Speaking at UBS's annual media week conference in New York earlier this month, executives with four of the country's largest educational publishers predicted strong growth in the elhi market over the next several years, but the forecast for the college market was more muddled.
Mark Armour, chief financial officer of Reed Elsevier, parent company of Harcourt Education (and PW), told the conference that 2004 is the last year of a three-year "trough" in the elhi market, and he predicted that the market will come "roaring back" in 2005. Terry McGraw, chairman of the McGraw-Hill Cos., sees a rebound in the school market not only in 2005 but for the next five years. The improved spending environment in the school market "is not a one-year phenomenon," McGraw said.
Both McGraw and Armour cited the dramatic increase in state adoption opportunities in 2005 as the key factor in the bullish predictions for the elhi segment. McGraw estimated that the adoption market will be worth more than $900 million in 2005, up from about $535 million in 2004, while Armour said the adoption market should post "significant" double-digit growth in 2005.
McGraw noted that in addition to more adoptions, the elhi segment will benefit from improvement in most states' economies, as well as the high priority that continues to be placed on education by both federal and state governments. The reelection of President Bush, McGraw said, means that the administration's emphasis on testing and accountability in education will continue, and may expand beyond reading. McGraw said the continued focus on assessment was a major factor behind MHC's decision to acquire the Grow Network earlier this year. MHC acquired Grow, which provides assessment reporting and customized content for school districts, in July. McGraw predicted that sales in the elhi segment will increase by more than 10% in 2005, and that MHC's elhi companies will outperform market growth.
Reed's Armour declined to predict how well Harcourt will perform next year, although he estimated that market growth in Harcourt's core basal areas will increase by high single digits in 2005, while the rebound in testing and supplementary publishing will be somewhat smaller.
Moderate College Growth
While Armour and McGraw were confident of strong gains in the elhi market for 2005, more moderate gains are predicted for the college market. Higher education "has some issues it has to deal with," Richard Harrington, president of the Thomson Corp., told analysts. Among the problems facing college publishers are used books, high textbook prices and the transition from a print-based to an electronic-based market.
Terry McGraw was the most optimistic about prospects for the college market in 2005, predicting that MHC will beat projections of a 3% to 4% sales increase for the entire college segment next year. McGraw said growth will come in all of MHC's product lines in 2005, led by science, math and engineering. MHC is also expanding its career education offerings next year.
Part of McGraw's optimism about the college segment stemmed from enrollment gains, and he noted that colleges are benefiting not only from the baby boomlet, but from enrollment of older students. John Wiley CEO Will Pesce also pointed to enrollment as a positive trend in the market, though he warned that the crackdown on student visa applications has resulted in a drop in the enrollment of foreign students.
The most serious issue for college publishers in 2004, however, is the price/value relationship of textbooks, Pesce said. Many students are reluctant to pay full price for a textbook, and few publishers raised prices in 2004, Pesce said. The "back and forth" between publishers and college bookstores over the price issue could lead to much more direct interaction with students by publishers in the future, Pesce said. He speculated that the 2% to 3% sales increase expected in 2004 will be driven almost entirely by unit growth.
Pesce observed that while colleges are among the first places to adopt many new trends, one place where they are slow to change is in the classroom. He said that while professors are moving toward greater use of technology in teaching, the primary teaching model remains a combination of lecture and print. Harrington agreed, saying there is "lots of inertia" among professors when it comes to changing instruction methods.
Both Pesce and Harrington believe a move to a more electronic-based teaching method is inevitable and will be beneficial to college publishers.
Harrington said the greater adoption of electronic products is the only way the college market will move beyond annual growth rates of 3% to 4%. He acknowledged that the college market has not grown as fast as Thomson thought it would in 2001, when it acquired the Harcourt higher education and professional publishing groups. Harrington told the UBS conference that while Thomson's other publishing segments (legal, financial, science/healthcare) all derive well over 50% of their revenue from electronic publishing, the learning division gets only about 33% of its sales from electronic products, most from electronic testing. He said Thomson will be ready when colleges hit the "tipping point" and move from "old-fashioned textbooks" to learning solutions that include print products and electronic tools.
