- AI threat to textbook business
- Slide in college enrolments overall also hurts
Pearson (PSON) has lived a number of lives. The FTSE 100 company, now synonymous with education, used to own Madame Tussauds, a French vineyard, Royal Doulton, a stake in the investment bank Lazard and – most recently – the publisher of this magazine.
Some reinventions have been more successful than others. Between 2013 and 2020, Pearson issued six profit warnings and lost almost two-thirds of its value. Since Andy Bird took over in October 2020, however, the publisher has entered a “digital first” era, which is yielding impressive results. Pearson was among the FTSE 100’s top performers in 2022 and smashed market expectations in its most recent set of numbers.
Plenty of analysts are convinced of the group’s transformation. More than 80 per cent now have it on a positive rating, compared with 42 per cent this time two years ago. However, persistent issues within Pearson’s higher education business are jeopardising future progress – and casting a cloud over the publishing industry more generally.
Textbook problem
For many years, Pearson was over-reliant on profits from its US higher education courseware division, which sold textbooks to college students. As much of the world went digital, Pearson clung onto paper, leaving it vulnerable to rivals. It also suffered as the market for second-hand books boomed with the help of the internet. In 2010, the secondary market was a fraction of the size of the primary one. By 2019, it had overtaken it.
Since Bird’s arrival, Pearson is now laser-focused on digital resources. By the end of the year it expects to be selling fewer than 1mn units of print products, compared with 6mn in 2018. This approach is more in line with how students learn now, and has strangled the supply of books into the second-hand market – a market that Pearson is desperate to recapture.
However, the digital revamp has not proved to be a magical solution. As other parts of Pearson have thrived, the higher education division – which still accounts for almost a quarter of sales – has languished.
In 2022, divisional underlying revenue declined by 4 per cent and profit growth was only achieved through cost savings. In the first half of 2023, underlying sales growth dipped by a further 2 per cent and the division (which is heavily weighted to the second half) reported an operating loss of £1mn. A nine-month trading update published last month was also disappointing: higher education revenue fell by 5 per cent, compared with UBS estimates of 1 per cent. Q3 was particularly poor, with sales down by 8 per cent.
Demand is a key issue. Since peaking at 18.1mn in 2010-11, undergraduate enrolment in the US has been on a steady slide and, as of last autumn, enrolment sat at 15.1mn. This trend has been repeatedly flagged by Pearson, but there were signs that enrolments had flattened out this autumn. Finance chief Sally Johnson described this as a “hopeful sign, if not a theme as yet”.
There is another problem, though. Pearson can charge a lot more for hefty physical textbooks than it can for digital resources. While subscriptions for its online textbook service Pearson+ are rapidly rising, therefore, there are no signs of sales shooting up.
This is partly a timing issue; management said some revenue recognition had been deferred until the final quarter of 2023. However, it also reflects the extremely competitive landscape. While Pearson used to have publishing houses and the second-hand book market to contend with, it now faces a far scarier rival: artificial intelligence (AI).
Everything is copy
Management is insistent that AI is a “real, long-term positive to the company” and is working on tools to enhance Pearson's products. However, the company is already losing business to “non-mainstream publishers” and the battle over written material is only just heating up. Students turned en masse towards ChatGPT when it was opened to the public last year, asking it to generate anything from study guides and essays to fiction.
Seventeen of the world’s most famous fiction writers, including David Baldacci, Jodi Picoult and John Grisham, have joined a lawsuit filed by the Authors Guild against OpenAI, claiming the company had unlawfully ingested their books to create large language models such as ChatGPT that generate texts.
It is still unclear how big a problem this will be. Publishing house Bloomsbury (BMY), for example, is adamant that it is protected from "the robots” by the quality and originality of its work even as large language models hoover up its authors' words.
“I imagine AI can produce a credible fantasy novel,” chief executive Nigel Newton told investors. “But if you're a fan of Sarah J Maas and you're following the unique world she's created in three different series, you don't want to read any old fantasy novel. You want to read Sarah J Maas.”
Outside the world of fiction, however, Bloomsbury’s digital resources (BDR) arm remains something of a worry. BDR was first established in May 2016, and beat its initial revenue targets in 2022. Management said the group is now on track to hit a new target of 40 per cent organic revenue growth over the five years to 2027-28.
The division is very important to Bloomsbury as it provides steady, recurring revenue, compared with the fiction division which is “very much in the hits business” (the publisher of Harry Potter is more aware of this than most).
After a stellar 2022, however, Bloomsbury’s academic and professional revenue plateaued in the six months to 31 August 2023, while BDR sales dipped by 2.2 per cent. This might be nothing, and management is still exuding confidence. However, mounting pressure on library budgets combined with aggressive tech companies providing low-cost alternatives, could prove disruptive for the nascent division.
The likes of Relx (REL) and Wilmington (WIL) have shown that it is possible to transition successfully from a print past into a digital, data-driven future. However, academic publishers, together with the copyright lawyers they rely on, are facing a steep learning curve.
