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 “go beyond what a traditional textbook can do,” Diaz says. “The industry as a whole is going through a huge period of transformation.” He sees the educational publishing model moving from print and e-books to software platforms with “more like a service or license model.”

In any case, the trend seems clear: the price of textbooks is going to come down, even as online tools and materials promise more interactivity and feedback from students and teachers. It all amounts to a huge challenge for both publishers and tech companies.

Let’s take a closer look at Cengage Learning. The 5,500-person company made $1.7 billion in revenue last year, and emerged in April from nine months of bankruptcy, following a private equity buyout in 2007. The vast majority of Cengage’s business is in higher ed, and its customers are primarily college students and their parents, not professors or departments. Now the publishing firm is trying to remake itself as a technology and services provider.

Michael Hansen, Cengage Learning CEO

Michael Hansen, CEO of Cengage Learning

In the traditional print model, says CEO Hansen (pictured), “you put it on a shelf, and you didn’t care how people were using the content. With the advent of digital, our ability to reach out and interact with our users has exponentially increased. The industry as a whole, and Cengage also, was somewhat late to the party.” Now, he adds, “it’s not about the print to digital, it’s embracing what the user does with our content.”

To that end, Cengage has embarked on a major effort to understand the workflows of college students and professors, through interviews about things like how kids study, how much time they spend on homework and test preparation, and what kinds of work they do on mobile devices. One thing the company found was there are big differences between subjects—American history versus accounting, say—in the types of content professors want to use and how pupils prepare. Also, students typically still prefer reading book chapters in print, but they do things like test-prep questions or video simulations on mobile devices and computers.

The results of such studies have been enlightening to publishers. “As an industry, we have ignored the student for decades,” Hansen says. “It’s a lot more work than it used to be. But it’s more fun work, in a way.”

Digital and interactive tools mean publishers and tech companies can also get real-time feedback from students and educators—if they can unify their product offerings and make sense of all the analytics. Cengage, for one, has rolled out a “personal learning” software product called MindTap. It’s an online platform where professors can combine readings, videos, apps, and assessments to provide a richer, more cohesive content stream for their courses.

Hansen would be among the first to admit that publishers have a long way to go in understanding their customers—and using technology to do that better. “We need to build products that students want to buy, and that they see as necessary for their education—while continuing to ensure that products meet the needs of the faculty,” he says in a follow-up e-mail.

I asked him how big a threat open content is to the company’s core textbook business, given that’s where the digital-media world seems to be heading.

“Open source content is not something I would consider to be a threat,” Hansen says. “We’re working with partners every day to explore ways to make useful content available alongside our own authoritative content if that is what faculty and students want. The key is finding ways to engage students in the materials, whether traditional course material or open content, and making this information accessible to learners in ways that best support the goals of the faculty and student.”

What does all of this mean for the future of education? So-called “blended” approaches to online and offline learning are being tried at all levels, and best practices are emerging. Meantime, the majority of U.S. college students already use some component of non-traditional instruction or materials. But the field is wide open, and a land grab is underway for the hearts and wallets of students, teachers, and administrators.

Bhatt, Blackboard’s CEO, emphasizes that the education industry “needs a leader in technology.” The question is whether that leader in digital will come from the established software world, or the edtech startup community, or maybe—just maybe—the big publishers.

Hansen’s bet, of course, would be on the latter. “We don’t have a magic crystal ball to tell us if or when digital will completely take over,” he says, “but we know that digital is the future.”

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