Hey kids and students of all ages, care for a lesson in capitalism? You probably won’t find it in the latest educational software -- but you might by watching as the giants of that industry undertake a wild and massive consolidation.
The Learning Company, makers of such cuddly titles as the Reader Rabbit series and MathMunchers, last month agreed to pay US$150 million to acquire ChessMaster-maker Mindscape. To the untrained eye, the deal was just another footnote for Moneyline's Lou Dobbs, but it joins a litany of other acquisitions by the voracious Learning Company, which last year alone added to its rolls Skills Bank, Creative Wonders, Learning Services, and Microsystems Software, publishers of the CyberPatrol Internet filtering software.
Following closely behind the Learning Company in the acquisition arena is Cendant Corporation, a $22 billion direct-marketing concern with major holdings in the hotel, rental car, and e-commerce sectors. Among its edu-entities, Cendant owns Davidson & Associates, maker of the Blaster series of kids learning software and a myriad of other titles.
In short, Learning Company and Cendant together control fully 60 percent of the edu-software market -- and much of what students use at school and home. That's up from 50 percent just five months ago.
"It's incredible consolidation," said Jean Hayes, president of Quality Education Data, a market research firm in Denver. "Everything is becoming more centralized."
In fact, others are making a stab at consolidating remaining bits of the market, too. The Tribune company, publisher of the Chicago Tribune, and Knowledge Universe -- a closely-held company in which Michael Milken's family is invested -- have reportedly been acquiring education software publishers.
The reason for the consolidation is straightforward: as in any industry, the education software publishers benefit from economies of scale. In theory, the move means lower costs for developing and distributing software, which in turn means lower prices for consumers.
Consolidation side-effects
But not everyone is rooting for giants to rule the landscape. Some educators charge that consolidation carries a hidden cost -- that is, as fewer companies control the market, they will not have as great an incentive to create innovative, cutting-edge products. Plus, they will control the distribution channels, freezing out the efforts of smaller software makers, the critics charge.
"These companies, due to consolidation, are offering less choice than before," said Peter Kelman, an industry consultant and former education instructor at Dartmouth College. "They are not doing the kind of new development that is good for schools."
Students now take a back seat to investors, Kelman said. To satisfy the latter, software giants are creating products with the mass market in mind, not -- as in the case of smaller independent software makers -- programs suited exclusively for schools, he said.
Even Hayes, who sits on the board of the Software Publishers Association, said there has been some slow-down in innovation thanks to consolidation.
But the Learning Company and Davidson say just the opposite is true. They invoke a different macro-economic principal: They say that the money they save by combining financial operations, marketing, and distribution allows them to invest more in research and development.
"We get way more for our R&D buck," said Kevin O'Leary, president of the Learning Company. "What you wind up with is much more high quality products."
In the case of Davidson, the company does not interfere with the creative operations when it makes an acquisition, said spokeswoman Linda Duttenhaver. Instead, she said, the company cuts costs by consolidating finances and distribution; for example, one warehouse in Torrence, California, now serves most of Cendant's education subsidiaries, including Syracuse Language, First Byte, Funny Bone Interactive, Learning Ways, and Animation Magic.
Davidson itself was the product of a major acquisition. Started by school teacher Jan Davidson in 1982, it began acquiring companies with a full head of steam in 1991, picking up Blizzard Entertainment in 1993. Then in 1996, CUC International paid a whopping $1.1 billion for Davidson, makers of such products as Math Blaster and Reading Blaster.
In December of 1997, CUC International (a minor investor in Wired Ventures) merged with HFS Inc, to become Cendant -- with interests in four primary areas, travel, real estate, membership (such as discount buying clubs), and "other."
"Other" includes educational software, Duttenhaver said. In addition to its software development firms, Cendant also controls two major distributors: Educational Resources in Illinois and Fast-Track in Ohio.
The Learning Company's O'Leary predicts consolidation will continue at its torrid pace. He said the market will ultimately be dominated by a handful of players. "The little player with great content is going to be purchased," he said.
Why the edu-market’s so busy
In spite of all the activity, the education market is relatively small - worth only $700 million. Most of that is made up of retail sales for home use by students, teachers, and parents -- with only a tiny fraction, $70 million, sold directly to schools (this excludes a several hundred million dollar market for learning systems that are sold on a district-wide basis).
But, the most interested parties say, now’s the time to position themselves. After all, today's students are tomorrow's consumers and CEOs; the market will grow; and most important, if you get in good with students and teachers, you can get in good with the parents -- and that's the market that counts.
"The school market isn't that big," O'Leary said. "But it has my utmost respect because it has a tremendous multiplier."
Not surprisingly, software makers are focusing on sales to individual teachers, not just relying on large distribution networks to approach entire districts, or even schools.
Microsoft, for example, reorganized its school sales force in the last year: A year ago, it had 8 sales reps focused on K-12 and higher education, now it has 43; its education marketing staff has grown from 5 to 30.
Corel, which competes in schools against Microsoft Office with its own WordPerfect office suite, has in the last year increased its own North American education sales force from 3 to between 15 and 20, said Daniela Gaudert, Corel's education program manager for the southeastern United States.
Officials from both Corel and Microsoft echoed other publishers in noting that they are increasing efforts partly because there are millions in new government funds targeted at wiring schools. At this point, much of the money is going to hardware, but software publishers know a computer cannot just have Intel Inside -- it needs programs too.
