need - however specific - would go unmet. Meanwhile, patients in hospitals would be encouraged to hold bake sales for things like sheets, syringes, and bedpans.

EDUCATION INSURANCE

• Education Insurance would consume 25% of the money spent on education for administrative overhead and profits. Free market zombies would earnestly argue that this is efficient. By comparison, administrative costs for socialized education take an average of 5% [as true for Medicare as it is for Education].
• If you needed access to an expert on a particular subject (economics?) you would need permission from your Education Insurance company. This permission would be routinely and randomly denied by insurance company "Ignorance Panels" even if your Homeroom Teacher thought you really needed the information. The bureaucrats making these decisions would fund fierce lobbying efforts to keep more efficient government bureaucrats out of their turf.
• Education Insurance CEO's would each make enough to fund an entire school district every year. Despite the gross inefficiency of their companies [see above], any attempt to challenge this allocation of resources would be met with resistance.
• Education Insurance Companies would operate as monopolies within large sections of the country. Over 90% of the coverage in many states would come from one "provider." Due to strong lobbying efforts congress would exempt these companies would from anti-trust laws.

STUDENTS

• 70% of the money spent on education would occur in the last year of life. Heroic efforts would be made to teach doddering seniors philosophy and particle physics in their waning days. Family savings would routinely be wiped out by intensive technology based instruction over the last couple of weeks of life.
• Efforts to get families to think about spending money at more appropriate developmental stages would be decried as "Ignorance Panels" and would be stripped from any legislation. Grandparents would beg their heirs to keep them from memorizing the state capitals in their final hours.
• There would be no incentives for people with access to insurance to make good educational choices. If you have education insurance there would be no difference in cost regardless of the lifestyle choices you make. Reality show addicts who avoid anything involving the written word would pay the same as those who watch PBS or do crosswords. Ignorance would be bliss.
• The concept of preventive learning to help people better themselves would be seen as an non-reimburseable personal choice under most Education Insurance plans. Electives would only be available to the economic elite.
• Many of the wealthy would purchase cosmetic learning - fooling no one but themselves.

TEACHERS

• Teachers Unions would be some of the strongest advocates for reform. They would beg for more accountability and a rigorous focus on outcomes.
• Teachers would charge by the learning objective and would make commissions from the testing and textbook companies. The faster they rush through lessons and the more tests and materials they could order during the process the more money they would make.
• It would take 8 years to become a teacher, including a couple of years of 24 hour teaching shifts.
• Teachers would not receive a tenured position after 2-5 years on the job. They would be subject to the labor market fluctuations just like everyone else.
• But - as licensed professionals - teachers would be paid 2-3 times what they make today.
• Society would accept a system of Educational Malpractice suits against teachers. "We'd signed him up for Chemistry but it conflicted with Calculus" complained a typical set of parents. "So they slotted him into English Literature and now he wants to be a Romantic Poet. The lifetime costs of this tragic shift in interest are in the millions of dollars - its only fair that we get some help with this."

IN CLOSING

I hope this attempt to examine this question with a little humor has opened some eyes. It could have gone on much longer - but I hope this makes my point. Universal access to education has on the whole been a huge success in our society. We should have universal access to healthcare as well for many of the same reasons. But the most fundamental reason to reform healthcare is that it is a moral challenge to our culture, in the same way education is.

Analogy is an effective educational strategy - with the ability to speed comprehension in the same way a power drill speeds home repair work. But it also has its limits. This has been a fun post to write - but I have no doubt it offended some people I hold near and dear. If I have - my apologies.

Education has its own share of thorny issues - and the pressure there is in the opposite direction of healthcare - towards more privatization. But given the out of control costs, gross inequality, and life and death impact, healthcare is the higher priority. It is good that we are tackling it first.
The fight over education reform will come up next year when the education act is up for renewal. Perhaps then we'll reverse this lens and see what Healthcare would look like if we ran it like education.

The Superintendent's panel at EdNet this week featured a discussion about education reform that was like a cold bucket of water to the face.

The Supers were teaching us about inertia, the tendency of objects to maintain their current state. As Newton himself put it:

The vis insita, or innate force of matter is a power of resisting, by which every body, as much as in it lies, endeavors to preserve in its present state, whether it be of rest, or of moving uniformly forward in a straight line.

The panelists were discussing what will change in the next 5-10 years in education. They were looking globally at the overall system (teacher evaluation, bell schedule, technology, instructional materials, funding flows, etc.). In this context the Superintendent of one of the largest districts in the country (LACOE), in a state (CA) that is experiencing a state of extreme financial distress, stated that she didn't think anything significant would change until we had a "major crisis."

If what we are experiencing right now isn't a major crisis I shudder to think what the hell would fit the definition? National bankruptcy? Nuclear Holocaust?

The Superintendents do expect to see change, but it will be small bore. They believe meaningful reforms will happen on a pioneer basis in a few schools and districts. But the larger issue of systemic education reform will require an even greater crisis than we currently have.

The system is so large and has so much inertia that even those with the will and positions to drive change don't hold out much hope for progress.

Think about that.

Special Education appears to be the first K12 market segment seeing the education stimulus dollars flow in volume.

At PCI Education we saw our numbers start to move up towards the end of May. By August we were roaring on all cylinders. As a private company we don't report out our details, but July was up over prior year and orders booked in August were more than double what we saw in 2008. I've heard through the grapevine that Cambium is in the same boat.

What is particularly stunning for us is that according to the reports on the USDOE's site by the end of August only about 15% of wave 1 of the IDEA ARRA funds had been committed. This handy report shows all the stimulus buckets for education and how much each state has already spent - bookmark it if you don't have it.

As I meet with other folks around the industry I'm not hearing similar stories about revenues. Some people have seen a modest pick up, but so far other segments seem to be lagging behind us. So the important question is - is there something unique about Special Ed or are we just on the leading edge of what everyone else will start seeing soon?

Timing

The Special Ed and Title 1 dollars were the first education stimulus money's released to the states back in April. Given this, it makes sense that our customers would see the funds first.

It took a full 8 weeks before we even saw a modest uptick and a full four months before we were comfortable that we were seeing a true trend. At months 5 and 6 we seem to be fully into it.

I would be interested in hearing from others in comments if you are seeing similar patterns. As confirmation - we only started hearing from people at the District level that they had the funds in hand towards the end of July.

Market Cycle

We also know that the regular IDEA funds were released as normal in July. Since districts usually order most instructional materials in the summer, what we might be seeing is educators spending their regular IDEA funds in anticipation of using the stimulus funds for salaries etc. later in the year. Even if this is true - which given the restrictions on using ARRA for avoiding the funding cliff doesn't seem too likely - we are seeing a huge spike in business.

The bad news for other publishers is that if ARRA funds for your products were not available in the summer buying months you may not see the big bump until next summers buying season. We do expect more of a bump in November/December than normal as schools buy materials for the spring semester - but the big buys will come in 2010. The good news - districts have two more years to obligate the funds so they won't loose the funds at year end.

Clear Guidelines

One of the advantages Special Education has is that the IDEA funds are specifically earmarked and because the program is decades old the guidelines are clear. As an established funding arena it may just be easier for districts to start spending these funds first because they don't have to engage in all the internal negotiations more ambiguous new programs (like SFSF) come with.

On top of this, because the Feds plan to audit the spending for compliance, school districts may hang back for more complete guidance in other areas before being comfortable spending the money.

Funds may be taking longer in other markets because there are two additional steps involving a lot of politics that Special Ed can ignore.

1. Get clear guidance from the Feds on what is allowed
2. Negotiate within a district on how the funds will be spent

New Products

Some of our particular spike may also be product related. PCI has two new comprehensive reading programs which are being well received in the market. PCI Reading Program and our new Environmental Print Program which are for students with intellectual and developmental disabilities at the middle and high school level. These are selling very well and this is driving some of the spike in our business.

The good news is that if you have something similar in terms of new products the stimulus funds will give them wings into the market. The even better news is that this doesn't account for all the activity we are seeing.

If you have been skimping on R&D and don't have recently released product this may be more of a problem for you - schools still want fresh copyrights!

Conclusion

I believe we are among the first to see what other publishers will start seeing as we get into the fall. There are a couple of unique things about Special Ed and about PCI that may be accelerating the funds coming our way - but the funds will flow. We expect the pace to continue for the next several months and to peak in the summer of 2010.

Perhaps the best news in all of this is that the spike in business is pushing us to do exactly what the act was intended to do - we are hiring for several new positions.

Doug Stein of Memespark has some commentary to share on ARRA and innovation.

By Guest Blogger Doug Stein

I don’t know if you saw this article. It details how one district is spending the ARRA education stimulus money:

• Most of the 6.5 million will be spent to keep teachers in place
• 1.4 million in Title I will be used to outfit all K-5 classrooms in Title I schools with:

• SMARTboards
• Clickers
• Audio systems
• FASTT Math (Tom Snyder’s LAN-based system)

• SMARTboards in all 9th grade remedial Algebra and English
• $51,700 to hire one technology teacher to train the other teachers…

In other words, nothing much will change in how they educate. SMARTboards are a great *sustaining* innovation that (with the right software) makes the “sage on the stage” more engaging (and hopefully more effective). Unfortunately, in themselves they won’t help drive disruptive innovations such as adaptive or differentiated instruction.

Multiply this by thousands of districts and we’ll have spent a lot of money putting lipstick (and Chanel) on the pig.

To be fair, the one-time nature of the money would mitigate against using it to fund long-term programs; it’s always easiest to spend one-time money on things where you can point-and-grunt to prove you didn’t’ waste it. I’m still hoping some insightful districts will use it instead to “lubricate” the transition to better educational models.

[Lee's note: I'm hoping many companies also use the one time boost in sales to respond to the disruptive changes the industry is facing regardless of the economic climate. This is an opportunity to drive change for our customers and for ourselves.]

Moodys* has completely withdrawn credit ratings for Houghton Mifflin Harcourt (HMH) after downgrading it to high risk just last month. This action means Moodys believes there is a high probability of default. From a practical standpoint this means that it will be harder and more expensive to service the company's $6.7 billion in debt on $2.1 billion in revenue.

According to the Irish Times the rationale was:

"the business risk and competitive position of the company versus others within its industry; the capital structure and financial risk of the company; the projected financial and operating performance of the company over the near-to-intermediate term, and management’s track record and tolerance for risk,”

Ouch.

The timing is particularly inauspicious as stimulus funds for education are just starting to show up in purchases of instructional materials. This should accelerate rapidly into June and July.

If the company is going to fail, it is in the interest of schools and the publishing industry that it happen as gracefully as it can. Many of the lenders have already agreed to relaxed terms which is a good sign.

How HMH would break up and be absorbed by the other industry leaders is an interesting question. There would be obvious questions about anti-trust issues since so much consolidation has already occurred in the industry. The many venerable imprints and popular materials would continue to hold value so they would ultimately find a home, probably with some kind of private equity play. The question would be at what price in this market?

Hopefully for all our friends at HMH the tide will turn once the ARRA money is flowing.

*Moodys requires a free account to access information on their site.

At 35,000 feet, with a steaming Starbucks and a purring iPod I read my Grandfather's memoirs last Wednesday. I'd already put in several hours of work when I decided to crack the sheaf of Xeroxed reflections written three years before he passed in 1964.

Ninety eight years ago in the summer of 1911 he was young Officer in Training in the English Army. Then poetry happened.

"I was on a march across Salisbury Plain in full regalia because we were going to sleep out that night. It turned out to be the hottest day on record and out of 600 more than 200 collapsed on the way. We were not a happy company, but we managed to bathe in the river when we reached out destination and that revived us. At night we lay down on the ground near the old ruins of Stone Henge, the oldest and most astonishing group of temple stones in England...The evenings are very short in England in summer and I think it was shortly after 4 in the morning when I was stamping around trying to get some circulation in my cold feet that I noticed the sun starting to rise over the old temple stones. At the same moment there was a racket and over the stones came one of the earliest aeroplanes in the world, the first I had seen and about 1,000 feet up. I was looking at a combination of the oldest and newest in the world. While I stood transfixed the motor of the plane conked out and the plane wobbled all over the place, but finally landed right side up. We rushed over and there was the pilot strapped in but shaking so hard he couldn't do a thing. We unstrapped him and laid him on the ground to carry on his shaking because he had had a close brush with death."

It was indeed one of the first. The British formed their first Airforce units in April 1911- the Air Battalion of the Royal Engineers. They had a total 57 pilots - I'm assuming 56 after this incident.

Harry Wilson emigrated to Toronto in 1913 and as a result managed to avoid the generational genocide of 1914 and beyond. Almost all of his college friends perished in the war. The rest of the his story is woven through the 20th Century, moving to the US, pioneering research in Radio transmission, Mayor of his town during the Depression, Entrepreneur in his 50's and 60's.

It is easy to lose sight of how far we have come in so short a period of time. Ninety eight years from crash landings at dawn to email, coffee, and a book in the few short hours it takes to get from Austin to Seattle (with a stop for a sandwich in Denver).

Times are tough, and we have difficult choices to make, but the conditions of our existence have shifted so quickly in just two generations that it makes me optimistic for the day when this economic blip is over. In the long view we'll be just fine.

Its the short term that scares me. The 20th century was the most violent in our short history. MIllions perished in a long running war of ideas and money as we sorted out the best way to organize and control an industrialized society. In the ocean of dislocation that marked this era hateful ideologies took root and were tools of power for the greedy and delusional.

As we pass from industrial to information economy the dislocations will be no less jarring at an individual and national level. Witness the death of newspapers (ironically reported daily) which is both a social transition and a personal tragedy for those who made their living in the industry.

As our collective lives improve many individuals pay an extremely high price. Education in this context is not just about having the job skills to adapt, it also means having the social and networking skills to contribute to the well being of our friends, family, and the endless stream of strangers who touch our lives. This wisdom is both ancient and urgently modern.

If you publish instructional materials are you part of the solution?

This article is based on notes from a panel at the Ed Tech Industry Forum in New York that took place in December. The insights the panelists shared are no less relevant now that we are into the new administration and sorting out the economic stimulus.

The panel consisted of:

• Moderator - Todd Brekhus - VP and CMO Plato Learning
• Francis Alexander - VP - Scholastic
• Robert Iskander - CEO VIP Tone
• Dr. Steve Ritter - Chief Scientist Carnegie Learning

The panel members are operators which stood in contrast to most of the investor oriented agenda at the ETBF.

The common threads that emerged from the comments are summarized as:

• There is opportunity in this economic climate - children still go to school and it is a political priority.
• Everyone needs to sharpen their game and focus on articulating value more effectively.
• SaaS is a mixed bag - lowering initial costs but setting up a long term commitment School Districts may hesitate to commit to in this climate.
• The Obama Administration will be friendly to NCLB reform and technology.
• Technology enabled individualized instruction is a growing trend.
• Customers are implementing books first, technology second.

The panel organized the discussion around a few core questions and it is presented below in that format and sequence. I have generally refrained from editorial comment - even when I disagree with a panelists statements. As you read the comments remember that some of the them were tempered by the fact that both Plato and Scholastic are publicly traded.

Q - The Education Market has observed downturns in the past, yet companies have come out stronger with new products and more efficient business models. What is your view of the current economic situation and the education market.

Francis Alexander (Scholastic) - There is one evergreen resource - children. There is opportunity - but you have to be a lot more focused and sharper about how you approach your customer base. Even in California there are categorical funds that are available. Warren Buffet still sees education as the one growth sector in this economy. There is still a demand for innovation and schools have an urgency around closing the achievement gap and improving test scores.

Scholastic has found that a message about being safe and proven and being proactive about helping customers find federal funding for products resonates.

Robert Iskander (VIP Tone) - The economy is disruptive on a scale that was unanticipated even 3 months ago at EdNet. Education is going to be fine - the downturn will be selective. Companies that have a balanced portfolio of consumer and enterprise will do better than pure play on one side or the other.

There are areas of growth - but they share a focus on cost savings for the customer. Virtualization, technology consolidation, etc. Value propositions that will save money based through innovative technologies will be the winners. It will be a selective process. Virtual learning will keep travel and other expenses down.

Steve Ritter (Carnegie Learning) - Making the transition from relatively good times is going to require a huge amount of focus. It requires knowing your customer and keeping them satisfied. One of the nice things about education is that doing well saves them money by reducing dropouts - efficiency is not just about running operations less expensively but about improving educational outcomes the first time around.

Todd Brekhus (Plato) - Subscription based SaaS models are going to be a real challenge from an ongoing retention model because budgets are under pressure. On the flip side the up front cost of SaaS is lower so it is a mixed bag. They work hard to define a return on investment in dropout prevention etc. and articulate that for their customers. The ubiquity of data systems is helping here. Forty two states now have data systems to monitor policy in action.

Q We are at an inflection point. What is your long term view of long term trends.

Steve Ritter (Carnegie Learning) - More individualized instruction is a broad trend.

Robert Iskander (VIP Tone) - Everything is going to move to a web service given the cost savings vs. legacy systems. Content as a Service, Software as a Service, People as a Service. How do we integrate all of these into a single platform with 24/7 delivery and platform independent. This is what his company does - so his perspective is understandable but a bit narrow on this topic.

Francis Alexander (Scholastic) - ACT.

• A - Accountability is stronger than ever even post NCLB but the nature of the assessments will change. Obama's people are tired of "autopsy" assessments - they want more "well kid" check ups (more formative assessment and less focus on summative measures). Response to Intervention (RTI) is going to accelerate because of this.
• C - They expect a big push to college readiness starting all the way back at early childhood education. This will be accompanied by a move to IEP's for all students and long term mentors beyond their teachers.
• T - Technology is the enabling environment for this. It will move the emphasis from textbooks to on-line delivery.

Todd Brekhus (Plato) - Interoperability is a big issue. SIFA is going to a web services model. When combined with content metadata from the publishers we are approaching a point where differentiated learning can be tied to accountability.

Q - We have a major political change in Washington and throughout the country. What impact will will these changes have on funding at the federal, state, and local level. How will this affect the education market?

Francis Alexander (Scholastic) - Obama's team are starting to talk about where education fits into the stimulus package. The UKs stimulus package does address this - particularly for infrastructure things like e-Rate. Obama has talked about $500 million education in matching grants for education technology. [Note: the final Education number in the stimulus was over $50 billion].

Robert Iskander (VIP Tone) - e-Rate is tied directly to the economy since it is tied to phone bills. As people switch to VOIP it will decline. NCLB is a bit question mark. The eventual revisions may involve more technology but it isn't clear yet. Hopefully the bailouts will affect the Department of Education as well.

Steve Ritter (Carnegie Learning) - He expects Obama's administration to be more friendly to education technology. They also expect to see technology spending to become more mainstream in schools - it is becoming part of the way they do business.

Q - What tactics can companies employ during a time of economic difficulty to remain healthy and vibrant.

Robert Iskander (VIP Tone) - If you don't have cash you were expecting business as usual. Companies in this position are going to be making severe cuts. Strategic investments will have to wait. If you do have cash in the bank this is a great time to buy people who don't have cash.

Steve Ritter (Carnegie Learning) - The key is focus. Don't try to be everything to everyone. Geographic focus on a state by state basis. A lot of schools don't have enough bandwidth to run SAAS - so a local installation option is important.

Francis Alexander (Scholastic) - Everyone needs to control costs and cash. They expect the market to come back and when it does being in technology will put you in the right place.

Todd Brekhus (Plato) - Stay hyper-focused on delivering only the features that are essential and usable to drive renewals and keep your costs down.

Q - There are a lot of smaller companies and start ups here at the conference. What advice do you have for them to keep in mind during this time in our economy?

Steve Ritter (Carnegie Learning) - Focus more on your customers than on your technology. This is the time to understand what they need and how they operate. Your technology may be great but if isn't filling a real need you won't go far.

Robert Iskander (VIP Tone) - If you don't have money in the bank then stop what you are doing and go raise it. If you do have it focus on profitability in the short term.

Francis Alexander (Scholastic) - Be a good smart partner to school districts.

Todd Brekhus (Plato) - Focus on solutions not products. Make sure your return on investment is well articulated for all stakeholders and customers.

Audience Questions

Q - With all the emerging SAAS models are we exposed to a global marketplace? (Asked by Nelson Heller)

Robert Iskander (VIP Tone) - Knowing customer requirements is essential - US companies have a leg up in servicing this market. With a strong dollar there are some interesting opportunities to invest outside the US (India, Australia). Open source is going to play a big role in this economy.

Todd Brekhus (Plato) - This panel is made up of content companies - we believe good instructional design sells. There is a play for the objects - but the value chain hangs on how the content is presented to students and how it demonstrates improvement against standards. Most of the open source materials don't do this.

Q - Should you focus on print or technology in this climate?

Francis Alexander (Scholastic) - Scholastic drives delivery of book content across multiple media. They are working towards blended delivery. It isn't an either or but what serves the current need best.

Steve Ritter (Carnegie Learning)- They have seen strong growth in the print line. They expected it would be blended - but currently districts are phasing product in by doing the print first and bringing in the technology later.

What impact will the economic stimulus have on educational materials and technology? A front page New York Times article yesterday left no doubt that education will be a significant part of the legislation. The Times reports that the total education allocation could be as much as $75-$95* billion a year over current allocations for the next two years. In sector that accounts for about $530 billion in total expenditures, 92% of which has traditionally come from state and local taxes, this represents a seismic shift in the Federal Government's influence on the market.

The questions executives in the industry have to wrestle with are how much of the total will be spent on instructional materials, when will funds flow, and what products will schools buy? The answers to these questions will drive investments, hiring, and M&A for the next couple of years.

I've talked to a few folks around the industry to see what people are thinking and the notes below represent a collective set of insights. It is still early days, the legislation probably won't be in a final format until mid to late February, but many companies are making decisions now about their '09 plans.

How Much Will Be Spent on Instructional Materials?

Historically about 1%-2% of education funding is spent on textbooks and supplemental resources and another 1%-2% is spent on education technology. 70%-80% of education funding goes to salaries. The question is will those ratios hold up with this new funding?

I'm betting that the percentage for materials and tech will be higher than normal - 4%-6% of the total is an educated guess. The bulk of the funds will still go to salaries - but it won't be for hiring, it will used to avert layoffs. Schools really don't like to hire people with transitory funds. Between unions and other requirements if they can't see sustained funding they will use the rest of the funds for infrastructure and other one-time purchases. A good chunk will also go to construction and deferred maintenance which could should boost the technology side of the equation.

Education companies have no compunction about scaling up and down based on market conditions - witness the efforts around any major adoption on the upside or the rolling layoffs at HRH on the downside. If the goal is creating new jobs quickly steering funds to instructional materials will have an immediate impact.

Rather than a contraction it is possible that we could actually see growth in our sector this year. If the annual increase is $80 billion then anywhere from $3 b to $4.7 b could flow to materials and technology. At least half of that would replace funds that have been cut or allocated elsewhere already, so the net impact could be $1b to $2.3 b in increased spending, or about 10% growth in the market. This would create a lot of publishing jobs if it happens.

If I'm wrong and the traditional ratios hold then we'd see flat sales year over year as the infusion replaces funds that the states have cut or will be cutting soon. Either way the stimulus is good news for education companies.

One huge caveat is that it is possible that states that are particularly strapped (e.g. California and Florida) would use the Federal infusion into education to move funds they would have spent there to other parts of their budgets. This could result in no net improvement or still a contraction in education spending depending on how dire their overall budgets are. If you have significant sales in one of these states you should pay particular attention to how the stimulus is implemented locally.

When Will Schools Start Spending?

The consensus is that the impact on publishers will be fairly immediate even if the federal funds don't start flowing for a few months. Most School Districts are sitting on budgets that were allocated and approved last year - in other words the funding is there, they just aren't spending it. Once Administrators are confident that the new money will be available from the Feds they are likely to restart spending from their current budgets. Since the significant portion of the education buying cycle is still ahead of us we may actually see a fairly normal year through August.

Note that any indecision about how to implement the program at the state level could delay schools releasing current funds until those questions are resolved.

The implication for companies is that you should be out working the pipeline for the big deals that could close in May-August. If the bill passes in February by late April or May you should start to have a handle on how schools are going to react and you can adjust at that time.

What Products Will Schools Buy?

The impact will be uneven across the industry. In this economic climate and with these funds there are types of products that will do better and some subject areas that will be favored.

Because the funding is only for a couple of years Districts will be loathe to commit to anything that requires ongoing expenditures. This means that subscription products and products that have big annual support fees or large infrastructure requirements won't do as well as one time purchases. A print reading program will probably beat out a subscription based on-line reading program in this climate because it costs less and it is a one time purchase.

By subject area the goals of NCLB aren't disappearing so expect to see an ongoing focus on Reading and Math. STEM is also a clearly stated priority of the new administration (see Obama's statements) so I would expect to see a heightened priority in this area. Many states are now testing Science which would couple local pressure with Federal priorities.
The legislation is also targeting existing programs that have been historically considered partially funded mandates - notably Title 1 (economically disadvantaged schools) and IDEA (Special Education). These are long term federal priorities in education and do not require extended arguments over program design and implementation. Focusing here is smart politics if the goal is getting funds released quickly.

Companies that provide professional development may also do well since Title 1 has significant set asides for training. One of my contacts also speculated that Districts might be willing to invest more in their current teachers by hiring contractors to be in the buildings doing longitudinal on-site PD for the next couple of years rather than hiring new staff.

Conclusions

This legislation is good news for our industry. At a minimum it may replace funds that have been cut by the states and on the upside it could actually create some growth in the market. Companies that provide products with a one-time purchase that target core subject areas and can be purchased with Title 1 or IDEA funds should do very well indeed.

If you would like to disagree or add something to the conversation please post a comment or send me a guest blog post. Guest posts are very welcome, if you would like to know more please send me a note.

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*A note on the numbers. The total federal education budget under the legislation could be as much as $150 billion a year for the next two years. Since the Feds are already spending about $60 billion we have structured this analysis around the incremental $80-$90 billion.

The ideas presented here are speculative, general, and are not business advice. The implications for any specific company should be analyzed to craft a specific response to the market. Full disclaimer here.

What are the prospects for raising capital for education technology companies in the current financial meltdown? Last week at the SIIA Ed-Tech Business Forum a panel of investors tackled this question. The panelists presented some solid and detailed advice for investors and companies seeking capital during the recession.

Key Points:

• Many investors are seeing Education as a safe harbor in a turbulent market, it is seen as relatively recession resistant. Education's profile is rising as a marquee investment arena for the next 10 years - it is a good time right now for education.
• Take in as little as possible at as light a valuation you can get because valuations are going to be low for a while.
• The strong are going to win big in this downturn. Access to capital is going to be an important differentiator in this market.
• Most venture firms are not looking at new deals, they are focused on down rounds and propping up existing investments. They are also all moving up the deal chain to safer investments than they make in normal times. If you are raising money be aware of this.
• It is all about being profitable per customer in this market. Hope isn't a strategy - go get paying customers and drive a lifetime revenue model
• Focus down on the core of what you have to provide and strip the organization down to doing just that. Have a crystal clear picture of who your customers will be, how they will find the money, and what are the essential features.

The panelists were:

• Moderator - Chris Curran, Managing Director Berkery Noyes
• Frank Bonsal III, Partner New Markets Venture Partners
• Kevin Custer, Founding Partner, Arc Capital Development
• Lou Pugliese - President Learning Diagnostics

Chris began with an overview of the market trends. Many investors are seeing Education as a safe harbor in a turbulent market, it is seen as relatively recession resistant. He noted that there is a huge capital overhang - investors have lots of funds but are making few investments. In education fundraising is actually up this year but we are seeing deals that are over capitalized. Later on Frank made the case that this is a bad deal from the entrepreneur's side.

Most investment groups are setting the bar higher for new deals. Investors are looking for $10m Revenue and $2m EBIDTA which leaves out most K-12 Ed-Tech companies. Companies at this size need capital to invest in Sales and Marketing to scale up. Lots of education companies with good products in the last 10 years have failed because they couldn't get past this hurdle.

His slides include a list of the private equity investors in education and a list of 100 deals that have been done in the education space in the past two years.

Follow below the fold for details on each panelists comments and the audience Q&A.

Continue reading "Raising Investment Capital - Strategic and Private Equity Perspectives - Education Technology" »

This panel is made up of seasoned veterans of the M&A markets for Education Technology companies. They addressed the K12, Higher Education / Post-secondary, and general M&A climate.

The panelists are:

• Moderator Jeff Fromme - Dorsey and Whitney LLP
• Robin Warner - Managing Director at Van Tulleken Company. K-12 Market
• Vivek Kamath Director Berkery, Noyes & Co. - Higher Education.
• Mark Marchesano with the Jordan, Edmiston Group (JEGI). M&A in a Turbulent Market.

It is sponsored by Empirical Education.

Key insights:

• Look to the UK market - it is an 18 month leading indicator of what is going to happen in the US market.
• Professional Development is now mandatory for all solutions in the UK. Are publishers using this to hold open source at bay or is this a real switch taking place?
• The US market is contracting - there are fewer strategic buyers because they have all merged and the Private Equity guys are sitting things out for a while.
• Buyers don't want to take any risk right now - only companies with proven business models, strong teams, and organic growth need apply.
• For profit higher ed is growing - the economy is actually helping with this as people look to expand their skill base.
• Expect to see many buyers looking for bargains over the next couple of years. Don't expect to see much in the way of IPOs.
• In K12 multiples are higher (almost double) for companies that have a strong technology component - but it has to be integrated well - it can't be a bolt on.
• Multiples are higher for Higher Ed than K12.

For my more free form notes follow below the fold.

Continue reading "Financial and Industry Analyst Views on the Education Technology Market" »

The global economic meltdown is going to affect education budgets. States and School Districts will react to a drop in tax receipts and a credit freeze. This entry is an attempt to map out some of the possibilities for how the slowdown will play out in schools.

First - some good news. No matter what happens in the economy kids still show up in school needing an education. The market is not recession proof but it is also a core service of civilization. Unless we end up in some Mad Max dystopia there will be a market.

Second - any market will have losers and winners. There are several market trends that will be accelerated by a budget crunch and companies that are poised to take advantage of them will do just fine. If your strategy isn't focused clearly on core funded needs you will struggle (strategic focus is a service I provide).

Normally the education market lags the general economy by 12-18 months. This cycle has already been different - many of my contacts at education companies saw the market step back as early as the summer of 2007. My theory is that falling property values which drive 30%-40% of tax receipts, are much closer to education decision makers than the usual macro-economic trends that drive the economy. Several significant states also led the way with severe budget shortages (notably Florida and California). Educators could see this one coming and acted early.

In the survey of education executives I conducted last May on Education Spending & the Economy the consensus was that the impact would be mild.

But what has unfolded over the past 3-4 weeks has the potential to have a much more dramatic affect on spending for education across the board. The good news - if it can be called that - is that educators have already acted pre-emptively to address a downturn and so many of the hard decisions have already been made. The incremental impact of the most recent developments will not be as significant as they would have been on their own.

The most immediate prospect is for a dramatic slowdown in capital spending. This will be the result of a combination of voters rejecting new levy's and bonds because their own pocketbooks are strained and the credit freeze in the banking world. If your business is oriented around new school construction prepare to hunker down for a while.

States will have to make some hard choices. California - which has been in a budget crunch for several years - has seen dramatic increases in class sizes and an underfunded market for instructional materials. Categorical funds and lawsuits have kept the markets for basal textbooks supplemental materials that address specific populations healthy. Outside of these areas it remains a tough market. Florida has delayed adoption cycles - forcing schools to use older materials for a year or two more. If you are targeting specific states you should be building relationships with policy makers at the state level because their decisions will have a direct impact on your business.

Districts are going to be a tough sell. They will buy, but they are going to demand more proof that what you are providing will deliver benefits. They are also going to pull more decisions centrally to keep a tight rein on spending. Your sales force needs to be comfortable calling on district decision makers and you should be hiring for this skill.

In tight times districts are also going to prioritize keeping people on staff. Many states (but not all) have specific money set aside for instructional materials and these funds will still be available. But, districts are always pressing for more flexibility in how they allocate funds - and where they have the ability to shift funds towards salaries they will.

The Federal level is a bright spot - particularly for technology. It is doubtful that we will see significant cuts for education at the Federal level. In the past Federal budgets have funded up to 50% of technology spending, despite being only 10% of overall education funding. See my note below on the candidates positions or read this post on McCain vs Obama on education. Obama is still proposing a $19 billion increase in Federal education spending.

Meta Trends a budget crisis plays into

Technology for efficiency

If you can show that your products save time and/or money because they make learning more efficient you can make a case to budget conscious administrators. You will have to make a clear and compelling case - there won't be a lot of room for experimentation.

Since 70-80% of education spending is for staff anything that can improve productivity will help districts run lean. Products like GradeCam (client) which can save hours of teacher time while improving the feedback loop to students should thrive in this environment.

See this series of posts on technology substitution in the education market for more quantitative analysis on this topic.

Accountability mandates and standards focus on core subjects

Tough times will force decision makers to focus their resources on the core subjects of Reading, Math, and Science. They will still spend money on other subject areas but it will be tight.

That said - accountability is here to stay. NCLB is a balloon payment coming due in a few short years and schools will continue to invest in resources that keep them ahead of that curve.

Career & Technical education

The Perkins renewal in 2006 has brought a renewed focus on career education and a real shift in the priorities in this area over the past few years. In an economic slowdown policy makers will place a budget priority on this area - and the affects will be felt in both secondary and post-secondary institutions. If your products serve this market you should be OK - but only if you are in sync with the new career clusters and priorities.

New business models that shift the economics (freemium, sponsorships, etc)

There is a great deal of innovation going on with business models (see the panel discussion on this I moderated at AEP this year). Schools may be more receptive to advertising and sponsorship driven models in this economy than they might otherwise have been.

The Election The outcome of the election will also have a significant impact on how the Federal Government responds to this crisis. The candidates have very different priorities for education. Obama is inclined to take the long view with regard to learning and is prioritizing Early Childhood Education and Lifelong Learning in his plans. Whether these priorities survive a brutal budgeting process next year is an open question, but you can make a pretty clear economic argument for investing in people in a recession. McCain places more emphasis on state control and privatization - but states are already deep in the throes of this crisis and he is not proposing any new spending on education.

This post is a starting point. If you have insights to add or disagreements with anything I've written here please respond in comments or submit a guest post. In the series on the economy and spending I did back in May Doug Stein and Charlene Blohm added a lot of value to the conversation with their guest posts.

Next up - who will thrive in a down market and who will struggle?

How are education publishers reacting to the economic downturn? Guest blogger and PR maven Charlene Blohm shares some concrete examples of steps companies are taking to trim expenses.

Part 1 - Education Spending & The Economy - Survey Results
Part 2 - Education Funding Market Dynamics - By Doug Stein

By Charlene Blohm, President C Blohm & Associates

District budgets are tight - many schools have already lost the music teacher, the art teacher, the band teacher, the librarian. Left with few other places to cut, two elementary schools near us will be sharing a principal next year. Districts seem to be delaying major purchases and upgrades, especially with administrative or support systems (those that aren't directly tied to student instruction).

How are companies reacting? More than one company has adjusted its sales forecasts down based on decreased spending. The major sales they were hoping to close yet this school year are being delayed, with the forecasted income moving to the next school year.

As a result here are some of the cost saving actions we are seeing across the market.

• Booth sizes at trade shows are a tad smaller - I've seen some movement where last year's 80x80 became a 60x60 this year, or 40x40 became 20x20, etc.
• Also, fewer staff are working trade show booths. Travel is down no matter how you look at it - flights are dang expensive, and often hard to find depending on where you need to go. And that applies to vendors as well as educators.
• There has been an up-tick in direct mail - people weren't getting the results they wanted from what I bet they thought were going to be "free" email campaigns. Even with the postal rate increases, people are blending the two more now than they were a year ago.
• People are stretching advertising dollars with more online purchasing. In fact, some folks are now online-only advertisers.
• There seems to be less money being pumped into product development, and the time for a product to prove itself in the marketplace is getting shorter and shorter. That's been happening for awhile now, so this is not necessarily related to the current recession.
• We're getting more phone calls from overseas prospects. I'm not sure if that's a function of our reputation (we've been doing that for years) or the economy - but I think it's safe to say that foreign companies aren't afraid to spend money on product development and marketing.
• In recent weeks, it seems that people are finally starting to think Web 2.0. I've had more conversations about keywords in the past two months than in previous two years. That signals to me that people are keen to make sure their name is up in bright lights - meaning they need the leads and visibility in a way they didn't before; I don't think there's just a sudden interest in Web 2.0 on its own merits.

Charlene Blohm is the President of C Blohm & Associates a full service Public Relations firm focused on the education market.

Today a look at education funding in the current economic crisis from guest blogger Doug Stein. Doug details how the market will react over the next two years and then lays out an interesting theory about how districts will bifurcate into factory and craftsman models on the rebound. Doug is one of the smartest thinkers in the business. His consulting company is Memespark.

Link to Part 1 - Education Spending and the Economy

By Doug Stein

Education budgets will go through three phases in this business cycle.

Phase 1 - In response to a rapid decline in local property taxes, K12 spending will pull back significantly. Everything outside of basic literacy (and possibly Math) will drop pretty hard for about 2 years. It's possible that "oil/energy" states will invest more, but those investments will depend on visionary leadership at the state level.

Phase 2 - The next administration will make significant changes (possibly even "scuttling/gutting") the NCLB regime. This will lead to a bifurcation of the market into two big pieces:

a) Districts dependent on Title I (mostly urban) which will revert-to-form and do what they had always done (use comprehensive basal textbooks to compensate for uneven teacher quality). Teachers will generally teach to the text/test. As always, there will be pockets of innovation, but for the most part, the faculty will hunker down and wait for retirement.

b) Districts that don't need Title I will be able to redirect their efforts away from Average Yearly Progress (AYP - which was a bit of a distraction for them). Many will leverage their investments in data-driven decisions and move to a "growth model" - trying to measure value-add for each student (because the parents and local taxpayers will demand proof that the investment is being well-spent).

In states where local taxing authority is restricted based on "equity" arguments, there will be major battles to keep K-12 funding from sagging. As the funding slips, so will the central state control of curriculum. (No pay, no play.)

Phase 3 - As funding returns (2010+), the schools and districts which have had some success will be empowered to try new curricula and new technologies. In particular, some companies are going to figure out how to apply social networking tools to enable the formation of "practice improvement networks". Some of these will be accredited professional development - usually a blended model. Some of these will be content creation focused - similar to a blog with an authorial voice and community participation.

Maybe someone will learn from what Flat World Knowledge is attempting in higher-ed (whether FWK succeeds or fails) and figure out how to build a profitable business where "tentpole authors" attract a community that develops and increases the value of new educational content - and where the community is truly a "community of best practice."

In short, I suspect that after a big dip in funding, we'll see market bifurcate into "factory" and "craftsman" models. Factory districts will look to big publishers and demand complete solutions (SIS + LMS + content); craftsman districts will look towards more "Web 2.0" horizontal collaboration with "just enough" data management to generate metrics that substantiate value-add. Content will come from the more innovative supplemental publishers (if they can adapt to a world of "users not units"); we'll also see a growth in user-generated content (with a revenue share model).

Why do I believe this?

I''ve seen clients serving the "must have" content areas growing quickly when they deliver a complete solution (content + data management + PD). Clients delivering "nice to have" or "innovative/unconventional" solutions are already seeing flattening sales.

In both cases, the sales cycles are growing longer and customers are having to cobble together money from more diverse sources. On the educator side, there have always been excellent craftsmen, but they are scattered across the US and have had a hard time receiving support from their peers (whom they couldn't find). They are starting to find each other.

Relevant Links:

COSL
Global Scholar
Wright Group

How will the economic downturn affect education budgets? How are executives at publishing houses and education technology firms planning for the recession?

Education Week noted a couple of weeks ago:

"...states across the country are confronting deteriorating budget conditions that have tied the hands of legislators and governors hoping to spare K-12 education...Altogether, the 2009 budget gaps—the difference between what states are expected to collect in revenue and what they’re expected to spend on services—will exceed $26 billion, the NCSL says."

I recently conducted an informal poll of 30 Education Industry executives on this topic. They expect that the impact will be far more immediate than past downturns but generally they expect it be moderate.

Most of the respondents are President or Vice President level executives. They come from a nice mix of large and small companies and a combination of print, education technology, and companies that serve those companies. This is not a scientific survey, take it as a directional pulse of what people are thinking as they do their business planning for the 2008-2009 school year.

In today's post I share some of the high level findings. In the next few posts we'll hear the detailed comments from some of the respondents to give you a more nuanced view of the data.

Across the Board - Pessimism

The is an almost universal expectation that the downturn will affect education budgets. 23 out of 30 expect a negative impact on business. Not a single respondent expected an increase in spending and only 7 said the market would remain flat.

Immediate Impact - Something New

Perhaps the most significant finding is that 63% expect the impact to be either immediate (they are already seeing it) or in the next six months. This is a big shift from past downturns where it took 18 months for the downturn to flow through tax receipts to school budgets.

In part this is attributed to the heavy reliance of many districts on local property taxes. With housing prices dropping across the board it is clear locally what the impact will be. Because schools will always try to avoid laying off people if they can many companies saw cutbacks as far back as last fall as districts anticipated lower 2009 budgets.

Another interesting insight is that ed-tech companies think the impact will be longer term while the print companies expect it to be more immediate. My guess is that seeing a couple of adoptions postponed really rocked the print world.

One additional reason cited for a more immediate impact by several people was the impact of increased prices for fuel and food.

Several respondents noted that Federal spending will remain constant or increase after the election in the fall. The downturn will be concentrated in the 88% of education spending that comes from state and local taxes.

Impact Will be Mild

The good news is that the general expectation is that the downturn will be relatively mild. Only 8 of the respondents expected it to be a significant downturn. Several people noted that the impacts are being felt in 23 states this time as opposed to 48 in 2001.

Folks who thought it would be mixed expected to see some areas of their business doing better (e.g. supplemental) while others were challenged to make the number (e.g. big ticket items).

This is one area where there was a real divergence between the largest companies and the rest of the market. 6 of the 8 people who think the impact will be significant are with very large firms.

Districts Will Delay Big Decisions

One explanation for the pessimism of the large companies is that people are seeing districts delay or defer large new projects - even adoptions. This would have a disproportionate impact on the largest companies. Smaller company's products fill in gaps and are easier to justify right now (as long as they target an urgent need). Several respondents noted that they are already seeing this in the decisions districts are making today about the 2008-2009 school year.

About the Respondents

I contacted 74 people on my LinkedIn network and 30 responded.* 67% are Executives with a specific industry focus, 23% are consultants who look across a wide variety of companies and the other 10% were Line Managers or Sales Reps.

Responses came from a wide variety of companies.

Industry Services includes management consultants, list providers, market research, and executive recruiting.

We also got a nice mix of company sizes.

*If you are interested in participating in future straw polls lets get connected on LinkedIn.