Creative destruction and the winner-take-all market

Posted: March 31, 2014 in investment
Tags: , , , , , , , , , , ,

Let’s take a look at the business of adaptive learning from a publisher’s perspective. Not an ELT publisher, but someone a few rungs higher on the ladder with strategic responsibilities. You might not know a great deal about ELT. It is, after all, only one of a number of divisions you are responsible for, and not an especially profitable one at that. You will, however, know a lot about creative destruction, the process by which one industry is replaced by another. The decline and demise of printed magazines, newspapers and books, of book reviewers and traditional booksellers, and their replacement by digital products will be such a part of your professional knowledge that they hardly need to be mentioned. Graphs such as the one below from PricewaterhouseCoopers (PwC) will be terribly familiar. You will also be aware that the gales of creative destruction in publishing are blowing harder than ever before.

2014-03-31_1020

In fact, you probably owe your job to your ability to talk convincingly about creative destruction and how to profit from it. Whatever your particular strategy for the future might be, you will have noted the actions of others. You will have evaluated advice, such as the following, from Publishing Perspectives

  • Do not delay in taking action when there are clear signals of a decline in market value.
  • Trade your low-profit print assets (even though some may have limited digital value) for core product that has a higher likelihood of success and can be exploited digitally.
  • Look for an orderly transition from print to digital product which enables a company to reinvent itself.

You will be looking to invest in technology, and prioritizing the acquisition of technological expertise (through partnerships or the purchase of start-ups) over the development of traditional ELT products. Your company will be restructured, and possibly renamed, to facilitate the necessary changes.

You will also know that big data and analytics have already transformed other industries. And you will know that educational publishing is moving towards a winner-take-all business market, where ‘the best performers are able to capture a very large share of the rewards, and the remaining competitors are left with very little’ (Investopedia). Erik Brynjolfsson and Andrew McAfee’s new book, The Second Machine Age (New York: Norton, 2014), argues that ‘each time a market becomes more digital, winner-take-all economics become a little more compelling …Digitization creates winner-take-all markets because [there are] enormous economies of scale, giving the market leader a huge cost advantage and room to beat the price of any competitor while still making a good profit’ (pp.153-155).

the second machine age

It is in this light that we need to understand the way that companies like Pearson and Macmillan are banking everything on a digital future. Laurie Harrison’s excellent blog post at eltjam  summarises the Pearson position: ‘the world’s biggest education publisher is spending £150m on a total restructure which involves an immediate move to digital learning, a focus on emerging markets, and a transformation from publisher to education services provider. If the English language learning market is worth $4billion a year, then Pearson still only have a very small chunk of it. And if you’re a company as successful and ambitious as Pearson, that just isn’t good enough – so a change of direction is needed. In order to deliver this change, the company have recently announced their new senior management team.’

Adaptive learning fits the new business paradigm perfectly. If the hype is to be believed, adaptive learning will be a game-changer. ‘The shifting of education from analog to digital is a one-time event in the history of the human race. At scale, it will have as big an effect on the world as indoor plumbing or electricity,’ writes Jose Ferreira of Knewton. ‘True disruption,’ he says elsewhere, ‘happens when entrepreneurs aim big and go after a giant problem, a problem that, if solved, would usher in an era of large-scale transformation across industries and nations. … Education is the last of the information industries to move online,’ he goes on. ‘When it breaks, it breaks fast. And that’s going to happen in the next five years. All the education content will go online in the next 10 years. And textbooks will go away. … Ultimately, all learning materials will be digital and they will all be adaptive.’

Ferreira clearly knows all about creative disruption. He also knows about winner-take-all markets. ‘The question is who is going to power [the] platform,’ he writes. ‘It’s probably going to be one or two companies’. He states his ambition for Knewton very clearly: ‘Knewton’s goal is to be like Amazon Web Services for education’. ‘It’s pretty clear to us,’ he writes, ‘that there’s going to be one dominant data platform for education, the way there’s one dominant data platform for search, social media, etailing. But in education, it’s going to be even more winner-take-all; there will be a number of companies that make up the platform, like Wintel. People might make a perverse choice to use Bing for search because they don’t like Google. But no one’s going to make the choice to subject their kid to the second-best adaptive learning platform, if that means there’s a 23% structural disadvantage. The data platform industries tend to have a winner-take-all dynamic. You take that and multiply it by a very, very high-stakes product and you get an even more winner-take-all dynamic.’

What is at stake in this winner-take-all market? Over to Jose Ferreira one more time: ‘The industry is massive. It’s so massive that virtually nobody I’ve met truly grasps how big it is. It’s beyond their frame of reference. The total amount of money (both public and private) spent annually exceeds all spending, both online and offline, of every other information industry combined: that is, all media, entertainment, games, news, software, Internet and mobile media, e-tailing, etc.’

But, still, a few questions continue to nag away at me. If all of this is so certain, why does Jose Ferreira feel the need to talk about it so much? If all of this is so certain, why don’t all the ELT publishers jump on the bandwagon? What sort of track record does economic forecasting have, anyway?

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Comments
  1. philipjkerr says:

    In answer to my final question, there’s an interesting article, ‘The Dismal Art’, which looks at the history of economic forecasting here: http://www.democracyjournal.org/32/the-dismal-art.php?page=all

  2. Thomas Ewens says:

    It seems to me that the likes of Pearson really are taking a colossal risk in aiming to corner a market that doesn’t really exist yet.

    I don’t know about other fields of education, but ELT is extraordinarily conservative and most teachers are resistant to and suspicious of change (often with good reason).

    And are you familiar with ‘Thinking Fast and Slow’ by Daniel Kahneman? It provides an excellent discussion of the dangers of economic forecasting.

  3. philipjkerr says:

    Yes, I’ve read Kahneman’s book, and really enjoyed. Come to think of it, I should probably read it again.

  4. philipjkerr says:

    Clayton Christensen’ s ‘Disrupting Class’ (McGraw-Hill, 2008) is probably the most well-known and influential book to look at disruptive change in education. In the follow-up, ‘Disrupting College’ (2011), the following lines will send a chill through the hearts of the big ELT publishers:
    There is no instance in the history of the hundreds of industries where disruption has occurred in which a significant company in one of the inner circles becomes a leader in a subsequent disruptive circle if it attempted to navigate that transition from within its mainstream business. (p.19)

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