Pearson: Setting the Standard for Education
Pearson Education (Pearson), the dominant educational publisher in the U.S., is facing several critical pressures. First, general U.S. education levels have deteriorated over the past three decades, prompting public outcry about the need for system-wide reform. Second, Pearson is facing increasing investor scrutiny in the wake of weak textbook sales and shifting industry trends. Third, Pearson’s two biggest competitors, Cengage and McGraw-Hill, announced a merger earlier this year that would displace Pearson’s grip as the industry leader. In order to defend its position as the industry leader, Pearson should foray into the project-based learning space, establishing an uncontested foothold, addressing long-term profitability concerns, and revolutionizing the U.S. education system.
The U.S. Educational Publishing Industry
The U.S. educational publishing industry consists of courseware, including textbooks and other learning materials, designed primarily for students in K-12 schools and higher education institutions. Today, Pearson dominates as the largest educational publisher in the U.S. by revenues, holding a 40-per-cent share of the market. Pearson is followed by Cengage and McGraw-Hill, representing 24 per cent and 21 per cent, respectively, with smaller competitors like Wiley, Macmillan, and Oxford University Press making up the remaining 15 per cent.
Traditionally, educational publishers earned most of their courseware revenue through physical textbook sales, supplemented by additional digital offerings like video representations of textbook concepts. However, recent technological trends are shifting learners and educators away from physical textbooks and towards the “online classroom”, where a greater portion of learning is done through digital exercises.
Moreover, technological advances have allowed companies to focus more on personalized services, with organizations like Khan Academy allowing individual students to study at their own pace through customized modules. These two trends—digitization and personalization—are the dominant developments in the U.S. education publishing industry today, and will continue to shape the space for the foreseeable future.
A Need for Change
For decades, the need for a wide-ranging educational reform was widely recognized across the U.S. as the nation fell from 6th in the world in education and healthcare in 1990 to 27th in 2016. The Hechinger Report, a non-profit focused on journalism related to educational inequality, claims that in 2016, “American fourth-graders, on average, had worse reading skills than they did five years earlier.” Opinions of public officials clearly show declining confidence in the public school system, with root causes thought to be the decreasing affordability of textbooks, lower funding for schools, inadequate Common Core standards, and a focus on learning for exams rather than for broader applications.
Several systems have been proposed over the last century in an attempt to reform the U.S. education system. However, none gained enough traction to become a viable replacement on a national level. One such system is the Montessori method of education. The Montessori method, an older system that re-thinks the essence of developmental learning, proposed a model based on discovery. In it, students learn concepts from working with materials, exploring their uses and understanding their interconnections. Although thought to be effective under certain conditions, the method demanded high investment costs and afforded students excessive amounts of independence in their education, which came to be scrutinized by the public. In addition, the Montessori method offered limited potential sources of income for educational publishers, and so it lacked vital support from industry leaders.
A more feasible alternative system is Project-Based Learning (PBL). Edutopia defines PBL as “a dynamic classroom approach in which students actively explore real world problems and challenges and acquire a deeper knowledge.” Instead of subjects being taught in isolation from other subjects and adhering strictly to a textbook, PBL offers an environment for students to work on projects that integrate several skills concurrently. For example, in a PBL system, one of the projects a student may be working on is building a hypothetical spaceship. The educator would guide the student to progress through the project, learning several crucial modules along the way in relevant areas. For instance, to build a spaceship, one would need to know mathematics, physics, and chemistry, among other subjects. Because the task revolves around a project, rather than a particular subject, students are encouraged to think holistically in approaching the problem. Framing education in this way assigns meaning to classroom activities and often builds skills directly transferable to the workforce. In a PBL dynamic, the teacher becomes less of an authority figure and more of a guide to the student, engaging in participatory teaching. Consequently, the classroom becomes more engaging and less monotonous. Indeed, PBL educators cite lower absences, better engagement, and higher test scores as a result. Studies in PBL implementation recorded numerous instances in which schools that implemented PBL outpaced general state-wide improvement scores on standardized tests by a factor of three to ten.
In today’s educational environment, PBL is likely the most viable alternative to the traditional textbook-oriented education system. Trends toward digitization in the industry allow PBL to be implemented on a massive-distribution basis through online channels. In fact, some companies have already created subscription-based platforms that employ the PBL methodology. For example, Defined Learning is a company that works with K-12 teachers to offer Defined STEM, an online platform that takes learners through project-based classroom-enhancing tasks. The online nature of the platform also makes it possible to personalize projects to each student, giving them the option of pursuing various topics at a variety of paces. Other companies have established extensive networks of students and institutions that have indicated a strong interest in PBL, committing to PBL principles. For instance, High Quality Project-Based Learning (HQPBL) is an organization that promotes PBL through its educational network, which includes 3,236 committed schools and 104 partners. HQPBL developed a high-level framework for PBL learning, and the organization constantly supports research in the area.
Coupled with the prevailing digitization and personalization trends, an online PBL platform provides a cheaper alternative to physical textbooks, a revision to the Common Core process through tailored education, and a focus on learning for broader applications, rather than exams. These factors rectify major problems the U.S. education system faces today. However, PBL has not yet been picked up by leading industry players. Traditionally reliant upon physical textbook sales, incumbents would have had to cannibalize their legacy business in the pursuit of expensive alternative models. In other words, industry leaders stuck with their profitable bread and butter, having no incentive to chase a large-scale alternative like PBL.
A Dire Circumstance
With the industry environment ripe for change, Pearson needs to act; in a press release late September, Pearson announced that it was revising down its profitability guidance due to weaker projected physical textbook sales. Students and academic institutions are making the shift to digital solutions at an alarming pace, threatening Pearson’s legacy business. In particular, its U.S. college courseware business, driven by textbook sales, is projected to decline 8-to-12-per-cent yearly, with sales from digital channels not growing quickly enough to cover losses from the legacy business. Pearson’s stock plunged 19 per cent in morning trading following the announcement, and has yet to recover. Investors are not optimistic about Pearson given its uncertain financial future.
On top of internal concerns, on May 1, 2019, Cengage and McGraw-Hill announced their entrance into a definitive agreement to combine in an all-stock merger of equals. Cengage-McGraw-Hill (CMGH) will soon represent 45-per-cent of industry revenues, superseding Pearson’s share and posing a significant competitive threat. In particular, CMGH will find efficiencies by optimizing its cost structure and increasing its supplier-negotiation power. As well, CMGH will command an extensive network of teachers, students, and educational institutions. Without a response from Pearson, CMGH will be in a prime position to chip away at Pearson’s market share and expand its circle of influence.
Although CMGH will wield significant market power after the merger, there is an opportunity for Pearson to take advantage of several factors. For one, CMGH will feature more than 44,000 titles in various fields of study. Compared to Pearson’s 1,500, CMGH will find one of its top priorities to be the streamlining and rationalization of its SKUs – overlapping subjects, an excess of authors, and dual operational management systems will all need to be resolved. CMGH cites that it will take three years to realize the merger’s full cost synergies. Furthermore, the 2013 merger worth GBP 2.4 billion between Penguin Group and Random House—two of the world’s most prominent trade publishers—serves as a good proxy for CMGH’s combination timeline. Penguin-Random House took 18 months to fully integrate; CMGH can be expected to take a comparable length of time given the similar nature of their publishing businesses. Therefore, CMGH will face difficulty remaining strategically nimble in the next two to three years, which presents an opportunity for Pearson to pivot to a stronger competitive position.
In an attempt to combat its declining physical textbook revenues, Pearson is investing heavily into technology as it undergoes digital transformation. In particular, Pearson is looking to develop its Global Learning Platform, which will play a central role in giving educators the flexibility to update content in real time. Even with this change, however, Pearson’s strategy represents a marginal improvement to its competitive position. Considering the public demands for a reformed model of education, the internal stresses from Pearson’s legacy textbook business, and the threatening merger between its two biggest competitors, Pearson must use its size, capital, and reputation to pursue a meaningful large-scale initiative.
To address the mounting social trends calling for educational reform, reorient its business model, and exploit CMGH’s strategic paralysis, Pearson should introduce PBL as the new, more effective method to educate America’s youth. In particular, Pearson should acquire Defined Learning, leverage internal resources to refine and personalize the Defined STEM platform, and rollout the new model in strategic locations across the U.S. By tackling the issue of U.S. education as a whole, Pearson will solve its own organizational difficulties.
Acquiring Defined Learning will give Pearson the jump start it needs to venture into the PBL space. The Defined STEM digital platform leverages the PBL method, giving students performance tasks to build literacy among various disciplines in pursuit of a project goal. Buying a ready platform would allow Pearson to avoid the otherwise-necessary monetary and temporal investment into understanding and digitally implementing the PBL method. Instead, Pearson can leverage its increasing competency in technology to make marginal enhancements to Defined STEM and elevate it to a massively commercial level. Pearson would also draw from its vast array of published materials to improve both the quantity and quality of projects on the platform, integrating its legacy competencies with its new digital Pearson PBL platform.
Pearson should begin its platform rollout by targeting carefully selected underperforming private schools. By focusing on private schools, Pearson would most accurately be able to measure the effect of its PBL platform on underlying education efficacy. Because private schools tend to be situated in socioeconomically secure areas, factors outside of Pearson’s control—such as crime and corruption—are minimized, allowing the platform to be assessed on its merits rather than situational influences. In addition, working with private schools will allow for easier platform adoption, as Pearson would not only avoid the tedious process of going through a school board, but also work with schools that have control over capital allocation. Given the incentive for private schools to chase better educational performance, underperforming private schools would be keen to implement a new model in pursuit of positive results. These schools would become the early adopters of the Pearson PBL platform.
By working with the early adopters, Pearson will be able to actively monitor the performance in each school and fine-tune their PBL platform. Once enough evidence of the system’s efficacy has been collected, Pearson would then target new participants from the HQPBL network of students and educators. Their indicated interest in PBL suggests that the learning curve for employing a PBL platform would be flatter, giving Pearson the next natural target for the continued rollout of the Pearson PBL platform.
Finally, with an increasing dataset of successful Pearson PBL platform implementations and rising classroom scores, Pearson could turn to mass market rollout. With enough interest, which studies on change adoption estimate to be 10 per cent of the population, a critical mass of students and educators would be reached. At that point, Pearson’s PBL platform would begin to displace the traditional textbook method on a nation-wide level, building a monopoly in the space.
If the acquisition is voted down by Defined Learning’s shareholders, Pearson has two paths forward. First, Pearson can force a hostile takeover, leveraging its size to absorb Defined Learning for its systems and platform. Alternatively, Pearson has the capital and technical competency to develop a similar system in-house. Admittedly, in-house development will take a longer time, since the PBL system would need to be studied and optimized into a commercial online platform through copious amounts of testing and iteration. Still, Pearson has the network reach and technological capability needed to exceed the hurdle and develop an independent platform.
Playing Catch Up
Considering the CMGH merger timeline, Pearson will have two to three years of breathing room to establish a meaningful first mover advantage in the PBL space. Having no competitors of a comparable size in the space, Pearson will have the capacity and freedom to target the most promising educational districts, capitalizing on the publicity that would arise from successful implementation. Establishing a grip in numerous educational districts, as well as making a loud splash in the news, will provide Pearson with a significant head start over its competition. By the time CMGH becomes nimble enough to join Pearson in the PBL space, Pearson will be securing long-term agreements with districts across the U.S.
After PBL is rolled out on a national level, Pearson could introduce the system worldwide, leveraging its global presence to challenge its competitors on an international level. By taking the initiative while CMGH is still integrating, Pearson will establish itself as the premier PBL provider. This will create a competitive moat that will shield profits and build long-term shareholder value. The Pearson PBL platform will have the potential of igniting a new generation of learning around the globe, bringing with it a brighter future of engagement and collaboration.