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Textbook challenge for education companies

Education companies are learning to cope with automation, tight budgets and online courses
October 30, 2015

Pencils, rulers, desks, textbooks - the essentials of education have changed little in the past century. But soaring tuition costs and competitive job markets are leading students to demand more value for their money. The traditional model of a lone teacher lecturing to a class of students of varying skills and knowledge, then assigning the same homework to them all, could soon be expelled. Computers that can track each student's progress, tailor his or her workload accordingly and provide access to online learning resources are gradually gaining traction. Teachers can then serve as on-demand tutors, helping struggling students with specific problems and gathering small groups to explain especially tricky concepts.

Technology is changing education in other ways. More and more students save money by purchasing second-hand textbooks on eBay or Amazon then selling them in the summer, or relying on free materials and videos on websites such as Coursera. Those trends have reduced publishers' pricing power and demand for their textbooks, forcing them to revamp their offerings to remain competitive. Growing numbers of universities are also introducing online courses, allowing anyone with an internet connection to enrol and receive a quality education - although such institutions have seen high dropout rates so far.

As a result, education companies have been forced to reinvent themselves as education technology providers. But the most effective ways to integrate computing with conventional learning remain unclear: studies have shown that students given internet-connected iPads and laptops remember less of what they're taught and perform worse on tests than their peers. Moreover, experts argue that successful learning requires social interaction: students who learn using computers may not develop skills such as working collaboratively, helping others and thinking creatively.

Still, the shift from paper to software has clear advantages for publishers. For instance, pressure on public schools and universities to cut costs and raise grades has fuelled strong demand for digital learning solutions. Publishers can also charge annual licensing fees for digital textbooks - that can't be resold or shared - and producing an additional copy costs them next to nothing. They can also regularly update the content of their textbooks, and adjust their prices to remain competitive with the used-book market. In the past, it took about "seven years to develop a science textbook, and it was probably out of date on day one", says Bloomsbury Publishing (BMY) executive Richard Charkin, who has held senior roles at Macmillan and Oxford University Press. However, he says the adoption of "blended learning" - which combines traditional teaching and digital tools - has been relatively slow in schools. "Books are holding their own."

 

Nonetheless, Pearson (PSON) has embraced the new paradigm. The education giant has partnered with US start-up Knewton to offer its course materials on an 'adaptive learning platform' that delivers personalised lessons for students. It has introduced a digital learning tool called Revel, which aims to transform the staid textbook into a media-rich platform with videos, interactive exercises and animated infographics. And Pearson's online learning programmes continue to gain ground - course enrolments rose 24 per cent to over 134,000 in the first half of 2015. But there have been a few apparent mis-steps: a Los Angeles school district claimed that 650,000 iPads running Pearson's software didn't work, leading to a sizeable settlement from Apple; and the University of Florida reportedly intends to cancel a high-profile online learning contract with the company worth up to an estimated $168m over 11 years.

That hasn't dissuaded Pearson from doubling down on education. It recently sold the FT Group - home to the Financial Times and Investors Chronicle - to Japanese business publisher Nikkei, and parted with its 50 per cent stake in Economist Group soon afterward. But the group's underlying sales dipped 4 per cent in the three months to end-September due to fewer enrolments in community college and more product returns in the US higher education market, and sluggish demand for school textbooks in South Africa. Analysts also highlighted the heated debate over curricula in the US, which has weighed on Pearson's testing business, and bets on for-profit and community colleges that have made it vulnerable to the US economic cycle - enrolments tend to fall when the economy is growing and jobs aren't scarce.

There are plenty of other options for investors seeking exposure to the education industry. Daily Mail and General Trust (DMGT), the publisher of Mail on Sunday and Metro, is the owner of education software and services business Hobsons. In early 2015, the subsidiary acquired Starfish Retention Solutions, which helps US colleges and universities provide personalised support for students and assesses which services and interventions are needed to keep them on track to graduate. Moreover, underlying sales at Hobsons rose 3 per cent in the 11 months to August 2015, contributing to 6 per cent growth for the information division as a whole.

Meanwhile, direct mail-order group and sports merchandise e-retailer Findel (FDL) also supplies stationery, teaching aids, furniture, janitorial supplies and other resources and equipment to primary, secondary and nursery schools. Educational sales fell 7 per cent in the year to March as political uncertainty and pressure on school budgets prompted customers to tighten their belts, and the group lost customers and market share. Findel's directors have strengthened the division's management and improved its marketing and online presence, which they expect to drive growth in time.