State Moves on Textbooks Could Extend Market Slump
In a recent round of presentations to investors, executives of the largest publicly traded educational publishers came across as upbeat about their sales prospects for K-12 education this year.
Despite a down 2002 that saw a 5 percent decline in U.S. sales of elementary- and secondary-level texts, they noted that 2003 offered a larger slate of textbook-adoption opportunities in the states. And the federal "No Child Left Behind" Act of 2001, they said, is likely to spur demand for new instructional materials.
"Targeted federal funds are flowing into the marketplace to drive change in the U.S. education system," Harold McGraw III, the chief executive officer of the McGraw-Hill Cos., confidently told investors early this month. He went on to note how McGraw-Hill, one of the nation's largest textbook publishers, was likely to benefit from increased spending on reading and testing programs.
But at just about the same time, state policymakers in California and Texas were throwing some cold water on the publishers' exuberant outlook.
In California, which is facing massive state budget shortfalls, Democratic Gov. Gray Davis has proposed reducing the number of categorical education programs which boost state aid to schools. And one of those categories sets aside funding for new textbooks.
In Texas, meanwhile, the Texas Education Agency has prepared a budget request that would postpone new textbook purchases for at least two years in subjects that aren't the subject of state testing. Purchases of 1st and 2nd grade social studies books, 7th grade books in Texas history, and high school world history texts would be among those deferred under the plan.
The Texas proposal, which some characterize as merely part of a worst-case scenario for dealing with that state's almost $10 billion budget crunch, is especially worrisome to educational publishers, because they were looking to Texas for a potential $250 million textbook-adoption program this year. In so-called "adoption" states, the state approves a list of textbooks that local districts may buy using state money.
Texas officials' postponement proposal would slash some $90 million from this year, which is money the publishers apparently had factored in as part of their optimistic forecasts for 2003.
"I do get worried when I see a proposal like the Texas one," said Peter Jovanovich, the chief executive of Pearson Education, the market-leading K-12 educational publisher in the United States and part of London-based Pearson PLC. "That gets everybody's attention."
Stephen D. Dreisler, the executive director of the school division of the Association of American Publishers, said the trade group has a team of people in Austin monitoring, and lobbying against, the Texas postponement plan.
"It is a real possibility, and it would hurt the publishers," he said. "There is a lot of screaming and gnashing of teeth by all kinds of constituencies there."
In California, the publishers' group was planning a "fly-in" of executives to Sacramento this week to lobby for maintaining textbook funding as a separate "categorical" in the state budget.
"California is one of our largest customers, but also the state going through the most financial difficulty," Mr. Dreisler said.
Pie in the Sky?
The precollegiate textbook market in this country is now consolidated in the hands of four major players. ("Vivendi Woes Roil Foreign-Dominated Textbook Sphere," Oct. 9, 2002.)
Analysts say that after seven straight years of mostly robust annual increases in K-12 purchases of instructional materials, last year saw a decline. (See accompanying chart.)
"We are probably back in a bust period," said Peter Salkowski, who tracks educational publishers for New York City-based investment bank Goldman Sachs. "Education spending tends to lag the economy."
The Anglo-Dutch company Reed-Elsevier Group PLC, which owns the U.S.-based publisher Harcourt Education, reported last month that Harcourt's K-12 revenues and profits grew slightly last year against the slight declines among its competitors. Like other publishers, it predicted that the No Child Left Behind law and a broader slate of state adoptions this year would help end the doldrums.
Such optimism wasn't enough to prevent recent layoffs at Harcourt Education, however. Some 270 employees were let go early this year, with another 80 accepting a voluntary "separation." The 350 jobs represented about 12 percent of Harcourt's 3,000-person U.S. workforce.
Mr. Jovanovich of Pearson Education said he was "cautiously optimistic" that his company might see an increase in K-12 sales this year.
"Normally, the market would have rebounded by a more than 5 percent clip," he said. "This year, I expect [K-12 sales in the United States] to go up zero to 3 percent. Financial circumstances will dampen what would have otherwise have been an up school year."
Mr. McGraw of McGraw-Hill told analysts on March 4 that the elementary and secondary market was "difficult to call at this time."
"For McGraw-Hill, if not the industry as a whole, we think the federal funds will help mitigate state cuts in education," he added. He suggested growth in K-12 publishing sales of 2 percent to 4 percent in 2003.
McGraw-Hill's Open Court reading program appears on all state recommended or approved lists for use under the federal Reading First program, which just received a congressional appropriation of $994 million for the current fiscal year.
Mr. Salkowski of Goldman Sachs said predictions of sales growth this year "may be pie-in-the-sky talk, given the fact that everyone is talking about cuts here or there."
Mr. Dreisler of the publishers' group said that besides California and Texas, other states grappling with textbook-funding issues in legislative sessions include Kentucky and New Mexico.
"The economic outlooks for most states are as bleak as they have been for a long time," he said. He noted that many states spared education from cuts last year, but face more dire deficit forecasts this year.
Besides troubles at the state level, publishers' sales representatives calling on school districts may also be getting the cold shoulder.
In Iowa, which is among the states that leave textbook-adoption decisions up to local districts, many school administrators are considering delaying book purchases to deal with tight budgets.
In the 32,000-student Des Moines district, officials have had a policy for years of stretching textbook use to the limit. When book bindings wear out, the district sends them out to be rebound.
Jerry Wadden, the district's chief academic officer, said Des Moines used to be on a seven-year replacement cycle. That goal hasn't been met in years, he said.
Rebinding books and replacing those in the worst condition (with used books, not new ones) is the thriftiest use of the district's limited textbook budget, he said. But there are trade-offs.
"Every time you rebind a book, the rebinders chop off an eighth-inch or quarter-inch from all four edges," Mr. Wadden said. "Some of our books have been rebound to the point that the page numbers are no longer there. When you have page numbers missing, it makes it hard for the teacher to say, 'Turn to page 101.' "
The district spent $150,000 last year on rebinding books, the most ever, Mr. Wadden added. Its budget allows only $300,000 for purchasing new textbooks.
Mr. Wadden estimated it would take about $1.5 million a year to get all the district's books on a replacement cycle shorter than 10 years. Many of the district's books date from the mid- 1980's.
"We see the [publishers'] representatives from time to time," he added, "but not as often as we used to."
Vol. 22, Issue 27, Page 8Published in Print: March 19, 2003, as State Moves on Textbooks Could Extend Market Slump