This writer sees no alternative to a marketplace in the products, services and programs of k-12 classroom teaching and learning. Such a market has always existed. Our policy choice is to stay with a market based on a publishing oligoply and overly well-connected local consultants, or one that fosters the the high level of quality, high rate innovation and high range of choice the United States requires to remain in the first rank of economic powers. His bias is to the latter.
Reviewing the August 1 front page article by Kathleen Kennedy Manzo and Andrew Trotter on Houghton Mifflin Riverdeep Group's (HMRG) proposed acquisition of Harcourt Education (an update of an online version published July 16) left your editor believing that Education Week readers might get the impression that he thinks:
1) some form of antitrust action is imminent, and
2) the giant publishers are not interested in moving to digital content.
Those would be overstatements; directionally correct, but exaggerations.
Antitrust
At least one analyst of the education marketplace said he believes the purchase of Harcourt Education raises serious antitrust concerns.... “We’ve got to look at the impact of the concentration of the industry on price, quality, and innovation,” said Marc Dean Millot, the editor of the Alexandria, Va.-based New Education Economy, an electronic newsletter for the education industry.
Your editor does not expect to see antitrust actions against HMRG, Pearson or McGraw-Hill in the next days, weeks or months. He does expect that legal analysts and some policy makers are going to start probing the subject because even a cursory examination of the marketraises issues of intertest to those who study the subject.
As the article points out, the deal would leave the three firms with a combined 82% of the k-12 publishing market.
Imagine a similar concentration in phone service, cars or air travel. Indeed, most readers have experienced the positive effects of adding new competitors to just such markets. There's not much argument about the consumer benefits of breaking up ATT in 1984 - essentialy moving us from one kind of phone, with one kind of service at one price, to any kind phone, service and price imaginable. American car buyers are still reaping the fuel economy benefits of Japanese market entry in the 1970's, to say nothing of everything that was once extra now being standard. And while flying is no fun, it's gone from being a privilege for the elite to a basic consumer commodity. It's also worth pointing out that in almost every one of these cases, the dominant providers proved unable to maintain their market positions - some indication that they had not been adequately motivated to support society's intersts in lower prices, higher quality, and ongoing innovation, and had actually lost the managerial capacity to pursue these values.
Similar effects of the longstanding current k-12 market structure on the products, services and programs that are the content of classroom teaching and learning were reflected in No Child Left Behind. There would be no reason to require that federal funds be used only for purchases emodying scientifically based research (SBR), to spell out what the term means, and to repeat the requirement in virtually every provision of the law, if Congress had been satisfied with what the dominant providers were selling. It was not satisfied, and expected that NCLB's requirements would be turned into regulations and enforced by the Department of Education in ways that would compel change. That they were not so interpreteted and policed by the Department - particularly in the case of Reading First - only serves to underline the pervasive influence of a market structure based on three roughly comparable content providers.
(More on SBR and this deal here. More on antitrust here.)
Transition to Digital Content
Adam J. Newman, the managing vice president of Boston-based Eduventures Inc., an education market-research firm, said the planned acquisition “certainly is a significant competitive challenge to McGraw-Hill and Pearson.”... One likely result of the deal... would be to help drive the resulting companies—and their competitors—further into publishing digital content. “It suggests a further and continued move away from the textbook as a model for content delivery, given the thinking these [participating] businesses have done and their investments in alternatives to basals.... It accelerates the transition away from textbooks.”...
Trace Urdan, an investment analyst at Signal Hill Capital Management llc, agreed that the deal would, over time, advance the transition to digital content.... “You now have at the head of the largest K-12 publisher a management team from Riverdeep that is predisposed to digital content, which may be a much more radical move than the consolidation of the textbook publishers,” said Mr. Urdan, who is based in San Francisco.... He said Riverdeep’s control marks a “generational change” in the company.
But Mr. Millot disagrees that the consolidation will hasten the K-12 publishing industry toward adopting digital formats.... Quite the contrary, he said: Riverdeep’s approach has been, “If you can’t beat them, join them.” The major educational publishers’ chief assets are their brand recognition and their sales and marketing channels into school districts, Mr. Millot said.... Through its takeover of Houghton Mifflin, Riverdeep gained a powerful platform for selling more of its digital products to school districts, he said... But now that the two companies are one, and with the addition of the Harcourt divisions, the company would be reluctant to endanger the cash cow of the printed textbook, Mr. Millot said.
One could read this as Newman & Urdan v. Millot. It's really more about the perception of a glass as half full or half empty. Newman and Urdan argue that the acquisition would speed up the distribution of digital content. Other things being equal, it should. HMRG has fewer concerns about a market open to digital content, because it has digital content and management that came out of digital content.
But other things are not equal, and those other things will curb HMRG's enthusiasm. The new company holds a very favorable position in k-12 content by sharing an oligoply in textbooks. That position is shored up by laws, regulations and practices in the adoption process that favor print. Hastening the erosion of the barriers protecting textbooks does not guarantee HMRG more sales or higher profits. Pearson and McGraw Hill are hardly devoid of digital properties. And there are plenty of smaller digital-only firms who would be much bigger firms if "textbook adoption" truly became "content adoption."
So to your editor, its just not clear that HMRG's management will be eager to dismantle the barriers protecting much of its position and profits. And when you look at the k-12 content market's product segments, that's pretty much what has to happen if HMRG is to make a material change in sales; it's not likely to get it going after the money outside of adoption or the little guys who serve it. Disrupting today's market structure to favor digital content, might just as easily leave HMRG losing more than marginal market share to its rivals. The three publishers might yield a more than marginal slice of the content market to the digitally-based providers. Why should the big three want to hasten the entry of the k-12 industry's equivalent of the Japanese carmakers?
What your editor would say is that HMRG may be marginally better positioned than its two sister firm to take advantage of such a market distruption should one occur. But rather than instigate such a distruption, the firm is more likely to exploit the texbook business in ways that make the shift to digital faster than what Pearson and McGraw-Hill would like, but more gradual than Newman and Urdan imply - milking the cash cow of print publishing, transitioning consumer brand/imprint identification from book to screen, and never really giving the "digital only" firms the beachhead they require to challenge the dominant players.