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Education and the death of textbooks

Sector Focus

Education and the death of textbooks

During my university years, I bought just one textbook. I'm not saying I was remiss - my dissertation referenced more studies than I care to remember - I simply didn't need to buy the books. My tutors put all lectures on the virtual portal system, with links to online versions of the recommended reading. The library and, to a greater extent, the internet provided me with all the information I needed to earn my degree.

The one book I did buy, The Biomechanics of Sports Techniques, was first published in 1973. I bought a second-hand version from Amazon (US:AMZN) and had it delivered to my house in Bath where it arrived within days of purchase. When I finished my degree I sold it on eBay (US:EBAY) to a first year degree student in Loughborough.

My case is not unique. Every year fewer students are splashing out on expensive new course materials, and so the textbook market is dying.

According to the National Association of College Students, in the US the average annual spending on course materials fell by 14 per cent between 2007 and 2016. It's a similar story in the UK. Although the National Union of Students (NUS) recommends that students put aside over £1,000 a year for books, interviews taken from many university prospectuses suggest that the average spend is nowhere near that. For Lucy, an engineering student at the University of Oxford, "all the books I need are in the college or faculty libraries".  

A spiral of destruction

It's easy to point fingers at the 'digital age' swooping in to steal market share from traditional print publishers. But the textbook conundrum started long before the influence of Amazon, Google or Wikipedia.

The textbook market is unusual as the person who chooses the book (the professor) is not the person who has to pay for it (the student). That means that publishers historically showed little concern for textbook prices in the knowledge that the person selecting the book would care little about the price and the person spending the money would have no choice but to pay it. Economists call this the 'principle agent' problem and in the early noughties, it drove the price of textbooks up to extortionate levels. By late 2014, The Principles of Economics - the world's best-selling textbook - retailed on Amazon at $350 (£281).



With prices like that it's no surprise that students began to look for alternative study materials wherever possible. The rise in free online information reduced the need for textbook spending, while a huge second-hand market opened thanks to Amazon and eBay. So publishers raised their prices to cope with the dwindling demand. But rather than increase revenue, this strategy sent more students away from printed textbooks. The answer? Publishers hiked prices again. This downward spiral has caused major problems for many textbook publishers in recent years.



Schools of the digital age

Demand for resources is also changing in schools. It wasn't long ago that information technology lessons involved logging on to an RM (RM.) computer, typing out a story and creating a title page using Word Art. Today seven-year-olds are being taught coding. RM no longer makes computers.

In a digitally connected world, technology proficiency is important. For UK children starting school this year, it is expected that by the time they leave (in 2030), 850,000 jobs could be lost to automation. Venture capitalist Marc Andreessen predicts a future with two types of job: people who tell computers what to do, and people who are told what to do by computers. Schools without the resources to prepare students for such a future are deemed to be falling behind. Not only that, but according to the British Educational Supplier Association, a digitally connected classroom helps promote student success across all subjects.

That's why tech expenditure in schools rocketed to £900m in the UK in 2015 and is expected to climb higher in the current academic year. School infrastructure has changed dramatically as a result. "We set our homework via an online pupil portal system, which can be accessed from home," says biology teacher Georgia Upjohn. "Parents can even receive notifications to their phones when a child is given a detention." This transition has seen traditional school supplies fall out of fashion. White boards and their marker pens (which already replaced the blackboard and chalk combination) are making way for interactive boards. Registers are no longer taken in a book, but using an online check-in system. Textbooks are being substituted with tablet devices.

Unsurprisingly the environment for the companies that make those traditional products has been tough. The Consortium - which was recently bought by RM as part of its acquisition of Connect Group's (CNCT) education and care division - provides 'consumables' to education institutions. In the 20 weeks to 21 January 2017 the company reported a 4.6 per cent decline in sales.

Pearson (PSON) - which became an education-only business when it sold the FT Group and The Economist in 2015 - has also struggled. Revenue from both courseware and assessment material declined in 2015 and the troubles persisted last year, too, forcing the group to issue a major profit warning in January 2017.


Opportunities arise

That said, a changing marketplace doesn't necessarily bring inevitable doom and gloom. Relx (REL) has reported considerable success since its heavy investment in new technology products and services in 2014. Its Elsevier education business - which includes products such as The Lancet medical journal - has successfully migrated its content online so that it no longer relies on hard copy sales. Group revenue returned to growth on an underlying basis in 2015 and continued to rise last year.

RM is also successfully managing the transition to digital. Its results business, which provides IT and software services to exam boards, reported a 3 per cent revenue rise in the year to November 2016, driven by demand for e-assessment products. Plus, the revenue decline at the group's education division slowed, thanks to a better mix of print and digital products.

There is also a whole new industry opening up thanks to the growth in demand for virtual or personalised schools. Aim-traded Wey Education (WEY) operates the UK's only online fee-paying secondary schools. "We've harnessed new technology for an old business," said chairman David Massie when I spoke to him last year, "so there is a place for us in today's society". He might be right. The group's first school, InterHigh, saw student numbers rise 52 per cent to 647 in the 2015-16 academic year.



RM endured a tough few years until 2014, but now seems to have emerged as a credible 21st century education business. Recent full-year results showed much improvement in the two main divisions and the acquisition of the education and care business from Connect should help RM return to revenue and profit growth in 2017. Although investors responded well to that acquisition, the shares had previously looked a little neglected. They now trade on 12 times forward earnings, which looks like good value to us.


On the other hand, we're recommending investors get out of Pearson. Once a diverse media giant, Pearson appears to be largely unprepared for the challenges of the digital age. Although management has a plan to speed up the group's progression to digital, we think it's all too little, too late. The steady stream of profit warnings does little to inspire confidence and although the share price has already suffered, we think it still has further to fall.


The broker's view

Pearson's recent performance indicates just how punishing the education market can be.

US higher education is the single most important area for Pearson. Increasingly, though, students are not willing to pay high prices - in many cases, $150-$200 - for textbooks, especially as other options (book rental, increasingly open source) are available or, in many cases, they're just not buying the material. Claims that new digital developments should help transform the company's fortunes have fallen flat, while blaming weak enrolment figures for its problems in the US higher education market is seen as somewhat of a red herring. True, fewer students means fewer people to buy books but that is secondary to the main problem.

Recent changes in US testing standards have also failed to provide the expected uplift in earnings. In 2010, 26 states were part of a national consortium that planned to use Pearson testing products to administer Common Core aligned PARCC exams. By August 2015 only seven states were still partnered with PARCC and in December 2015 a bill was introduced in the New Jersey state legislature to drop Pearson's PARCC. With states having more testing flexibility, Pearson could lose more members. The US education system is also more politicised and localised than the UK. That makes it hard for unpopular companies to win contracts. Pearson's brand in the US testing market has been shredded.

And the problems have started to spread to other markets. In the UK (its second most important geographical market), Pearson has admitted to problems around the assessment business and the ongoing dispute with UK universities on ebook pricing is still not resolved. A number of the trends we are concerned about in the US are likely to have global implications.

Ian Whittaker is an analyst at Liberum

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By Megan Boxall,
16 February 2017

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