Last week, McGraw-Hill Education announced the establishment of a "Center for Digital Innovation". What does this mean? According to the press release, the initiative is "a first-of-its-kind research and development center focused on bringing to elementary and secondary classrooms the same digital environment that today's young people have embraced outside of school." McGraw-Hill CEO Terry McGraw discussed the importance of education for economic growth and the center in this CNBC clip.
While we agree with Mr. McGraw's view that education is key to human capital development and economic growth, we can't help but wonder whether elementary school children might be better served by simply focusing on the three Rs -- reading, writing, and arithmetic -- the old fashioned way: by hand with pen/pencil, books, and paper. Perhaps secondary classrooms make more sense to prepare kids for an increasingly connected world, yet then again, we all spend so much of our lives surrounded by computers and other digital devices nearly 24/7 (save sleep hours). Maybe McGraw-Hill's solutions will find a middle ground and truly accelerate learning across disciplines.
Aside from a few questions about how/where the new center will achieve measurable, positive impacts at the elementary level, we also wonder how the effort will contribute (or detract) from the company's reported financial results. The Education segment contributed 42% of McGraw-Hill's total $6.4 billion in revenue for 2008 and 25% of adjusted operating profit with an adjusted operating margin of 13% compared to 15% in 2007 (for details, please see: 2008 Annual Report). We are pleased that large, market leading companies such as McGraw-Hill are willing spend R&D to innovate and potentially drive society forward, yet we are uncertain of shareholder returns from the center's initiatives. One project highlighted in the press release:
CINCH Project, a collection of Web 2.0 tools for collaborativeSounds interesting and akin to Facebook/MySpace for the classroom (is this necessary? ...bringing the "same digital environment" to the classroom...), yet we're uncertain how such an offering will make money for McGraw-Hill. Put simply, will budget strapped schools actually pay for such a solution? The likely answer is that the R&D center will be run as a loss leader (cost center) to sell more textbooks and potentially up-sell software-based solutions down the road.
learning projects, features a community-based Web site where teachers
and students create digital profiles and participate in group inquiry
opportunities all in a safe and secure Web environment.
Despite our questions regarding the new center, we plan to keep an eye on McGraw-Hill and the company's efforts in the education sector. We note that the emphasis on education and technology is inline with our favorable views on Sonic Foundry (SOFO, $0.66) and Mediasite, except that lecture capture is here and now, with well-documented benefits for organizations and students alike. For its part, Sonic Foundry put out a bevy of press releases last week surrounding EduComm/InfoComm, including news that more than 50,000 students and alumni of the Wharton School viewed an online course captured with Mediasite. Lastly, one more point related to both companies: it appears that McGraw-Hill's Standard & Poor's unit may now be using Mediasite for analyst commentary, although we're watching for more information on this front (user trial or actual deployment).
Disclosure: long SOFO.
© 2009 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer