By Katherine Rushton- The Telegraph (UK) | http://bit.ly/1D59fRX
Education publisher Pearson is set to face a test of its own.
3:58PM BST 11 Oct 2014 :: Most people have, at some point in their lives, felt a bout of nerves as they awaited a crucial set of exam results. Pearson’s chief executive, John Fallon, could be forgiven for having the same feeling.
Next month, the London-listed education giant will face its own version of this peculiar kind of torture, as it learns whether Texas plans to renew its contract for Pearson to provide testing in schools. The deal is a valuable one, worth around $500m (£310m) over five years. It is also a matter of particular strategic importance.
Texas is amongst America’s biggest and most influential states when it comes to education spending – the linchpin in the North American market, which accounts for 59pc of Pearson’s revenues and 66pc of its profits. And it has a long history of doing business with the British company, whose chief executive cut his teeth in the US textbook market, and whose former boss, Dame Marjorie Scardino, is herself American.
If the educational testing business were an election, this would count as Pearson’s safe seat. Yet there are signs Pearson may be about to lose its grip on its traditional stronghold. An audit of the Texas Education Agency recently found problems with the way the Pearson contract was tendered and managed.
Questions have been raised in a number of different states over the quality of Pearson’s digital courses. An influential religious lobby group, the Texas Freedom Network Education Fund, has meanwhile lambasted the publisher over one of its textbooks, for allegedly drawing exaggeratedly close links between Moses’s Ten Commandments and the US constitution.
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Texas has not awarded the testing contract yet, but industry sources fear it will not go Pearson’s way.
The company is large enough to swallow this sort of hit, of course. Pearson, which also owns the Financial Times and a 47pc stake in Penguin Random House, made £871m last year, on revenues of £5.2bn. A $100m-a-year dent is not going to send it into the red.
However, the tussle for Texas follows a difficult 12 months, and analysts fear that it could be the harbinger of more problems to come.
The company has already issued three profit warnings since last April, repeatedly blaming a decline in college enrolments and public spending cutbacks which have battered the North American market. “Our biggest business, North America, is facing the most difficult trading conditions in a decade,” said Mr Fallon earlier this year.
Most of its income in the region comes from the education business, which does everything from publishing traditional college text books to designing interactive digital courses, many of which students can follow at their own speed. Meanwhile, the testing unit under fire in Texas writes and manages the regular assessments used to calculate students’ grades. An increasing number are computer-based.
In August, the business suffered another painful blow. Pearson and Apple were both dropped from a $1bn project to supply digital textbooks on iPads to schools throughout Los Angeles, amid concerns that they were in contact with the schools authority before the contract was awarded.
They will be allowed to apply for the contract again, but Pearson’s odds don’t look good after an official report lambasted the quality of its product. The course fell short of “minimum requirements” because “there were numerous lessons and even entire units missing across every grade level”, the Los Angeles Unified School District said.
Pearson is not the first to be criticised in this way. A number of publishing houses have been reprimanded for the quality of their digital courses — something the industry regards as teething problems.
“In this transition from print to digital, we don’t have all the infrastructure, but directionally things are moving the right way,” a Pearson spokesman said.
“There are short-term headwinds and long-term opportunities. It is not going to be a clear, straight path. It’s hard work. It’s a case of trial and error as you innovate. The question is, ‘How quickly do you learn?’”
They echoed Fallon’s view, that Pearson is grappling with the shift to digital at the same time as it is being buffeted by a confluence of powerful external factors. The budget cuts and reduction in enrolments come hand in hand with increasing political tensions.
“The polarising politics that have already affected everything else, [are now] crossing into the classroom. There is no doubt in my mind that education within the US and globally is going through the biggest transformation any of us have seen in a generation or more,” the spokesman added.
Some analysts argue that Dame Marjorie carefully timed her exit at the end of 2012. Pearson expanded enormously under her tenure, using a series of acquisitions to develop digital products and expand in emerging markets, notably China.
Mr Fallon, these analysts argue, is now unfairly having to grapple with a ragtag bag of companies, shouldering the blame for a combination of changing market dynamics and decisions taken by his predecessor.
Others claim Dame Marjorie is the one being scapegoated. They argue that the FTSE 100 business she led for 16 years is wobbling because of much more recent decisions, and that Fallon has lost key staff and contracts because of a reduction of investment in digital projects.
Whichever interpretation one adopts it is clear that Pearson’s troubles are not all of its own making. Its current turbulence started at a time when the tectonic plates of the education industry were already shifting rapidly. Part of this is down to a redrawing of the battle lines between established rivals. In America, McGraw-Hill Education has lately sharpened its focus on digital products under new chief executive David Levin, the former boss of UBM.
News Corp’s education division has also upped its game, under the guidance of Joel Klein, the former New York City schools chancellor.
But there are also a number of new rivals bearing down on the sector: Some of these are start-ups. We are in the midst of an unparalleled splurge in investment in new digital education businesses. In 2008, venture capital firms ploughed just $200m into the sector. This year, that sum is on course for $1bn.
Meanwhile, established technology giants like Amazon, Google, Apple, Microsoft and Samsung are all making inroads into the industry, in the hope that they will build loyal audiences to sell other products to down the line. “We’ve handed education to the big software and hardware providers,” says a senior industry figure. “Google is slated to have 20m teachers working on Google apps, and it’s all free. The margins are different because the motivations are different. Google can give away education because it is securing customers for the future.”
At the moment, the big technology companies tend to partner with the traditional players – Apple was supposed to provide the iPads for LA’s $1bn digital project, for example, but Pearson was responsible for the content. However, we have already seen this story play out in other industries. It is only a matter of time before these technology giants start producing their own content, and try to disintermediate the traditional publishers altogether.
“Partnering with one of these guys is like going to bed with a serial rapist,” one senior source says. “It is only a matter of time.”
He identifies Amazon as the biggest single threat. Its motivation is clear. The more educational content it provides, the more likely it is users will become dependent on its ecosystem and use it for future purchases.
Organisations that are not trying to make money arguably pose an even greater challenge, however. In 2011, Facebook’s founder Mark Zuckerberg and his wife, Priscilla, ring-fenced between $1.5bn and $2.5bn to fund education projects. The endowment, informally dubbed the Zuckerberg fund, is a relatively low-key operation at the moment, but industry figures speculate that he will end up tackling education, in much the same way as Microsoft founder Bill Gates established the Bill and Melinda Gates Foundation to improve world health.
Those sorts of initiatives should only ever be welcomed, but they do not make life easier for traditional education companies.
One former Pearson executive argues that “for-profit” organisations in education are “seriously under threat”, and could end up losing their footing altogether.
But the Pearson’s spokesman feels differently. “The private sector has a pivotal role to play,” they say.
Either way, Pearson has reached a crucial moment in its trajectory. Fallon has to whip the ragtag bag of businesses he inherited into a smart, digital company. Otherwise, the venture capital firms could soon start circling and pick-pick-pick it away.