Pearson takes on education after surviving digital disruption

John Fallon is still optimistic he can finish turning Pearson into a dominate force in education, its chosen sector.

John Fallon: ‘High-quality content needs paying for’. Picture: Stuart McEvoy

John Fallon, chief executive of Pearson, one of the world’s biggest education companies, knows all about disruption.

Eighteen months ago he saw the British-based company’s share price plummet by 30 per cent after it issued yet another profit warning as its strategy to reorient to the digital revolution in education hit a fresh obstacle, this time an unexpectedly poor performance in one of Pearson’s key businesses, the US college textbook market.

The January 2017 price plunge came at the end of a difficult two years in which Mr Fallon had prepared the company for the rise of digital by selling Pearson’s media assets (The Financial Times and a 50 per cent stake in The Economist) and implementing a major restructure that involved axing 4000 jobs, 10 per cent of the company’s global workforce.

Shortly afterwards, Pearson announced an after-tax loss of £2.3 billion for 2016, including a goodwill impairment of £2.5bn.

Speaking on a visit to Australia last week, Mr Fallon said it had been “a traumatic few years”.

But since last year’s nadir things have looked better and Mr Fallon is optimistic he can pull off one of the biggest Houdini acts in business, turning a traditional information company that was a giant in media, publishing and ­education into one that continues to dominate in the one sector it has chosen to remain in — education.

He is reinvesting the proceeds from the sale of media and publishing assets (Pearson sold its share in Penguin Random House last year) into building a digital education business.

“We are spending just shy of $US1bn ($1.36bn) a year on the research and development of new educational products and services, which are overwhelmingly digital,” he said.

Of Pearson’s £4.5bn annual revenue, 60 per cent was digital, or digitally enabled, he said.

This decision involves a big bet that education will prove to be different from the media industry — that it will not be dominated by players who provide information for free and rely on highly focused personalised advertising and sale of personal data for their revenue stream.

“That’s not a sustainable model and it’s not one that I believe society or education communities are willing to tolerate,” Mr Fallon pointed out.

“Those models don’t work in education because clearly it is really important that we respect individuals’ privacy. The data belongs to the student and it belongs to the university.”

Like many of its smaller competitors, Pearson is working hard to replace the traditional textbook model and become a big player in providing the interactive learning modules that give students real-time, interactive feedback on their learning. Mr Fallon believed quality products in this area would earn revenue.

“High-quality content, like high-quality journalism, needs paying for,” he said.

The issue is how much students, and universities will pay for it, and what the model of payment will be. Mr Fallon said that in the US, Pearson’s huge college textbook market had completely changed in the past decade from students buying $US300 books to buying digital coursework for $US60 to $US100.

But there was also competition from free, or nearly free, products such as massive open online courses. To make revenues more certain, the company was shifting to a subscription model for this education material, which offered greater certainty in terms of ongoing revenues.

Pearson has its large assessment business, plus an increasing number of contracts with universities to deliver online courses on their behalf, including in Australia with Monash University and Griffith University.

Mr Fallon said Pearson was ready for the big challenge of preparing people for the world of work that would be transformed by artificial intelligence, machine learning and other technologies, in which reskilling and retraining would be the norm.

“The single most important gift you can give anybody is the ­capacity to learn how to learn,” he said.

He said choosing the education track for the company was the right decision because the horizons in education were almost endless.

“You know, $6.4 trillion a year is spent on education around the world. It’s the third largest vertical in terms of spending, (but) only around 2 per cent of that is digital at the moment,” he said.

Pearson’s share price is back above the 807 pence level it was at before it plunged in January last year. The company returned to the black last year, announcing an after-tax profit of £408m.

“We’re on the cusp of a point where we’ll see a turnaround in ­financial performance,” Mr Fallon said.

He said not only would Pearson’s profits grow, but the company would also help equip every young person to prosper in a world being hit by massive disruption in the way people work and in the skills they need.