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1\ Pretty big news about planned merger between McGraw-Hill Education and Cengage Learning, sounding like all-stock (no cash) transaction between roughly equal partners wsj.com/articles/mcgra…
2\ While news calls out the private equity angle (both PE owned) and associated cost savings (estimated $300m over 3 years) due to combination, and while they mention the size of combined company (est. $3.1b revenue w $5b market value) to compete w Pearson ($5.4b / $8.5b)...
3\ those are secondary reasons for merger. The potential upside / value of merger is based on the movement to subscription model for course materials. Both MHE and CL have Inclusive Access offerings, which is moving in direction of subscriptions.
4\ And CL has Cengage Unlimited, which already is a subscription service. Subscriptions have different dynamics than individual textbooks sales; one big issue is winner-takes-all nature of platform / aggregators. Scale increases value of subscription.
5\ One of biggest criticisms of Cengage Unlimited is limited scope - students only get real value if 2+ courses use CL courseware. But with scale (combining MHE and CL), you have more titles and more value for subscription right away.
6\ Both companies have seen value of this move towards subscription-based courseware, but their bet is combination is greater than sum of parts due to these dynamics.
7\ If merger goes through, I would expect new company to double down on this move to subscription courseware. And potential acceleration of institutions considering this model.
8\ Will it reduce costs for students as claimed by CL CEO? or will reduced competition allow them to raise prices, as is history in textbook market? That depends on willingness of execs to commit to future path and push back on old guard protecting turf.
9\ But it is important to note that course material (dig courseware, print textbooks) list pricing has plateaued over past ~2 years and is even showing signs of dropping. Not what you hear often, but BLS and other data back this up.
10\ Raising prices would not only jeopardize benefits of move to subscription courseware, it would also try to reverse pricing history. Would be stupid move. Not saying to discount possibility, just saying it won't work.
11\ But this merger will give marketing ammunition to OER providers and alternative courseware and homework platforms. Whole market will be interesting to watch. Good or bad for education? Important question that is not the same as market dynamics.
