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Published in Print: November 21, 2001, as Downturn Threatens Ed. Business More Than Terrorism

Downturn Threatens Ed. Business More Than Terrorism

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The education industry has emerged from the past two months largely unaffected by the terrors of Sept. 11 and anthrax-tainted mail. Whether it can endure the economic downturn is another question.

"I don't think that the education markets have been marked by the tragedies in any special way," said Peter Stokes, the executive vice president of Eduventures.com, a Boston firm that researches the for-profit education sector. "Companies that were hurting before September 11 may be worse off. But the companies that were running healthy businesses, they are bouncing back quickly."

Mr. Stokes said he was unaware of any loss of life from the education industry in the attacks on the World Trade Center and the Pentagon. A Children's Discovery Center operated by the child-care giant Knowledge Learning Corp. of San Rafael, Calif., was located at the trade center. The children's center was safely evacuated before the twin towers and other buildings in the complex collapsed.

New York City is the headquarters for numerous education- related businesses, including educational publishers such as Scholastic Inc., school management companies Edison Schools Inc. and Mosaica Education Inc., test-preparation businesses Princeton Review Inc. and Kaplan Inc., and a number of education-related start-ups doing business on the World Wide Web. Some of those companies had short-term disruptions to their operations, especially if they were at all close to the site of the World Trade Center.

EChalk, a provider of Web-based e-mail communications systems tailored for schools, has its offices in lower Manhattan, not far from the devastated area now known as Ground Zero.

"We are about four or five blocks away, and that has had a very profound effect on the people who work here," said Daniel C. Watts, a co- founder and the chief operating officer of the company.

The offices were closed, and eChalk's 15 headquarters employees were displaced for about seven days after the Sept. 11 attack, he added. But because eChalk's Web computer servers are located elsewhere, its services to schools were not seriously disrupted.

The 21/2-year-old company provides service to about 100 schools in 22 states. After the terrorist attacks, there was a spike in interest in eChalk's products because some districts were looking for better ways to get the word out about school closings, Mr. Watts said.

"Schools want to have a more effective emergency-response system," he said. EChalk's e-mail service can be limited to just a school's employees and student families, he noted, making it less likely students will be the subject of unwanted e-mail come-ons. Revenues come from subscription fees paid by districts, typically $8 per user.

At Princeton Review, there was a different effect in the two weeks after the attacks. Enrollment in the company's preparation courses for the SAT and other tests took a nosedive as students' lives were disrupted or they had other things on their minds, company officials say.

But enrollment has come roaring back, according to the company, both nationally and in the two markets most directly affected by the terrorism: New York and Washington.

"Each of the last seven weeks, enrollment nationally has been up 30 to 45 percent over the same week of a year ago," said Stephen W. Quattrociocchi, the executive vice president of Princeton Review's test-preparation division. "It seems that futures are more precious now, and people want to do something about their futures."

For some people, Mr. Quattrociocchi has noticed, that means joining a gym or following through on training to run a marathon. For others, it has meant signing up for a course to prepare for the law school or graduate school admissions test.

"We haven't had any special marketing," Mr. Quattrociocchi added. "We never did anything but answer the phone."

Positive Signs

He pointed out that enrollment in graduate school test- preparation courses tends to run countercyclically to the economy. When more adults are laid off, many decide to enroll in graduate school. But enrollment in SAT-prep courses tends to take a dip in tough economic times because families can't afford them as easily.

Princeton Review recently reported that revenues for the quarter ending Sept. 30 were 66 percent higher than for the same three months in 2000. The company, which has been losing money in recent years, narrowed its losses in the most recent quarter to $892,000.

Peter P. Appert, an analyst who follows the education industry for the investment bank Deutsche Banc Alex. Brown, said it was unlikely that terrorism was having any significant effect on the sector. But he is worried by signs that states and school districts are beginning to see decreased revenues.

"What we are starting to see, in effect, is a replay of the early 1990's, when Saddam [Hussein] invaded Kuwait," Mr. Appert said. "There was a deferral of school purchases at that time."

In recent weeks, executives of major textbook publishers have hinted in remarks to analysts that spending for their products may feel the effects of the downturn.

"Political officials are subject to crises of confidence, just like consumers are," Marjorie Scardino, the chief executive officer of Pearson PLC, the parent of Pearson Education, said at an analysts' conference last month. "The expectations of lower tax receipts may make them more timid, and that may hit local education budgets."

Harold McGraw III, the chairman and chief executive officer of the McGraw-Hill Cos., told analysts that "in the face of falling tax receipts, some states in the South and Midwest have started to squeeze education funding and reduce the level of their buying."

"Based on the conditions we are seeing, the growth of the el-hi [elementary and high school] market may not be quite as robust as originally expected," Mr. McGraw added.

New York City-based McGraw-Hill and London-based Pearson are the two largest publishers of textbooks in the United States.

Mr. Appert said, "Across the board, I think we're going to see much lower rates of growth in terms of school purchases."

Of course, the education industry is not facing the dire circumstances of sectors such as transportation and tourism, where the impact of the September terrorism has been severe. Some young education companies are even getting venture funding, which has not been easy to come by in recent months, said Mr. Stokes of Eduventures.com.

In October, Carnegie Learning Inc., a Pittsburgh-based developer of mathematics products for middle school and high school students, secured $14 million in venture funding. Also last month, Digi-Block Inc., which develops math products for students in prekindergarten through 4th grade, attracted $5.4 million in new capital.

The investments are significant because venture funding for education-related businesses had all but dried up over the past six months, Mr. Stokes said.

A Magical Hedge

Some companies may even be getting a short-term boost from the increased attention to world events. Scholastic, which publishes classroom magazines and other supplementary educational materials, has mobilized to produce content for magazines, Web sites and books to help "teachers and children understand the changed world we live in," the company's chairman and chief executive officer, Richard Robinson, said in late September.

Raymond Marchuk, Scholastic's vice president for finance, said last week that the company's book-club and book-fair sales appeared to be performing well even after Sept. 11.

"We are hearing rumblings about school budgets being tightened," he said. "But if you look back, in fiscal 1991, our school book-club and -fair businesses grew that year."

Scholastic has another hedge against economic downturns: a character named Harry Potter. The company holds the U.S. publishing rights to the best-selling J.K. Rowling children's series. In fiscal 2001, the publication of the fourth book in the series, Harry Potter and the Goblet of Fire, was the main driver of some $190 million in revenue for Scholastic's bottom line. The company had total 2001 revenues of nearly $2 billion.

In Scholastic's current fiscal year, which ends next May 31, there will be no new volume in the series, with the fifth book expected next summer. And Scholastic has no direct financial interest in the first Harry Potter movie, released last week. But it expects to sell more books because of it.

"You can look at any best-seller list and see that the movie is helping sales of our backlist," Mr. Marchuk said.

Vol. 21, Issue 12, Page 8

Web Resources
  • "What Is the Education Industry?," a report from Eduventures.com on the for-profit education sector, "identifies and defines four industry sectors—schools, products, services and e-services—and provides a framework to assist individuals and organizations involved in the education marketplace."
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