As Book Prices Drop, Big Publishers Push Into Software and Edtech

Don’t look now, but textbook publishers are trying to become software companies. And tech startups are trying to outmaneuver these giants to win the future of educational content and tools. It’s one of the big trends in edtech and digital media.

Indeed, digital publishing has “fundamentally changed every aspect of what we are doing with our content,” says Michael Hansen, the CEO of Cengage Learning, an education publisher that recently moved headquarters from Connecticut to Boston, while also opening a new office in techie-rich San Francisco.

Why should the innovation community care? Well, the U.S. textbook market is valued at roughly $14 billion annually. Big education publishers like Cengage, Pearson, Houghton Mifflin Harcourt, and McGraw-Hill Education are billion-dollar companies with large profit margins. They have a deeply vested interest in understanding their customers—mostly students and parents—in the digital age. They also want to keep their content proprietary, whether it’s print or digital—even as the price of books is dropping and forcing them to innovate and come up with new business models. What’s more, they have some of the deepest pockets with which to compete with, and acquire, startups creating digital tools and content.

That means traditional publishers are driving tech partnerships, startup exits, and investor returns in a field that is only starting to get more attention from venture capitalists and big tech companies (hello, Amazon). How the landscape of publishers and startups evolves will greatly affect innovation in education products, services, and technology—and the future of education itself.

On the innovation front, the startup community is “very fertile ground for us,” Cengage’s Hansen says. Edtech companies can sometimes “get to $15-20 million in revenue, but they run into the issue of distribution,” he says, because they often have a “very fragmented buyer base.” At that point, Hansen says, “they come to us or we work with them beforehand, or they become acquisition targets. We’re looking very actively, and we’re well-capitalized now.”

Big publishers certainly have been making noise on the tech acquisition front (see table below). Houghton Mifflin Harcourt recently bought SchoolChapters, Curiosityville, and Channel One News. In 2013, Pearson acquired companies such as Grupo Multi and Learning Catalytics; the publishing giant is going through a massive restructuring around global learning services and digital operations. Meanwhile, Macmillan acquired Late Nite Labs, and McGraw-Hill bought Aleks Corp. and, more recently, Engrade and Area9.

Publishers Moving Into Edtech
Notable acquisitions by big education publishers
PearsonGrupo Multi, Learning Catalytics, EmbaNetCompass
McGraw-Hill EducationEngrade, Area9, Aleks Corp.
Houghton Mifflin HarcourtSchoolChapters, Curiosityville, Channel One News
MacmillanLate Nite Labs, Maths Doctor
Cengage LearningQuestia Media, Aplia

For an established education-software company like Blackboard, which was founded in 1997, the story is somewhat similar. This year, the company has acquired MyEdu, Perceptis, and others it hasn’t  announced, as part of its efforts to keep growing and remain innovative, especially in the competitive higher-ed market. “Startups have sharpened our game,” says Blackboard CEO Jay Bhatt.

Blackboard doesn’t produce content, but it does deliver it via an online bookstore, digital tools, and a learning management system that hooks into everything from teachers’ lesson plans and workflows to students’ profiles and job searches. Like the big publishers, Blackboard is trying to more precisely understand student behaviors and preferences—all part of what Bhatt calls “the rise of the learner.”

Meanwhile, to protect their interests—and curtail the competition—publishers have taken legal action. In late 2013, Cengage, Pearson, and Macmillan settled a copyright lawsuit they had brought against Boundless, a Boston-based startup that’s developing Web-based resources and alternative textbooks while promoting open educational content. Terms of the settlement weren’t disclosed, but the publishers had claimed the startup’s free, online materials for college courses infringed on their copyrights.

Boundless seems to have recovered from the legal distractions, which went on for almost two years. The company now makes money from its premium course materials and recently rolled out collaborative teaching software that lets educators customize textbook materials, track students’ progress, and share resources with peers. “Unlike big publishers, Boundless is using a community approach to create and improve content,” says CEO and co-founder Ariel Diaz.

The startup is also working with Web- and mobile-based teaching systems such as Top Hat, to try to bring cheaper, more customizable course materials to students. The big goal is to … Next Page »

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