The battle for the college digital textbook market—including startups like Inkling and Kno—gets a fair amount of attention. But the K-12 textbook business that Apple (NSDQ: AAPL) nowseeks to revolutionize is much less talked about outside of education circles.
Apple announced this week that it is partnering with the three largest K-12 educational publishers to sell iPad textbooks. It will be entering an $8 billion industry where most of the funds are controlled by state governments and school districts, which can mean long and politically charged funding discussions. Unlike in the college market, startups in the K-12 market have struggled to gain venture capital. One reason, on top of the bureaucracy that companies have to deal with: the digital infrastructure in many K-12 schools is weak, with an average of three students for every device as well as more mundane problems like too few electrical outlets.
That said, there's clearly some real opportunity: While many assume the K-12 market is largely controlled by the three big companies that Apple is partnering with, in fact, more than half of that $8 billion market isn't. Here's a look at some of the challenges and opportunities awaiting Apple.
How big is the K-12 education market?
The market is estimated at $8 billion. There are 50 million K-12 students in public schools in the U.S.
K-12 school publishing—including elementary and high school textbooks and other teaching materials—is the second-largest publishing category in the U.S. after trade. Net sales revenue was $5.5 billion in 2010, according to the Association of American Publishers. (K-12 publishing net sales revenue fell 12.4 percent between 2008 and 2009, but increased by 7.1 percent between 2009 and 2010. Overall, net sales revenue between 2008 and 2010 declined by 6.2 percent.)
How is the K-12 publishing market different from trade and higher-ed publishing?
The main difference is that state governments and school districts procure about 90 percent of the books. "It's very much unlike the consumer market where we decide to go into Barnes & Noble (NYSE: BKS) and buy a book," says Jay Diskey, executive director of the AAP's school division. "A school district will decide it needs a new reading program for its elementary school students and will request proposals from publishers. If the state likes the proposal, the contract is negotiated."
Publishers don't always sell the books individually; a parent may not be able to buy a single textbook, for instance. The AAP notes the average net unit price of a K-12 title was $65 in 2010, but extensive pricing data is difficult to obtain because so many books are bought in bulk by state governments and school districts.
Textbook rental doesn't yet factor into K-12 education the way it does in higher ed, although some private and parochial schools are trying it.
Who are the main textbook publishers?
The K-12 textbook market is often seen as being dominated by just a few big companies, but that's not entirely accurate, says Diskey. It's true that three companies—McGraw-Hill (NYSE: MHP), Pearson (NYSE: PSO) and Houghton Mifflin Harcourt, the same three companies that are partnering with Apple in its new digital textbook store—capture about 85 percent of the K-12 core textbook market, which is worth roughly $3.2 billion. (The rest of that core market is made up of books from niche publishers on subjects like foreign languages, art and music, and books for technical and vocational schools.)
With the whole market estimated at $8 billion, though, there is still about $5 billion up for grabs outside of core textbooks. That portion includes many players, publishers and technology companies. They publish supplemental materials like workbooks, encyclopedias, books for teachers and reference works, all in print and digital formats. "There is far more diversity in the market than I think a lot of people understand," Diskey says.
What is the role of digital?
Digital products are becoming a more important part of the K-12 school publishing market. Revenues from digital products increased by 45.6 percent between 2008 and 2010, to $638.7 million, according to the AAP. (The market for print books is still much larger but revenues from print products declined 13.7 percent between 2008 and 2010, to $2.6 billion.)
Spending on e-learning as a percentage of overall K-12 education expenditure is small, according to the September 2011 White House report "Unleashing the Potential of Educational Technology"—it makes up just $0.46 of every $100 spent, for a total of $2.9 billion. (Expenditure on e-learning in higher education is over ten times greater: $5.60 per $100 spent, a total of $24.4 billion.)
K-12 publishers all offer digital products now, but school districts have to decide how to buy them. The digital products are often bundled with print, but "a lot depends on the digital infrastructure in the school district and whether it can support digital learning," says Diskey. "Not too many states have one-to-one student-to-hardware ratios. In order to have full-blown digital learning, students should have access to their own devices in the same way you had access to your own textbooks when you were in school."........
http://paidcontent.org/article/419-the-abcs-and-123s-of-apple-and-the-k-12-textbook-market/
Bloomberg Businessweek 
