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Is Pearson Education in Serious Financial Trouble?

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On April 3, 2014, Pearson PLC closed at 1008 on the London Stock Exchange, down from a 2014 high of 1365, which represents a loss in value of over 25%. According to a PSO Trend Analysis reported by Investopedia.com, Pearson had underperformed the S & P 500 index by 23%. Company President John Fallon acknowledged Pearson's financial problems in an online release on the company's website in January 2014 but attributed it to cyclical factors and a shift to digital platforms. However, financial page headlines suggest that Pearson, the publishing and "education" mega-giant, may be in more serious economic trouble than Fallon admits.

In February 2013, Bloomberg reported that Pearson PLC (PSON) "predicted operating profit will be stagnant in 2013 as it cuts jobs and spends more quickly to shift its education business to online from print . . . The stock fell as much as 6.3 percent, the biggest intraday decline since October 2008 . . . Education budgets remain tight and the business is shifting from print sales to digital subscriptions, Pearson said." In November 2013, in response to this and other developments, the Financial Express reported "Goldman Sachs cuts Pearson to neutral from buy, target cut from 1590p to 1530p."

Pearson's troubles continued and on January 23, 2014, Bloomberg announced "Pearson Declines Most Since 2002 on Digital-Expansion Costs." Ian Whittaker, a media analyst at Liberum Capital in London, argued "The real shock will be on restructuring" and he recommended selling Pearson stock.

On February 28, 2014, a Bloomberg headline reported "Pearson Plunges as Earnings Drop on North America Education." Pearson PLC (PSON) profits fell in 2013 by 5.9% and the company acknowledged "it wouldn't emerge from a difficult transition period until 2015 after earnings plunged last year on weak demand in U.S. higher education and restructuring costs." The company claimed "Pressure on its U.S. performance should ease from 2015 as curriculum changes take effect and college enrollments stabilize." It also argued that "Good growth in digital, services and emerging markets" would "partly offset by cyclical weakness in US higher education and school curriculum change in the US and UK." Meanwhile, in March 2014, Pearson announced lay-offs in its higher education division.

Pearson has been making a big push to expand its education, digital services, and testing programs in the United States and in Third World countries, but the problem may be that the company is way over-extended and cannot deliver on its promises. In February 2014, Pearson was selected by the University of Florida to maintain and promote its online undergraduate degree programs, but the partnership got off to a rough start when the director of the project resigned after three months. Pearson and the university were also criticized when it became public that Pearson required the university to pay cash up front on the project. Pearson stands to make $186 million over the eleven-year life of the contract. There was also at least an appearance of irregularity because Pearson had donated to a foundation established by former Florida Governor Jeb Bush. Pearson is also pushing online CourseConnect™ Early Childhood courses through Pearson's eCollege without evidence that early childhood education can best be delivered digitally without candidates actually working with children. In addition, there is no assurance that these classes will actually be accepted for certification by state education departments.

Pearson generates approximately 60% of its sales in the United States. In 2013, its North American Education division accounted for 55% of its operating profit and its International Education division (emerging economies) for another 19%. Pearson's Professional division, which provided 7% of the companies operating profit in 2013, is also heavily invested in global education, providing online testing and English language instruction. The company is worried that its U.S. market might sink because of declining college enrollment and resistance to Common Core standards and tests. Meanwhile profits at its Penguin Random House division declined by 20% from 2012 to 2103.

New York State is in the middle of collecting student teacher portfolios known as edTPA that will be evaluated by Pearson to determine if candidates qualify for teacher certification. But as of March 17, 2014, Pearson was still trying to hire people to evaluate the portfolios. Pearson was requesting that "scorers possess both strong pedagogical content-specific knowledge and experience in roles that support teaching and learning in the edTPA content area in which they are scoring," but had no procedure in place to evaluate the evaluators. The portfolios contain twenty minutes of video and as much as fifty pages of lesson planning and commentary, but evaluators were expected to complete their task in two hours and were being paid $75 per portfolio or $37.50 an hour if they work fast.

Pearson's financial hopes may hinge on its ability to corner online education in places like India where it is investing in "eduprenurs," for-profit start up companies that will compete for public education dollars. It has created Pearson Affordable Learning Fund, a for-profit venture fund, to meet what it describes as a "burgeoning demand for affordable education services in Africa, Asia and Latin America." The fund is active in eleven countries including Bangladesh, Brazil, Ghana, Pakistan, Philippines, and Uganda. In testimony before the British House of Commons and in commentary on a BBC website, opponents of these low cost for-profit schools argue that they drain money and support from state run school systems that serve most students and if they prove unprofitable, they will disappear as quickly as they arrived. Pearson and its partners may make money, but if the public school systems are weakened, there will be long term negative consequences for people in these countries.

People in the United States may not be that concerned about what happens to public schools in India, Africa, and Latin America, but Pearson's push to expand its operations can also have a dire impact on education and community life in the United States. Currently Pearson College offers online business courses and degrees in the United Kingdom. In the United States. Pearson partners with over 200 colleges and universities providing online services and classes. Pearson's partners include prestigious institutions such as Teachers College Columbia University whose president is on Pearson's Board of Directors, and the George Washington University School of Business, state university systems in California, Colorado, Iowa, Indiana, Kansas, New Jersey, Arizona, North Dakota, Texas, and Washington, private and religious schools such as Charleston Southern, Palm Beach Atlantic, and Indiana Wesleyan, and proprietary schools such as the University of Phoenix, Kaplan University, and Nova Southeastern University. A Pearson sub-division, EmbanetCompass, has a list of clients that include Adelphi University, Boston University, Brandeis University, and Northeastern University.

Pearson's EQUELLA digital repository system has helped to make possible the rapid nationwide online expansion of the supposedly not-for-profit University of Southern New Hampshire. In 2006-2007 (the only year I could find and before the colleges massive expansion), Paul LeBlanc, the college's entrepreneurial president who refers to students as "customers" was paid $350,000. Since then Southern New Hampshire, which advertises heavily on television, has become one of the five largest online nonprofit colleges in the United States. According to the Chronicle of Higher Education, with Pearson's support Southern New Hampshire's College of Online and Continuing Education generated $73 million in revenue in 2011 and an estimated $100 million in 2012. Although it is technically a non-profit institution, its online program had a 41-percent "profit" margin in fiscal year 2011.

Eduventures, a marketing research company, estimates that about 200 nonprofit colleges and universities have partnerships with business service providers like Pearson and another 500 will form partnerships in the next two years. Pearson also recently sponsored an online learning conference to promote its products in Fort Worth, Texas.

Little thought is given to what happens if the online programs provided by Pearson undermine or even destroy the current United States college system. Entry-level professional careers at universities will disappear as professors are replaced by digital avatars. Thousands of small non-profit colleges may be forced to close which would have a devastating effect on the communities, families, individuals, and local businesses that depend on them. The National Association of Independent Colleges and Universities has about 1,000 members and educate about 35% of American college students. They operate schools that are among the largest employers in Abilene, Texas, New Rochelle, New York, Adrian, Michigan, Graceville, Florida, Decatur, Georgia, Reading, Pennsylvania, Nashville, Tennessee, Morehead, Minnesota, Anderson, Indiana, Wilmore, Kentucky, Berea, Ohio, Brunswick, Maine, Eureka, Illinois, and Des Moines, Iowa. Pearson might make money, but what happens to everyone else?

I also have questions about whether a financially desperate Pearson may be creating demand for its products by making tests more difficult to deflate student performance. One of the reasons for the big push for Common Core and high-stakes standardized testing in the United States is supposed poor student performance on international tests like PISA (Programme for International Student Assessment) and TIMSS (Trends in International Mathematics and Science Study). Pearson designs, creates, and sells Common Core aligned tests and curriculum in the United States and will be developing the frameworks for the OECD's landmark PISA educational assessment in 2015.

In a sense, the worse students do on these tests, the more desperate families become, the more politicians promote miracle solutions, and the more money Pearson will make.

So, is Pearson Education in serious financial trouble? We can only hope so!

American Girl® Doll, Pearson, and Common Core

Pearson is under attack for "product placement" in its Common Core ELA reading passages. On recent tests administered in New York State to students in grades 3 through 8, featured brands included Barbie, iPod, Mug Root Beer and Life Savers. Pearson spokesperson Stacy Skelly said neither Pearson nor New York State Education were paid for the mentions.

But the real marketing coup may be in the American Girl® Doll's backpack. For $28 an American Girl® Doll fan or his or her parents can purchase the school backpack set with an enVision Math workbook. envision Math, of course, is a Pearson product.