Last week McGraw-Hill and Cengage announced a merger which would combine the two businesses into a $3.1Billion provider of education textbooks and materials. Assuming this merger proceeds through competitive review, as is likely, then McGraw Hill – as the new company will be known, will be second only to Pearson, plc ($5.5Billion) in size and reach. The new McGraw-Hill will be run by current Cengage CEO Michael Hansen. While broad trends in education indicate a widening of the education and training marketplace as employers and employees see the need for full career based training, traditional education companies such as Cengage, Pearson, Macmillan, John Wiley and McGraw Hill have struggled to protect their legacy print businesses and address new market and product opportunities.
Financial reporting across the industry suggests that publishers are losing the battle of the textbook whic
h is one reason this merger was inevitable. The question is how the remaining textbook publishers such as Macmillan, John Wiley, Wolters Kluwer and others will react: I expect some additional M&A activity and partnerships in this space. With revenues declining at a steady rate, unless alternative sources of revenues – whether new products or substitutions – are found then all publishers face an inevitable decline in scale benefits. Having faced steady declines in revenue over the past ten years, some of these publishers have infrastructures which can support larger businesses and thus combining with one or two other publishers can ‘top-up’ this scale gap. It is no surprise that new McGraw-Hill anticipates $300MM in efficiency savings and I would not be surprised if they have privately targeted a much larger number.
But what about revenue growth? This is a very dull story if it is only about cost and scale improvements and CEO Michael Hansen hinted at a more appealing story line. He disagreed with a question about market concentration: Rather than the combined company having 45% market share he suggested that both companies have a market share in the teens
. His perspective is that students have many options when they visit a bookstore and a variety of business models to chose from (including buy, borrow and steal). Additionally, the target student is being redefined to include ‘professionals’ and career focused students. If you agree to both these points then, in effect, the market in which the new McGraw-Hill competes is larger than that presented by the legacy textbook market. Cengage’s aggressive move to address this new market has been their all access subscription pricing model which in less than twelve months has grown to over 1MM subscribers and over $60MM in revenue. (See the PND articles below on these points).
It is my expectation that this deal will proceed without significant deliberation and McGraw-Hill will argue successfully that the education market is now much bigger than the legacy t
extbook market. Other publishers may find themselves a step behind McGraw-Hill and Pearson which will result in further market consolidation and/or combinations. We are now on the cusp of changes like those the journals business went through over twenty years ago. What is interesting to contemplate is whether what is happening today in journal publishing vis-à-vis open access content is in some way a predictor of what may happen to textbook content. Journal publishers have moved to services and analytics and we may see a similar move in education. Just not in twenty years.