Pearson's Bet on Common Core Fails to Pay Off

By Michael Rothfeld 

Pearson PLC, the world's largest education company, made a major miscalculation on the Common Core academic standards, expecting a windfall that failed to materialize as it headed into a downward spiral in sales, stock price and staff.

The company's Common Core strategy ran into trouble on two fronts: It struggled to develop and deliver new digital courses on time, as the academic standards themselves faced a political backlash in which several states pulled out.

Pearson's strategy included a digital curriculum for the common academic standards approved by most U.S. states starting in 2010, and a vigorous pursuit of standardized testing contracts that backfired. Those were among several factors that hurt the U.K.-based Pearson, exacerbating a decline in U.S. college textbook sales that company executives say is the primary culprit for its problems.

Pearson's share price has declined 32% over three years and sales have fallen in three of the past four. It has laid off thousands of employees. Investment analysts have predicted that Chief Executive John Fallon could be replaced if the situation doesn't turn around.

Mr. Fallon, in a recent interview with The Wall Street Journal, said Pearson will eventually make money on its Common Core courses and is heading for recovery. "We are testing the patience of our shareholders, and we have to get on and deliver," he said.

Reduced college enrollment and the closure of some for-profit colleges in the U.S. have cut college textbook sales, Pearson's largest North American revenue stream. Those problems and others reduced Pearson's profits by $338 million a year, "which for a company of our size is a lot to absorb," Mr. Fallon said.

As for Common Core, Pearson invested more than $125 million to build the digital courses, but they are three years behind schedule and haven't produced returns, current and former executives say. Last year Pearson took a write-down of about $103 million on that and other digital products. Worse yet, its high-profile role in controversial Common Core testing brought a backlash in some states, and it lost several big U.S. contracts.

"The simple fact is that Pearson's brand is politically toxic in the United States," Ian Whittaker, an analyst at Liberum Capital Ltd., wrote in January. A Pearson spokeswoman called that view "an outlier," saying many education stakeholders view Pearson positively.

The company's Common Core experience is a far cry from what Pearson's previous chief, Marjorie Scardino, envisioned.

Adopted by 46 states, Common Core was intended to improve instruction and afford all students a comparable education. Education companies prepared to cash in on revised classroom materials, training, and tests.

"I think we will benefit from it," then-Pearson executive William Ethridge said to analysts in mid-2010. "And more importantly, the students will benefit from it."

On the curriculum side, Pearson set out to build the "Common Core System of Courses," interactive digital courses for elementary through high school that were aligned to the standards.

Development of the courses went slowly under Judy Codding, an academic with little technology experience whom Ms. Scardino hired for the project. In an interview, Ms. Codding said she wanted to produce tablet-based courses to emulate in school how students learn on devices at home.

Her vision sometimes clashed with technological realities, causing friction with some colleagues. "The technology had to support the learning and teaching, and so when it didn't I spoke up," Ms. Codding said.

However, the app nearly filled up all the storage on the devices and crashed often, according to current and former Pearson employees.

An agreement to try the courses on iPads in some Los Angeles schools in 2013 ended disastrously. Students couldn't download material. Teachers stopped using the product. Pearson reimbursed $6.4 million to the district because of the problems.

Common Core testing seemed to be a brighter spot. Pearson won a competition in late 2014 to give a test on the standards in more than 20 states in a coalition called the Partnership for Assessment of Readiness for College and Careers, or PARCC.

Meanwhile, resistance grew to Common Core. Some conservatives called it a federal takeover of education. Some parents found the testing excessive, and targeted their complaints at Pearson.

At least a dozen Common Core states have repealed, revised or renamed their standards. The predicted market for Common Core products fizzled.

Pearson wasn't alone. News Corp, which owns The Wall Street Journal, last year sold education division Amplify Insight, which marketed Common Core-related products, after significant losses. A News Corp spokesman said "the market for a digital curriculum was slower to develop than was expected."

The PARCC contract failed to deliver the $2 billion in revenue over eight years Pearson hoped for, as all but six states dropped out. Pearson lost testing contracts in other states, too, costing it some $147 million in annual revenue. Those contracts were competitively bid, but the losses came at time when Pearson had been widely criticized for some content on Common Core tests and other factors.

Pearson executives insist the company will rebound. Corporate restructurings will save Pearson an estimated $515 million a year, though other factors are out of its control, like college enrollments, they say.

"Sure, there's been some short-term bumps and controversies around Common Core and we've got caught up in that along with others at points, but the commitment is unchanged," Mr. Fallon said

The digital product is now the Pearson System of Courses -- Common Core was removed from the name. Pearson said it has reduced file sizes and made other improvements, and expects to release it next year.

As for his future at Pearson, Mr. Fallon said he was "doing the best I possibly can for Pearson and it's not really for me to focus on anything other than that."

Write to Michael Rothfeld at [e-mail]

(END) Dow Jones Newswires

November 22, 2016 11:14 ET (16:14 GMT)

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