Where Is The Education Market Headed?

Pearson’s conference call updating investment analysts on the company’s financial results for the first half of 2014, offered some interesting insights into where the education business is headed.

Pearson's (PSO) CEO John Fallon acknowledged that his company, as well as the industry, has been “through a period of internal change and disruption… (In our last report) We said that 2014 was going to be another difficult year, that we faced tough conditions in our biggest markets.”

By the end of 2014 Pearson will have cut its physical infrastructure and warehousing capacity in half compared to what it was 2 years ago. They will have cut 4,000 jobs, around 10% of the their workforce, primarily in print-related activities in mature markets. “Obviously, cutting warehouse capacity means we are expecting to sell many fewer books in the future,” Fallon added.



He continued, “We are powering ahead in digital, in services and emerging markets, building a bank of deferred revenue which sets us up very well for future growth.”

Emphasizing the shift from print to digital CFO Robin Freestone pointed out, “Our online university services business grew 11% (in the first half of 2014).” He then added that they see, “continued enrollment-driven contraction in book volumes, notably, in the career college channel. We are heading towards a target next year of about 70% of the revenues of the company digital and services and 30% books.”



Fallon continued, “The interpretation of major curriculum change in the form of Common Core is slow and uneven, and it's hurting us this year… Curriculum changes are also affecting the U.K., our second largest market.”

Services, Not Content, Is King

In the new environment the education business is no longer “just about the content, it's also about the services and the wider implementation that goes with it.” Fallon added.



“The company is reinvesting more and more efficiently each year in driving the growth of our digital services and emerging market capabilities,” according to Fallon. “We’re now investing in world-class modular assets and capabilities that are demonstrably able to improve outcomes. We're combining these capabilities to help our customers tackle their biggest challenges, which is often about achieving much more in education with the same or less total resources.” (emphasis mine)

Much of Pearson’s future growth is likely to be in testing, teacher training and providing an overall management structure for the education process, rather than supplying more materials that require visual content. Fallon said, “we are now very confident that we can sustain value and price that we can actually maintain or, even increase, average revenue per user in the switch from analog to digital.”

The challenge for Pearson is “how do you make better education more accessible and affordable for more people globally.” Fallon says that taxpayers and individuals spend more than GBP 5 trillion (approximately $8.46 trillion) on education around the world.
 
In the new educational environment Pearson expects to be able to address 50% or more of that GBP 5 trillion pot “rather than being restricted to the 5% or less that goes to textbooks and teaching materials.” Much of the opportunity is also in other parts of the world, not just in their current core U.S. and UK markets.

Tim Bozik, President of Higher Education for Pearson, said, “today (there) are 180 million students in higher education worldwide, projected to go to 300 million by 2030, to 500 million by 2050. And most of that growth is a result of a demographic dividend in what we would call our growth markets and the aspirations of a growing middle class.”

Fallon continued, “So the combination of the restructuring and reinvestment program that we started in January of last year is making Pearson a much more powerful company. We're creating a lower cost, more flexible analog infrastructure. (emphasis mine) This is really important because whilst our print products are in decline, they are going to be in demand by our customers for many years to come and they're often going to form a part, a vital part of the blended solution.”

Transitioning To Subscriptions

Pearson expects to benefit from subscriptions, rather than one-off sales. In the long term this may greatly help them to benefit from the “second life” of their products. In the past this revenue went to the used book market.

Freestone commented, “When you sell a book, you recognize the revenues right away. When you sell a subscription or an access code, then that access code is for a duration and part of that duration is probably outside your accounting period.”

While image creators never benefited from used books sales, they were able to benefit when titles needed revision or updating. In the digital environment there will be constant updating and revision, but seldom will that mean that new images are required or that there will be any additional revenue sharing with content creators. Meanwhile, image creators supply their images for unlimited use over longer and longer terms, often for less money than they used to receive for short-term limited uses.