THE PARTHENON GROUPBoston • London • Mumbai • San Francisco
North American Publishing:So, What Do We Do Now?
Parthenon Perspectives
June 5, 2012
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Agenda
What Informs our Perspective?
Parthenon Perspectives on U.S. K-12 Market Trends
The Implications We See for Providers in the Space
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What Informs Our Perspective?The Parthenon Group has completed 400+ education assignments globally
Pre-Kindergarten K-12 University Vocational and Other
Career and Professional
= On-the-Ground Education Sector Projects Completed
= Parthenon Offices
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What Informs Our Perspective?Public and private sector work provides us with a strong sense of what is happening “on the front lines
We advise a number of leading education institutions…
…and work with the private companiestrying to meet their needs
• Local educational authorities, states, and governments
• Charter schools, private K-12 schools, and other innovative education providers
• Global post-secondary institutions
• Foundations on the forefront of educational reform
• Educational publishing
• Assessments
• Tutoring
• Intervention/Special Ed
• Technology providers
• Consumer education products
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Agenda
What Informs our Perspective?
Parthenon Perspectives on U.S. K-12 Market Trends
The Implications We See for Providers in the Space
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0
20
40
60
80
100%
U.S. K-12Education Spending
Benefits
Salaries
Supplies & Related Services
Other
Content
100%
U.S. Market Perspectives Within K-12 education, content is considered more “discretionary” and has suffered accordingly
K-12 Publishing Market Revenues, 2007-2011
Note: Figures are from company financials where available; Simba estimates are used for competitors without relevant public dataSource: U.S. Census Bureau; E-Learning Council; National Center for Education Statistics; BMO Capital MarketsSimba; Company Financials; Company Earnings Calls; Analyst Reports; Veronis Suhler Stevenson
Content is less than 2% of all
K-12 spending
Total U.S. Education Market, 2008
McGraw-Hill
Pearson
HMH
Other
School SpecialtyScholasticEducation
$8.2B$7.7B $7.7B
$7.1B
0
2
4
6
8
$10B
2008 2009 2010 2011F
-13%
-3%
-11%
2%-12%
1%
('08-'11)-5%
CAGR
57% 50% 52% 50%Top 3 Share
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Required assessment of student performance and imposed consequences
Demand for intervention and assessment materials increased (assessment market grew at 7% CAGR from ‘05-’11)
Did not impose new requirements related to basal textbooks
Basal spending has been mostly flat since 2000
0
1
2
3
$4B
1990
$1.9
B
1991
$1.9
B
1992
$1.9
B
1993
$2.1
B
1994
$2.0
B
1995
$2.3
B
1996
$2.4
B
1997
$2.8
B
1998
$3.0
B
1999
$3.0
B
2000
$3.3
B
2001
$3.3
B
2002
$3.1
B
2003
$3.2
B
2004
$3.1
B
2005
$3.4
B
2006
$3.4
B
2007
$3.4
B
U.S. Market Perspectives NCLB’s spotlight on performance spurred spending on intervention and assessment – so, what is next?
Impact of No Child Left Behind on Instructional Materials Spending
1
2
Note: *Based on AAP respondents only, does not equal full marketSource: Association of American Publishers; Parthenon interviews
U.S. K-12 Basal Market*, 1990-2007
Aggregation and customization NCLB
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Curriculum - WHAT is being taught
• Common core standards and assessments
• Balance of cognitive and non-cognitive skills acquisition
Advances in Technology• Realization of potential for true differentiation at scale through online delivery and
proliferation of devices• Leveraging the “I” in “IT” - potential rise of business intelligence
Changing Federal Role – At least for now• Competitive grant funds (RTTT, i3)
• ESEA Reauthorization
Pedagogy - HOW it is being taught
• Personalization / Next Generation Models
• Adaptive assessments• Self-directed, competency-
based models
Human Capital -WHO is teaching
• Measuring and making decisions on quality
• Developing new roles and pathways
• Personalization of professional development
Changing Institutional Landscape – Increasing accountability and competition• Performance management within K-12 systems
• Post-secondary NCLB-like accountability • Rise of non-public competitors (for profit and charter schools)
U.S. Market Perspectives The sector is addressing challenges through innovative curriculum, pedagogy, and human capital
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U.S. Market Perspectives Nearly all successful products and services over the past few years adhere to four broad heuristics
Personalization has always been a goal but digital solutions and adaptive technologies make it seem just within reach
Products and services that fit within, and enhance, established workflows succeed; those that fight them fail
$50 to $150 of instructional materials expenditure vs. $7,000 to $12,000 of instructional expenditure
The performance gap continues and is still front-and-center on Superintendent’s agendas
Help Close the Performance Gap
1
Support Personalization
2
Enhance Teaching and Administrative
Workflows
3
Get Closer to the Point of Instruction
4
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0
20
40
60
80
100%
National Assessment Est.(NAEP)
Basic (below standard;partially mastery of
required areas)
Below Basic (below standard;unable to keep up
with grade-level work)
Advanced
Proficient(demonstrate competency
in required areas)
Help Close the Performance GapServing the students receiving accountability scrutiny is a challenge for most districts
K-12 Variability in Student Performance (2009-10)
1
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Help Close the Performance GapIf Common Core has teeth, the “Performance Gap” will get a lot bigger!
Note: Proficiency delta is for 2008-2009 and is an average of deltas for 4th and 8th grade reading and mathematics proficiency; Budget shortfall for Tennessee is not available
Source: NCES; Center on Budget and Policy Priorities
State-National Proficiency Delta vs. FY2012 Budget Shortfall
Avg. = 38%
Avg. = 11%
Low funding, Low need
Low funding, High needHigh funding,High need
High funding,Low need
Democratic Governor
Republican Governor
Independent Governor
0
20
40
60
80%
0 10 20 30 40 50%
5MK-12
Enrollment
CA
TX
FL
ILGA
NC
MI
NJ
VA
AZ
MAMO
CO
MN
MD
AL
SC
LA
OK
UT
MS
IA
KS
NM
ID
NE
HI
MT
DC
5MK-12
Enrollment
FY2012 Budget Shortfall
Sta
te-N
atio
nalP
rofic
ienc
yD
elta
NYOH
PA
IN
WA
WI
KY
OR
CT
AR
NVWV
NHME
RI
AK
DE
SD
WY
ND
VT
1
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2Support PersonalizationTechnology is putting “Personalization” within the grasp of educators…
Static Interactive Individualized Personalized
Increasing Complexity
Content • Static digital content (on screen book)
• Supplemental materials over reasonably static content
• Prescriptive options built into program that allow individualized pathways
• Content delivered according to students personal needs
Assessments • End of chapter
• Digitized item banks
• Test prep
• Instructor ability to modify/create tests
• Formative with ability to indicate groupings or pathway for instructor through content
• “Authentic Evaluations”
• Fully adaptive assessments
Delivery/ Device
• PC in classroom on school network
• PC-based, accessible anywhere • Multi-platform, wireless
• One-to-one
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Enhance Teaching and Administrative WorkflowsTeaching and Administrative workflows dictate how well your products and services will be adopted
Teaching Workflows Administrative Workflows
3
One of the largest workforces in the Country, who:
• Tend to work alone;• Have established classroom rhythms;
and are• Change resistant – for good reasons
Extreme budgetary and performance pressure grappling with:
• Rising standards and persistent performance gaps;
• Increasing statutory compliance complexity;
• Distributed workforce with high turn-over• Highly politicized constituents (unions,
parents, boards, politicians)
Do not fight these workflows – odds are, you do not know better!
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3Enhance Teaching and Administrative Workflows Products and services in a digital world also need to fit within established workflow needs
Static Interactive Individualized Personalized
Increasing Complexity
Content • Static • Supplemental • Prescriptive options • Personalized
Assessments
• End of chapter
• Digitized item banks
• Test prep
• Instructor ability to modify/create tests
• Formative with ability to indicate groupings
• “Authentic Evaluations”
• Fully adaptive assessments
Delivery/ Device
• PC in classroom on school network
• PC-based, accessible anywhere • Multi-platform, wireless
• One-to-one
Teaching Workflows
• Basic Teacher Tools (grade book, calendar)
• Teacher ability to monitor, group and customize (student profiling and grouping, customization of content/assessment, content creation tools)
• Algorithmically drive recommendations for scope, sequence and personalization
Admin Workflows
• Data capture and transfer
• Administrative tools • Business Intelligence
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0
25
50
75
100
$125B
2010
Ed TechSupport Services
Instruction& Services
Content
$87B
2014F
$125B
Get Closer to the Point of InstructionBeing at the point of instruction invites higher growth and higher margins
Source: Company 10K’s; Simba; Outsell; Global Insight; Eduventures; NCES; Parthenon market research
U.S. Commercial Education, 2010-2014F
Higher Growth; Higher Margins
4
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0.0
0.5
1.0
1.5
2.0M
2005-2006
0.7M
2008-2009
1.6M
32%
('05-'08)CAGR
Online K-12 Public Enrollment, 2005-2008
Get Closer to the Point of InstructionInnovative solutions are accelerating in the K-12 landscape – much as they did in post-secondary
Note: K-12 Public Online enrollment includes students who are enrolled in both hybrid and fully virtual schoolsSource: Education Public Interest, Eduventures and BMO Capital Markets; SRI International for the U.S. DOE
0.0
0.2
0.4
0.6
0.8
1.0M
2003-2004
0.5M
2006-2007
1.0M
Post-Secondary Online Enrollment, 2003-2006
4
0.0
10.0
20.0
30.0
40.0M
2006
11M
2011
31M
Online K-12 Course Provider Revenues, 2006-2011
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Agenda
What Informs our Perspective?
Parthenon Perspectives on U.S. K-12 Market Trends
The Implications We See for Providers in the Space
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Parthenon Perspectives: Impact on Industry Ultimately, scale positions will matter, as only the strong will survive
0
1
2
3
4
$5B
1995
Other
Tribune
McGraw-HillAddison-Wesley
PearsonSteck-Vaughan
HarcourtHoughton Mifflin
$3.4B
2007
Other
McGraw-Hill
Pearson
HMH
$4.2B
0
1
2
3
4
$5B
1995
Other
Times Mirror (Tribune Co.)John Wiley & Sons, Inc.
McGraw-Hill, Inc.Addison Wesley
Prentice HallD.C. Heath & Co.
Harcourt BraceHoughtonMifflin Co.
West
$2.3B
2007
Other
John Wiley & Sons, Inc.
McGraw-Hill,Inc.
Pearson
Cengage
$4.6B
Thomson
Source: MIR; AAP; Outsell
K-12 Basal Market, 1995-2007
U.S. Higher Ed Publishing, 1995-2007
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0
20
40
60
80
100%
K-12
Student SupportServices
Publishing
Schools
Training and Professional DevelopmentTesting and Assessment
Technology
143
Higher Education
Publishing
Universities and Colleges
Vocational
Technology
Testing and AssessmentInstitutional Service
159
CorporateTraining& Other
Cor
pora
teTr
aini
ng
ProfessionalTraining
Other Training/Education Services
46 Total = 348
Mix of Ed.Servicesand OtherEducationServices
Other
Parthenon Perspectives: Impact on Deal MarketsSignificant capital has been poured into instruction and services
U.S. Education Market Investment Activity:Number of Deals (2005-2010)
Source: Pitchbook, December 2010; Capital IQ Education Industry, December 2010; BMO Education Market Equity Report September 2008; Stifel Nicolas Postsecondary Education Factbook
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Parthenon Perspectives: The CaveatsSorting out winners and losers requires both an educational and business perspective
• Emerging markets are ill-defined and highly fragmented
• Product offerings are relatively undifferentiated (and sometimes downright difficult to understand)
• Few companies have a sales force of any real size
• District purchasing processes evolve slowly and sporadically
There will be winners and losers
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About The Parthenon Group The Parthenon Group is a leading advisory firm focused on strategy consulting, with offices in Boston, London, Mumbai, and San Francisco. Since its inception in 1991, the firm has embraced a unique approach to strategic advisory services built on long-term client relationships, a willingness to share risk, an entrepreneurial spirit, and customized insights. This unique approach has established the firm as the strategic advisor of choice for CEOs and business leaders of Global 1000 corporations, high-potential growth companies, private equity firms, educational institutions, and healthcare organizations.
About Parthenon’s Education Practice Parthenon has served as an advisor to the education sector since our inception in 1991. Our Education Practice – the first of its kind across management consulting firms – has an explicit mission and vision to be the leading strategy advisor to the global education industry. To achieve this, we invest significantly in dedicated management and team resources to ensure that our global expertise extends across public sector and non-profit education providers, foundations, for-profit companies and service providers, and investors. Parthenon has deep experience and a track record of consistent success in working closely with universities, colleges, states, districts, and leading educational reform and service organizations across the globe.
For further information, please contact:Robert S. LytlePartner, The Parthenon Group Education Center of Excellence(617) 478 [email protected]
Assistant: Deborah Spitzley (617) 478 [email protected]
About The Parthenon Group and Our Education Practice