Earning from Learning

Spurred by a rising school-age population, a strong economy and an increasing emphasis on education, both the elhi and college publishing segments have seen consistent growth since 1992, when the latest boom in educational spending began. Over the 1992 through 2000 span, the elhi sector posted a compound annual growth rate of 8.1%, with sales hitting $3.88 billion in 2000. Sales increased slower in the college segment, but its annual growth rate of 5.7% brought sales to $3.23 billion in 2000 and was faster than the 5.2% annual growth rate recorded by the entire publishing industry during the 1992 through 2000 period. Moreover, most industry forecasts predict that the elhi segment will continue to significantly outperform the book industry in general over the next five years, while the college segment should see gains that are slightly better than industry averages.

"We've been in a school boom since '93, driven by enrollment, funding growth and standards," says Peter Jovanovich, CEO of the Pearson Education Group. "Enrollment growth is still with us, standards are alive and well, but will funding growth be there? That's the question."

The number of students in grades K—12 is projected to grow by 0.4% annually over the next five years. Population growth rates are expected to be higher in many of the 20 adoption states, which last year accounted for slightly less than 50% of the elhi market. Textbook sales in the three largest adoption states—California, Texas and Florida—grew by 22.7 % in 2000.

This year, the three big adoption states are selecting either science or reading textbooks, or both. Ten other states are holding science or reading adoptions in 2001, signaling at least one more promising year for elhi publishers even if the economy continues to cool. "School budgets lag the rest of the economy," says Jovanovich. "If there's a slowdown, we'll see it in '02."

Publishers are less enthusiastic about sales in nonadoption states, however, where textbook sales last year grew much less than in adoption states, increasing by 7.5%. "Spending wasn't as great as we had anticipated," says Buzz Ellis, president of the McGraw-Hill School Education Group.

Nonadoption state budgets are already beginning to reflect the economic slowdown, according to Steve Driesler, executive director of the Association of American Publishers School Division. "We're having to fight to hold onto the revenue expenditures for textbooks that we had last year," he says. "We're looking at across-the-board cuts. We're more defensive this year rather than offensive in terms of funding for instructional materials."

The development of standards fueled funding for instructional materials at the state level during the 1990s. Although the economy may now be slowing, the emphasis on accountability appears to be here to stay. "We're not being fair to kids if we say, 'here are the state standards,' but we don't give them the materials to meet those standards," says Julie McGee, executive vice president of educational publishing at Scholastic.

The federal government has played a major role in the push for accountability in education, and President Bush is continuing the trend. He has made education a priority for his administration, promising increased aid from the federal government to help schools meet more rigorous standards. His budget asks for $44.5 billion for education, 5.9% more than was allocated last year. Of those funds, $19.8 billion have been allocated for elementary and secondary education, an 8% increase over last year.

"Any increase in funding is good news for our industry," says Ellis. But, he points out, only about 6% of total education spending comes from federal funding, and funding for educational materials is less than 1% of the total education budget. "Like anyone else, we say that's not nearly enough."

There is some concern in the industry that in the past federal funding has emphasized technological hardware and infrastructure over educational content. "The federal government has not had a role in instructional materials, which we think is wrong because content is very important," says Driesler. "They're spending more money on technology, helping schools get on the Internet. We're not against that—publishers are looking to deliver content electronically—but the school systems often have very sophisticated computer labs and very ineffective content. If they don't have good content, you have to question the educational value. Technology doesn't reach its full educational potential if the content side and the teacher training side are weak."

Bush has not specified how much of this year's budget will be spent on technology, nor has he earmarked funding for specific programs such as Title 1. One exception is $5 billion for early reading over the next five years, which should benefit elhi publishers. "The reading initiative is very important and will become more important," says Driesler.

The Bush plan also calls for annual standardized testing of children in grades 3—8 in math and reading. Forty-nine states have already established academic standards, and almost as many have implemented testing programs to assess student performance. Publishers have long been in the low- to mid-stakes assessment business, but the increasing demand for high-stakes testing has spurred the acquisition of online testing companies, which make it easier for students to be tested throughout the year and instantly assessed. Pearson acquired National Computer Systems in 1999, and last year Houghton Mifflin bought Virtual Learning Technologies. Standardized testing net sales increased 7%, to more than $234 million in 2000.

To some in the industry, the Bush education budget represents the beginning of a consensus on education. "The emerging consensus is that accountability and standards are good, but we also have to invest in schools in order to make it happen. For decades, we had people talking cross-purposes. Conservatives focused on accountability, and liberals on spending. Conservatives said, 'If we spend more money, how do we know it's well spent?' This led to stalemate, but in the last few years that stalemate has broken down," says Jovanovich. "Now it's 'We need to invest more, but we also need to know how well kids are doing.' My sense is that in education, because of the compromise between the two sides, they're going to get something done."

The increasing emphasis on assessment and achievement represents new possibilities, as well as new challenges, for educators and educational publishers. "The rise in accountability creates a responsibility on the part of schools to not just identify a child who doesn't get it but to help the child who doesn't get it, and not just by telling them the same thing again," says McGee. "One of the rising issues is going to be not just testing and condemning, but fixing. It will require new thinking on the part of schools, publishers and politicians."

Part of the new thinking involves pre-K learning programs and early intervention. "If a child is two grades behind by grade three, there's a very high likelihood they'll drop out by ninth grade," notes Ellis, making early intervention programs key to keeping disadvantaged children on an academic track. With or without universal pre-kindergarten, elhi publishers are also increasingly developing products for younger kids, in the hopes of better preparing them for school and preventing the need for intervention later.

The increasing attention to standards means both more testing and a higher premium on educational content. "The big focus on accountability and standards is driving the textbook business," says Jovanovich, and not only in the elementary market. "The addition of high school testing, such as Regent's exams, is driving textbook sales in the secondary market. With high-stakes graduation tests, kids are taking more challenging courses. Without the Regent's exam, how many kids would take algebra?"

The increasing attention to standards is also encouraging more tailored learning. "The overall trend that we see is increased demand for customization," says Margaret Sherry, director of media relations at Houghton Mifflin. "Everything is correlated now to state standards."

Digital technology is helping publishers meet the demand for a more customized learning experience. Now that most of the hardware has been installed, digital technology will make further inroads into elementary and high school classrooms, publishers predict. Over 95% of schools are wired to the Internet, and a majority of individual classrooms in those schools have Internet access. But computers aren't replacing textbooks anytime soon. "You're still talking about a computer-to-student ratio of 5:1 or 6:1," says Driesler. "You need 1:1."

Digitization of content isn't happening as quickly as in the higher education arena, but it will happen, says Jovanovich. "School systems have been doing things with local area networks and CD-ROM, and they will move toward a Web-based enterprise approach," he says. "Over time, teachers, too, will act like every other professional and be dealing with a wired environment, for student information, testing and educational content. Publishers are asking, 'Where do I belong in this space?'"

There is no part of the book publishing industry that hasn't found a new paradigm in digital technology. For education publishers, however, it hasn't just transformed the way they develop and distribute content, it has transformed the content itself. Elhi publishers offer most of their textbooks with multimedia enhancements, which are primarily geared toward increasing the market share of publishers' print products. CD-ROMs have become a staple supplement to elhi textbooks and an integral component to children's educational experience.

Publishers are now working to take advantage of the Internet, which promises to add yet another new dimension to the learning experience. McGraw-Hill, Pearson and Houghton Mifflin are all stepping up their efforts to provide a more multidimensional learning experience by developing digital communities that link teachers, students and parents. These learning networks offer teachers the ability to plan lessons, maintain grade books, post assignments and communicate with students and parents online. They also provide professional development tools to help teachers sharpen their skills.

Through the networks, students can get their homework assignments and grades and participate in learning games and streaming video tutorials. Publishers are also incorporating their diagnostic testing capabilities so students' performance can be assessed instantly online. "By doing that, we think we'll have a system that will help teachers and students significantly improve learning," says Ellis. Parents can also log on to check up on their children's progress and keep tabs on their assignments and upcoming tests.

Publishers are all selling supplementary educational products to parents, teachers and children online. Sherry said Great Source, Houghton Mifflin's online supplemental materials division, is the company's fastest growing unit. Scholastic's acquisition of Grolier similarly expands the company's ability to sell books directly to parents and children worldwide. "Everybody is producing technology to give away. We're also making it a business," says McGee.

Gains in Higher Education

The higher education segment has also enjoyed strong growth over the last decade, although sales slowed in 2000. Higher education publishers are not sure why sales are growing more slowly than in the elhi industry. "It's a difficult overall assessment," says Henry Hirschberg, president of McGraw-Hill Higher Education, Professional and International. "We believe some of it could be that bookstores are scared to over-order."

Bonnie Lieberman, senior vice- president of Higher Education at John Wiley, agrees. "Part of it has to do with several online booksellers going out of business or changing their focus. You have a company like Bigwords. Last year, they ordered books. This year, they're not only not ordering, but they're returning books. Varsity.com is now selling other things to students," she says. "I think higher education publishing is experiencing some kind of correction through our intermediaries."

Publishers are optimistic, however, about the higher education market in the coming years. "One of the key factors is demographics, which are very positive in our market. In the early '90s, enrollments really dipped. But now our market is growing," says Lieberman. "Higher numbers are going from high school into college. We have more adult learners than ever before. More people are going back to school to get additional degrees."

Nearly two thirds of high school graduates now go on to college within two years of leaving high school. From 1992 to 1998, enrollments in institutions of higher education increased at a rate of 0.2% per year, but the National Center for Educational Statistics estimates that enrollments will grow between 1.3% and 1.8% each year over the next decade. And unlike the elhi industry, an economic recession doesn't mean less business for publishers. In fact, it often means more business. "With job cuts, people tend to go back to school," says Hirschberg.

The explosion in higher education is not happening only in the U.S., but also worldwide. "The growth in education is following the growth of market capitalism," says Will Ethridge, president of the Pearson Higher Education Group. Publishers are selling more translations and increasing their distribution of English-language titles abroad, as well as investing in foreign-language publishers.

Not only are more people going on to college or back to school, but more and more are pursuing professional development opportunities. Higher education publishers offer a wide range of books and other learning tools for professionals in a variety of industries, especially in the IT field, which requires that skills be constantly updated. "We're making the connection between academic learning and professional learning," says Ethridge. "You may be training to be a computer scientist in college, say, but you're going to have lifelong learning after that."

Technology plays a part in growing the demand for higher education because it increases the need for intellectual capital and makes it easier for people to continue their education. "There is some reason to believe that the electronic world may further increase the total population in the higher education market, more than it will take away from the base population," says Ed Stanford, president of McGraw-Hill Higher Education.

Educational publishers are increasing their digital titles and their online presence. "That's the transformation in our business," says Lieberman. "Students are coming out of high school computer literate, very savvy with the media. We have to be able to produce content in multiple media."

Publishers are packaging digital materials with their textbooks. Wiley, for example, has its own digital tutorial service called eGrade, which offers students access to online practice problems linked to their calculus textbooks. Higher education publishers are also partnering with digital content providers to enrich the content of their own books. Through partnerships such as Wiley's with adam.com, students who buy anatomy and physiology books have access to an online database of anatomical structures.

Higher education publishers are also signing deals left and right to provide their textbooks in digital format. McGraw-Hill, Pearson, Houghton Mifflin and Wiley all have arrangements with one or more companies such as WizeUp, netLibrary, Lightning Source, Rovia, Questia and Versaware to digitize their titles and offer them online. Pearson is also working with companies such as goReader to distribute its titles through handheld devices.

Publishers are not overly concerned with copyright security issues for digital content or lost revenues from sharing. "Given that we can secure content to a particular computer, we think that's very secure," says Stanford. "Even with an e-book device, the willingness to lend is pretty low. Students are even less likely to lend a computer." And students can't sell back digital content the way they can pulp books.

Students could print out pages from digital books and photocopy them, but that's also the case with print books. "You have the same sharing issue in the print world, and it's never been a factor," says Stanford. "Publishers cry, 'Woe is me, the sell-through is weak from photocopying and sharing.' We think that's nonsense." Even so, some publishers are talking about offering digital content than can be downloaded to students for only a short period of time, so that they will be locked out after the semester is over.

Publishers say it's still too early to gauge the demand for digital textbooks. "We'll see this fall," says Stanford. "We expect it to be slow in the beginning—no great groundswell. There's a difference between saying there's interest and actually telling students to buy them." Because professors select the materials, they determine the content of students' education and the way it is delivered to them.

If professors' adoption of the new media is any indication, adoption of electronic books in higher education looks likely. Most professors already have course Web sites, and publishers think the number will only increase. For now, professors are mostly using the Internet to help coordinate their courses, but publishers think they will increasingly see the Web as a way to deliver content.

"We are moving from media and technology being supplementary to being much more integral. That doesn't mean the print product is going away. But we're moving toward a more integrated, hybrid model," says Ethridge. "Professors every year are getting more and more comfortable with the technology. More importantly, we're learning how to translate technology into meaningful education. The move from supplementary to integral opens up many opportunities to improve the quality of education and to improve the business model. We're entering a pretty exciting time."

Higher education publishers have been working with teachers to customize their materials. What's changing is the method of delivery, which is moving from print to digital. Virtually all college publishers have custom publishing services that allow professors to aggregate content from different sources into a printed or digital book and to obtain permissions for materials to which they don't own the rights. Custom publishing is still a small segment of the market, around 5%, according to Hirschberg. But publishers say this part of the business is growing fast. Digital technology has made reproduction cheaper so that, although it's still more efficient to mass produce, Ethridge says, "Over time, that's starting to change."

All the major higher education publishers have deals with companies such as Blackboard and WebCT to offer course management software to college professors so that they can post syllabi, schedules, assignments and grades online. McGraw-Hill also has its own service called PageOut.net, which is free with the purchase of higher educational materials. PageOut.net gives teachers the technological tools to provide their students with online discussions, self-assessments and slide demonstrations of course content.

The ability to provide students with questions and quizzes online helps professors, too, who no longer arrive at lecture just guessing at what their students do or do not understand about the material. "It's a good way to get feedback on how students are doing," says Ethridge.

Access to such online services is still being worked out in the industry. "Blackboard and WebCT are trying to set prices now," says Stanford. "Students get the text with a password, then go online and pay for access. It's too early to know whether students will buy that."

Publishers are also partnering with database companies to provide their content through online research portals. Pearson has a deal with EBSCO Information Services and has also jointly invested with McGraw-Hill into ebrary.com, which will offer students and other researchers online access to a wealth of materials. "It's another way of getting content that can add value to our curricula," says Ethridge.

Technology is the major dynamic in the education business, but publishers stress that content is still king. Publishers and authors are learning to work with digital media to tell stories and teach people in new ways, but the emphasis on quality educational materials hasn't changed. "Good books still sell better than bad ones," says Jovanovich, chuckling. "It's the authors, stupid!"

Education Revenues vs. Industry Sales, 1992-2000 ($ in millions)

* Compound annual growth rate.

Source: Association of American Publishers