Education business Pearson (PSON) underlined its underdog status at today’s first-quarter trading update. The uninspiring numbers do little to change market perception that academic journals printer Reed Elsevier (REL) is the better-placed of the FTSE 100’s two publishing constituents.
Hopes that a £150 million restructuring plan announced at Pearson’s finals (25 Feb) would mark an end to this year’s poor share price performance, minus 3.3% as at close yesterday, were dispelled as the counter drifted 0.3% in morning trade. The update confirmed there is no quick solution to the £9.4 billion cap’s transition from print to digital.
Investors believe that Reed’s own existing print-based business of academic journals is a more defensible one, and should give the rival publisher time to adjust its model. Unlike Pearson’s schools and university textbooks lines, open source digital-based academic publishing is not such a threat given the brand power accumulated by such august titles at The Lancet or Nature.
Now is not the best time for Pearson to be transitioning to digital learning products as its existing US kindergarten to Year 12, or K12, textbook business is under intense pressure. This market account for about 15% of group profits. The firm confirmed that ‘K12 markets remain weak’ but the risk is they get much weaker and a reaffirmed expectation for flat 2013 operating profits may need to be abandoned.
State funding for K12, while not directly affected by the sequester Federal budget cuts, is likely to come under pressure with the central government unable to bail out failing states as has happened since 2009. If schools can’t afford a new range of textbooks they’re unlikely to have the upfront capital required to transition to new digital products.
Meanwhile, the academic publishers are responding to their threats, the most recent example being Nature Publishing's strategic alliance (27 Feb) with Swiss-based open access publisher Frontiers. They have more time on their side as academic journals, although dependent on university funding in the US, are sold on subscription and it’s very hard for new upstarts to challenge their titles, many of which have been published for numerous years.