parthenon perspectives - education week: blogsblogs.edweek.org/edweek/marketplacek12/120726...
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THE PARTHENON GROUP Boston • London • Mumbai • San Francisco
Balancing Opportunity and Risk in
North American K-12 Publishing
Parthenon Perspectives
July 26, 2012
THE PARTHENON GROUP
2
Agenda
What Informs our Perspective?
Parthenon Perspectives on U.S.
K-12 Market Trends
The Implications We See for
Providers in the Space
THE PARTHENON GROUP
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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
Education Sector Projects
Completed by Parthenon Teams
Parthenon Offices
THE PARTHENON GROUP
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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 companies
trying 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
THE PARTHENON GROUP
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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
THE PARTHENON GROUP
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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 data
Source: 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 Specialty
ScholasticEducation
$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
THE PARTHENON GROUP
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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
.9B
1991
$1
.9B
1992
$1
.9B
1993
$2
.1B
1994
$2.0
B
1995
$2
.3B
1996
$2
.4B
1997
$2.8
B
1998
$3
.0B
1999
$3
.0B
2000
$3
.3B
2001
$3
.3B
2002
$3
.1B
2003
$3.2
B
2004
$3
.1B
2005
$3
.4B
2006
$3
.4B
2007
$3
.4B
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 market
Source: Association of American Publishers; Parthenon interviews
U.S. K-12 Basal Market*, 1990-2007
NCLB
THE PARTHENON GROUP
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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
THE PARTHENON GROUP
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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
THE PARTHENON GROUP
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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 Gap
Serving the students receiving accountability
scrutiny is a challenge for most districts
K-12 Variability in Student Performance (2009-10)
1
THE PARTHENON GROUP
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Help Close the Performance Gap
If Common Core has teeth, the “Performance Gap”
will get a lot bigger!
1
Note: Proficiency delta is for 2008-2009 and is an average of deltas for 4th and 8th grade reading and mathematics proficiency;
Source: NCES; Center on Budget and Policy Priorities; National Governors Association
State-National Proficiency Delta vs. % Change in Per Student Spending, FY08-FY12
Avg. = 38%
Avg. = -4%
High funding, Low need
High funding, High need Low funding,
High need
Low funding,
Low need
Democratic Governor
Republican Governor
Independent Governor
0
20
40
60
80
100%
-30 -20 -10 0 10 20 30%
5MPK-12
Enrollment
CA
TX
NY
FL
IL
OH
PA
GA MI
NC
NJ
VA
AZ
WA
IN
TN
MAMO
COWI
MN
MD
AL
SCLA
KYOK
ORUT
CT
IAAR
MS
KS
NV
NM
NE
ID
WV
NHMEHI
MT
RI
AK
SD
DE
WY
VT
DC
5MPK-12
Enrollment
% Change in Per Student Spending, FY08-FY12
Sta
te-N
ationalP
rofici
en
cyD
elta
ND
THE PARTHENON GROUP
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2
Support Personalization
Technology 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
THE PARTHENON GROUP
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Enhance Teaching and Administrative Workflows
Teaching 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!
THE PARTHENON GROUP
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3
Enhance 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
THE PARTHENON GROUP
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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 Instruction
Being 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
THE PARTHENON GROUP
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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 Instruction
Innovative 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 schools
Source: 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
THE PARTHENON GROUP
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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
THE PARTHENON GROUP
18
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-Hill
Addison-Wesley
Pearson
Steck-Vaughan
Harcourt
Houghton 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
THE PARTHENON GROUP
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0
20
40
60
80
100%
K-12
Student SupportServices
Publishing
Schools
Training and Professional Development
Testing and Assessment
Technology
143
Higher Education
Publishing
Universities and Colleges
Vocational
Technology
Testing and AssessmentInstitutional Service
159
CorporateTraining& Other
Co
rpo
rate
Tra
inin
g
ProfessionalTraining
Other Training/Education Services
46 Total = 348
Mix of Ed.Servicesand Other
EducationServices
Other
Parthenon Perspectives: Impact on Deal Markets
Significant 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
THE PARTHENON GROUP
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Parthenon Perspectives: The Caveats
Sorting 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
THE PARTHENON GROUP
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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, San
Francisco, and Shanghai. Since its inception in 1991, the firm has embraced a unique approach to strategic advisory services; long-
term client relationships, a willingness to share risk with our clients, an entrepreneurial spirit, and customized insights are the
hallmarks for which The Parthenon Group has become recognized in the industry. 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.
Advisory Services for Investing in Education
The Parthenon Group advises clients in all stages of investing in education companies, including target identification and screening,
strategic due diligence, portfolio company strategy and operational improvement, and sell-side support. The combination of
Parthenon’s Private Equity Practice, which has advised clients on over 1000 transactions, and our Education Center of Excellence,
which has worked across all aspects of for-profit and non-profit education, make The Parthenon Group the preeminent advisor to
private equity firms considering investments in the education industry.
For further information, please contact:
Robert S. Lytle Jay Bartlett
Partner, The Parthenon Group Partner, The Parthenon Group
Education Center of Excellence Private Equity Practice Group
(617) 478 7096 (617) 478 4612
[email protected] [email protected]
Assistant: Deborah Spitzley Assistant: Jessica Mingolelli
(617) 478 6312 (617) 478 4661
[email protected] [email protected]
Follow Us on Twitter:
@Robert_S_Lytle
@Parthenon_Group
www.parthenon.com
Parthenon Perspectives: The Caveats
About The Parthenon Group and our advisory
services for investing in education