What Apple Is Wading Into: A Snapshot Of The K-12 Textbook Business

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."........

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