The Waywardness of Ed Tech Market Leaders

Will the McGraw-Hill / Cengage merger yield focus or fatigue? In this essay, I reflect on the trajectory of publishers in the ed tech market and consider strategic implications for the new entity.

I am now in my 15th year in the Ed Tech industry. When I joined Pearson in 2005 to take over what was then CourseCompass and restructure it into the MyLabs platform, the industry was proudly referred to as textbook publishing, and tech was an afterthought to most of the industry.

Pearson’s rapid rise to the head of the pack was the result of doubling down on an emerging tech story, to the point where CEO Marjorie Scardino had bet her market cap on the shift from print to digital. She alerted industry watchers to track the share of the company’s revenues that were attributable to “digital.”

The US Higher Ed group led the way in this shift with the clever revolution-by-evolution that was the MyLabs. What drove the shift primarily was the faltering economics of new print textbooks due to competition from self-generated substitutes: used books and rentals. Because publishers ceded the used and rental markets to the college bookstore, and because most students saw more utility in selling the textbook “asset” back than keeping it forever, textbook publishers found it increasingly difficult to recoup their investments in print products. With the digital MyLabs, Pearson flipped the script. Get the textbook any way you want — new, used, rental or even borrowed from your classmate. But you WILL need to purchase online access (which is tied to your grades and therefore cannot be shared or resold) to the MyLab required for your course by your professor.

The MyLabs were not a “disruption” in the classic sense — they didn’t really change the customer, the sales person or any core channel dynamics. Instead, they evolved a well-understood business model with a product bundle where one element of the bundle — the digital subscription — had more favorable economics for publishers.

This was a brilliant move by Pearson’s US team, led by the likes of Ethridge, Barke, Bozik, Behnke and Tobin. Their commitment to the MyLab strategy set them at the head of the pack — charting the course amongst their competitors, who were ill-prepared to challenge. McGraw-Hill was tethered to the S&P ratings agency scandal surrounding the financial meltdown, and the company had to spin out its Education division — the one now known as McGraw Hill Education. Cengage, the re-branded LBO’ed version of Thomson Learning, found itself limping along with a mountain of debt service that made operating so untenable that the cap table had to be restructured. Pearson at this time was clean as a whistle: leading the market with a clear direction and virtually no debt.

That was then, and this is now, and a lot has changed.

First, most of the crew that led Pearson’s ascent left the company for one reason or another. Amidst the MyLabs heyday, another unit emerged as the growth leader: the Solutions business. Born out of its custom publishing roots, it made hay of its own by providing customers that couldn’t decide between Pearson’s legacy brands of Prentice Hall (PH) and Addison-Wesley (AW) with a way to “mash up” products from these sibling rivals. This is the unit into which other solutions acquisitions, such as eCollege and Embanet, could be folded into the Pearson portfolio.

Second, Cengage and McGraw, through their near-death experiences, emerged from the ashes as leaner, meaner, more focused competitors. Each had product teams led not by textbook editors but by technologists who were given the mandate to build technology organizations. (It is little coincidence that both established tech centers walking distance from one another in South Boston, which has seen a renaissance in part fueled by tech companies). Pearson, ever the acquirerer of top-line revenue drawn from successful yet disparate products, struggled to have a coherent, rationalized technology stack upon which to innovate, try as they might. Rather than a tech stack that could drive innovation, they held a pile of non-integrated assets — learning and assessment platforms and content that struggled to co-exist technically or come together from a business perspective.

Third, and maybe most importantly, the market landscape had changed. No longer was the college degree the unassailable first brass ring to snatch at any price. Valuable, yes, but no longer justifying constant annual tuition increases. Price pressure flowed downhill to the textbook market, with schools looking to help students with affordability of their education.

Related to this, colleges and universities found themselves existentially vulnerable. For publishers, this was the disruption they were not ready for, as these schools are the very foundation of the textbook publishing industry. If they are shaking, God help their suppliers.

So it is within this historical and market context that McGraw and Cengage merge.

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I recently found myself reflecting again on a seminal work on corporate strategy, The Discipline of Market Leaders, a book written by Michael Treacy and Fred Wiersema almost a quarter-century ago. In it, they put forth a foundational framework for understanding corporate strategies. They posit that there are really only three kinds strategies companies can pursue. If you find yourself not doing one of these things predominantly, you most likely lack the focus you need to be successful over the long term, because it is these strategies that determine the long-term capabilities you develop and hone. According to Tracy and Wiersema, winning companies pursue one of the following:

• Operational Efficiency — operate a hassle-free service with low prices;
• Product Leadership — push the envelope on product development;
• Customer Intimacy — create close relationships with your customers and fully understand their business.

Applying this frame to publishers, one can begin to understand why the sector has been struggling for the past several years.

It would be hard to argue that Operational Efficiency described any traditional publisher strategy. I might, however, apply that label to someone like EdX, which has made it incredibly simple for schools to publish courses, learners to consume them and corporates to adopt their library.

Most textbook publishers have been built for Product Leadership. From acquiring the most talented authors to packaging content in ways that drive learning most effectively, this has clearly where the sector has been pointed. Yet my LinkedIn notifications have revealed a spate of editorial teams being disgorged from the publishers over the past few years. Pearson’s recent layoffs will soon be accompanied by more editorial downsizing resulting from the McGraw/Cengage merger. So, whence product leadership?

There is a belief among publishers that customers no longer value content (at least not the way it used to be built by the publishers), and that product leadership needs to rhyme with technology. This, however, puts the publishers on unfamiliar ground. Will publishers be able to compete with technology companies like LinkedIn (Microsoft), Salesforce, Google and Apple when the domain shifts to technology? While most of these tech giants have stumbled in the past when it comes to education, they understand how to build and innovate technology, for consumers, enterprises and ecosystems.

I will come back to this point in a moment.

This leaves Customer Intimacy as a strategic orientation. Pearson’s Solutions business was clearly one built on customer intimacy, even in the midst of the MyLabs and an editorially-driven product leadership culture. What its Solutions business figured out was how to connect with customers and create a “revenue envelope” into which products can flow in and out, delivering value all the while to the customer.

If one studies the interest publishers have shown in the OPM market, one sees the desire for them to create this revenue envelope by being the one-stop shop for aggregating everything their customers need: from content, to technology to program design and marketing. Even though McGraw’s next CEO, Cengage’s Michael Hansen, declared recently that the company would stay away from “the business of recruiting students to schools,” I would be shocked if the new McGraw Hill were not in some way equipping schools to build their own OPM capability — much the way John Katzman’s Noodle is set up.

The challenge for publishers regarding customer intimacy strategies is, colleges and universities are in the midst of the biggest shake-up of their industry in its history. From schools closing and merging on the one hand, to the cash cow of international students flowing to the US being stymied by a confusing immigration policy, this shake-up may also shake the publishers hanging onto higher ed. In response, many publishers are adding offerings in “employability” — the pathway between higher ed and employers — as important arrows in their quivers.

There is a different kind of customer intimacy, though, which promises potentially much more and better opportunity for publishers. It is customer intimacy with students. While schools may collide and consolidate, they will continue to serve students. These are students that need to prepare to get into school, prepare to get into a job, re-skill themselves for their next job and ultimately stay knowledgeable in a knowledge economy.

Yet, for the most part, there is almost no vestige of student customer intimacy amongst publishers. The noteworthy exception is Cengage Unlimited, the all-you-can-eat subscription to all of Cengage’s store of content.

Years ago, a few of us at Pearson experimented with and proposed business models that would focus less on the big money to be made in large first-year courses (Developmental Studies, Economics, Psych, Freshman Composition, etc.) and more on making the student a long-term subscriber. Our efforts met with a lot of resistance. In contrast, Chegg, whose market cap is just shy of the new McGraw and half of Pearson’s, has consistently and relentlessly focused on the college student as the customer. Having sat in meetings during the time when Chegg’s market cap was a lot closer to my bank balance than to the balance sheet of major publishers, I see this lack of a student customer intimacy strategy as an astonishing miss by the publishers to date.

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The competitive landscape is far more crowded and more confusing for publishers now than when I first entered the industry. For one thing, the venture community is now much more significant in and educated about ed tech, especially after 10 years of the ASU GSV Summit — from its humble beginnings in the Scottsdale desert. Early-stage ventures no longer need to rely on 3 or 4 big publishers as their only paths to growth and exit. The next tier players, including Wiley and Macmillan, have quietly been making moves. Companies like 2U (with its recent acquistion of Trilogy), Microsoft (which devoured LinkedIn, which devoured Lynda.com — now known as LinkedIn Learning), the MOOCs (led by EdX and Coursera), Pluralsight (vertically focused on IT and developers), Salesforce (with its recent acquisition announcement regarding Salesforce.org), ASU (with new ventures in areas ranging from K12 to employability) as well as many others backed by VC, private equity and skilled entrepreneurs, all make for an increasingly competitive and complex landscape — one that traditional publishers were never fully trained or equipped for.

The good news for the new McGraw Hill entity is that opportunity abounds, and there is no player in the space that is unassailable. But for them to succeed, they will need to have a level of strategic clarity that has eluded the market leaders for nearly a decade.