Reviewing industry analysts - not just Junker and Macker, your editor has a hard time understanding whether they have an “investment theory” for k-12 based on an understanding of its actual and potential market structure. Clearly the big picture is positive. Demographics, public attitudes, political rhetoric, certainly need, but even budgets all point towards a favorable future. But against these fundamentals, Wall Street analysts report an unending, ever-changing, seemingly random series of unrelated, unfavorable events.
Investors need to understand the “why?” It's time for the analysts to start giving them some answers – or, in the words of intelligence failures, to “connect the dots.” Surely the analysts have some thoughts on a common cause, or a few causes.
Your editor has a view on this. The new k-12 industry threatens to disrupt the old (actually current) market structure. The primary business beneficiaries of the current structure are the multinational publishers, but they are only the business beneficiaries. School districts, teachers unions. state education agencies – pretty much everyone involved in public education except students and taxpayers – are all advantaged by an opaque decision-making structure.
The new industry depends on the proper implementation of NCLB - motivated by the spirit of the law, rather than mere compliance or political preference. But from federal regulation down to district purchasing decisions, public education is anything but transparent. Opacity protects the status quo. So long as this is true, market share will be a function of personal relationships, established marketing channels (brands) and marketing budgets, rather than the value-added to student performance demonstrated by credible evaluation. And this formula favors the established players.
Sunlight is the worst enemy of the status quo. Ironically but understandably, caught between the promise of a new market and the reality of today’s, the new k-12 providers are conflicted. On the one hand, they decry the general lack of transparency; on the other they are not exactly eager to give up the few special relationships they’ve managed to establish with school systems. Similarly, too many new firms claim their programs are based in research, too few are serious about demonstrating program efficacy.
The net effect of this is a large number of new firms reliant on small client bases and a few funding streams, none of which could stand up to concerted competition from a major publisher. Today's market is more like the old than the one promised by NCLB. This structural challenge lies at the root of the low valuation of firms like PLATO and Leapfrog – poor performance is considered a problem of management, when it is really a function of market structure, i.e. political risk. If there is a management failure, it is a failure of management teams and boards to recongize the need for collective action to hasten the implementation of NCLB provisions essential to realize new market. It is a huge collective blind spot, and investors are punishing the whole industry for it, even though few can put their finger on ut as the reason capital has been withheld.
Once the investment community becomes clear about “why” the new k-12 firms have one problem after another, your editor believes they will start signaling firms and, more important, the venture investors who put money in and would like to take it out, And that may get the firms to start treating their trade groups as more than good PR. K-12 is the epitomy of a highly-regulated industry; no one survives this kind of an industry without first-rate lobbying. Publishers have it. Consider one name - Sandy Kress. And no none changes such an industry without an even better political and policy presence.
But in your editor’s view, this will only start when investment analysts start thinking strategically.