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Friday Guest Column: Notes From The K12 Supplemental Market

Trace A. Urdan is a Managing Director of Signal Hill.

In May of 2001 in the fading flush of the dot-com boom, my then firm, WR Hambrecht + Co., with my enthusiastic support, helped PLATO Learning sell 2.4 million secondary shares at a $21.00 share price. The basis for the enthusiasm expressed by myself and others had to do with the perceived inevitability of digital content – personalized, interactive, up-to-date, engaging (you get the idea) – to ultimately dominate the education landscape, even at the expense of the printed word. I knew, of course, about the distribution power of the entrenched publishers; but in my view, their need to jump on the Ed-tech bandwagon would make PLATO an asset over which they would all (there were still four back then) compete auction-style. Based in some small measure on my purple prose, (I wasn’t the only one!) the stock reach an all-time high of $26.19 in July of that same year… Last Friday PLATO shares closed at $3.50.

This story has been a defining one for my continued coverage of the K-12 supplemental market. To every budding entrepreneur with a promising product that finds his way to my office, or buttonholes me at a conference, I generally offer gentle discouragement. Now PLATO’s decline is more complex than simply its being outmaneuvered in the market by the big, bad, publishers. However, I believe it is the combination of a politicized buying process, decision-makers that are rewarded modestly for success yet punished severely for failure, and sheer numbers of feet on the Street that have protected the status quo and kept alternative content strictly contained in the supplemental box. My PLATO experience has made me an Ed-tech cynic.

But recently I have come to view the challenge to the dominance of textbooks in a new way. It has less to do with digital versus printed content, I think, than to do with alternative modes and methods of conveying instructional material. The catalyst for this change, as I see it, is not the inevitability of the Internet, or the growing digital literacy of kindergarteners, but rather the pressure on schools to improve outcomes. If the facts of science, for example, have not changed since Newton and Copernicus, and dozens of editions of slightly re-written science texts have not had a material impact, then it stands to reason – at least as far as instructional content is concerned – that the only way to secure a substantially different outcome is to make a more radical change. Ergo as the pressure for change intensifies, so does the pressure on the content itself. And I believe many schools would concur that the pressure reaches new highs every week.

There is, of course, the example of Pearson’s digital win in the California social sciences adoption. But more recently there is the example of School Specialty’s success in the California elementary science adoption with its FOSS product. (We currently rate the company’s NASDAQ-listed SCHS shares a Buy.) FOSS takes a project-oriented approach to science education and instead of textbooks, offers hands-on kits. (In Nashua, New Hampshire, in a giant warehouse, workers scoop spoonfuls of dirt into packages that will be shipped to classrooms in Los Angeles for earth science instruction.) One of three approved products, FOSS did extremely well in California, winning LA Unified among many other districts. In those districts where FOSS was not purchased, we heard the objection, that while the approach was compelling, the training required of the teachers and the fear that older teachers would reject the new-fangled methods. Yet with accelerating generational turnover among the ranks of teachers, that particular obstacle to change may diminish.

Armed with the data points of Pearson and School Specialty in California I was further encouraged about the prospect for big changes in the basal market by the effective takeover of Houghton Mifflin and Harcourt Elementary by digital supplemental player Riverdeep. That company, I figured, has both the resources and the mindset to approach the content market differently. I still hold out hope for this. However a recent conversation with Andy Myers, current COO of Scientific Learning (we rate its NASDAQ SCIL shares a Buy) and former SVP of Digital Product Development of Pearson Curriculum, suggested I may be naïve on that score. Andy notes – and no one should know better than the digital products chief inside a textbook publisher -- that the culture inside large publishers makes change from the top unlikely, as the entire organization is typically focused first and foremost on preserving existing (print-based) revenue. In this environment, gathering resources and support for alternative approaches can be… challenging. The basal adoption process, notes Myers, is hidebound, both from the buyers’ side, which is all about entrenched process and fear of failure, and the sellers’ side, which has an obsessive orientation towards books.

So, forced for now to abandon top-down as an immediate source of change, the remaining question becomes, I think, whether supplemental materials with their range of alternative approaches and more skeptical buyer, can ultimately grow to subsume the business-as-usual basal market to the point where, as one operator in the space described it, textbooks themselves become a supplemental product. School Specialty is operating as though that can be the case. The company aims to march slowly but surely across the curriculum and is confident that school districts are increasingly viewing it as a real curriculum partner. In addition to elementary science they have a curricular offering in physical education which, given the focus on childhood obesity is becoming, along with nutrition, an area of growing importance for schools. They also have a small but highly-rated reading intervention program and plans to add curricular overlays soon to their sale of art products, math manipulatives and early childhood education materials, among others.

Ultimately, we think whether this approach works or not will depend on whether the company’s unpretentious (some might even say crass?) approach in moving from products to curricula provides a useful and effective service to schools (we think it does.) But what we would also note is that for the first time, we think in this supplemental curriculum space there is a player attacking the content market with effective distribution behind it. School Specialty’s scale and reach in terms of direct selling capability and catalog touch points easily rivals that of basal publishers and that, we think, is something genuinely new. We’re not suggesting that School Specialty is about to take down McGraw-Hill but what we firmly believe is that slowly but ever so surely there is a new force to reckoned with that could by sheer force of its size and will, rewrite the curriculum landscape better even than the upstart with a killer app and salesforce of 10.

But we’ll go further and suggest that the net result will be positive not just for School Specialty, but for the K-12 content market overall. First, because only product that is effective will stick no matter how large School Specialty’s sales force. And second, because there may be some genuine, effective competition that maybe (just maybe) could begin to upset the status quo and perhaps deliver a different, more satisfying outcome for student instruction.

Note: Signal Hill received compensation from SCIL in the past 12 months
SCIL currently is or during the 12-month period proceeding distribution of a report on the company, a client of Signal Hill.

Relevant Podcasts from School Improvement Industry Week Online. Each runs 6-10 minutes, strem or download to your computer or mp3 player.

From Firm Risk to Political Risk

Political Power and the Adoption of Education Technology

Three "E's" In The School Improvement Industry's Year Ahead

What's a CODiE and How do I Get One (And What Does It Tell Buyers)?

Four Factors Shaping the School Improvement Market

One Education Industry, or Two?

The School Improvement Industry's Interests in the Next NCLB (I)

Barriers to Venture Investment

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