PEARSON ETEXTBOOK READER

Ahmed TantawyBrian Guernsey

Josh LaumanPranav Dharwadkar

Tapan Kamdar

Hawk and Dove

Pearson & Market Background

Public K-12 Private K-12

Public University

Private University

Total

50

6

14

5

75

North American Educational Market

(Million Students ,2008)

• $6.4 Billion annual textbook industry

• 37% market share

Major Business Units

• $880.5 Million profit Education segment

• $605 Million profit N. America Edu.

Pearson’s strategic decision

Distribution

Content only

Reader +

Content

Segment

All content

Textbooks only

Hardware

Partner with

eReaders

Build through 3rd party

Physical vs. Digital Model

Author Editor Publisher Wholesaler

Educational

Institution

Physical Model

Author Editor Publisher

Educational

Institution

Digital Model

Author royalties = 7% on a book sale Rents captured by Publisher & Wholesaler

Partial book sale, subscription model Removes middle man (Wholesaler) Added value provided by publisher to educational institutes

$$ or Market Share - Protecting market share/ eroding profits in the emerging digital age

Class/yr

Books/Class Books

Cost/Book Annual Cost

Grade K-8 8 1 8 55 $440Grade 9-12 10 1 10 75 $750Undergraduate 8 2 16 55 $880Graduate 6 2 12 95 $1,140Average 10.4 60.8 $630

NPV (CF)Device Cost 37% 50% 75%

$99 1.59B 1.44B 1.17B$199 1.48B 1.34B 1.06B$299 1.34B 1.23B 0.95B

Market Share

2008 2011 2012 2013 2014UniversitiesPublic 13,972,000

Undergraduate 12,591,000 1.00% 2.50% 4.00%Graduate 1,381,000 1.00% 1.00%

Private 5,131,000 Undergraduate 3,775,000 1.00% 2.00% 4.00% 5.00%Graduate 1,356,000 1.00% 1.00%

Elementary / SecondaryPre-K - 8 39,179,000

Public 34,667,000 1.00% 2.00% 3.00%Private 4,512,000 1.00% 2.00%

Grade 9 - 12 16,321,000 Public 14,955,000 3.00% 4.00% 6.00% 8.00%Private 1,366,000 3.00% 4.00% 5.00% 6.00%

Mkt Size 527,380 1,200,920 2,197,205 3,128,370

Subscription per subject / year = $10 # of Books / year = 10.4- Free Device (one time) =

$299* Market Penetration- Cannibalization

*=

Recommendations

Partner to build eReader Interactive content for textbook market New subscription model for schools

V/S

APPENDIX

Porters Five Forces

Threat of Substitute

s•eContent

Providers:•Book

publishing houses

•Google online book

•Blogs/Wikipedia

•eBook Readers•Amazon

Kindle, Apple iPAD

•Computer•Texbooks

Threat of New Entrants• eContent Providers• Traditional content providers moving to

digital content• eBook Readers• Fujitsu, Sony, Google, Netbooks

Customers Bargaining Power • Schools/State Government: High. • Consumers: Moderate. In some ways

consumers are limited to what the school/state chooses. But consumers can potentially influence that choice through petitions, parent funding, etc

Suppliers Bargaining

Power•eContent

Providers: High•Volume of

content : Key differentiator amongst different ebook readers

•eBook Readers: Strong Bargaining power•Multi-

purpose devices have market penetration and network effects

Competitive

Rivalry

Modeling Parameters- Savings Schools $$ and penetrating additional segments

Overall School Savings

$10 54,529,537$ 178,701,123$ 405,885,640$ 729,349,873$ $15 81,794,305$ 268,051,685$ 608,828,461$ 1,094,024,809$ $20 109,059,073$ 357,402,246$ 811,771,281$ 1,458,699,745$

$55 22,193,521$ 50,537,836$ 92,464,099$ 131,649,943$ $60 24,211,114$ 55,132,184$ 100,869,926$ 143,618,119$ $75 30,263,893$ 68,915,230$ 126,087,407$ 179,522,649$

Digital $10 w/ Physical $60 30,318,422$ 123,568,939$ 305,015,715$ 585,731,754$ Current School costs 322,019,772$ 733,285,268$ 1,384,350,188$ 1,910,191,881$ School Savings 291,701,350$ 609,716,329$ 1,079,334,474$ 1,324,460,127$

Digital text book costs @ 37% Market Share

Cannibalization (Loss of Physical textbook revenue)

Financial Model- $10 digital replacing $60 textbook; retaining 37% market share

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Period 0 1 2 3 4 5 6 7 8 9 10Units Sold 0 527,380 1,200,920 2,197,205 3,128,370 3,159,654 3,191,250 3,223,163 3,255,394 3,287,948 3,320,828Unit Price $299 $293 $287 $281 $275 $269 $263 $257 $251 $245 $239Reader Revenue $0 -$3,153,732 -$14,363,003 -$39,417,858 -$74,830,610 -$94,473,646 -$114,502,059 -$134,921,592 -$155,738,067 -$176,957,378 -$198,585,502Content Revenue $30,318,422 $123,568,939 $305,015,715 $585,731,754 $591,589,071 $597,504,962 $603,480,011 $609,514,812 $615,609,960 $621,766,059Revenue $0 $27,164,690 $109,205,936 $265,597,857 $510,901,143 $497,115,425 $483,002,903 $468,558,419 $453,776,745 $438,652,582 $423,180,557R&D -$5,000,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000 -$3,500,000E-Reader Unit Costs -157,686,620 -201,388,460 -297,889,215 -278,418,335 -9,353,826 -9,447,365 -9,541,838 -9,637,257 -9,733,629 -9,830,965 -9,929,275Labor/Distribution 0 -7,726,644 -17,235,604 -30,877,322 -43,027,601 -42,513,141 -41,984,088 -41,440,203 -40,881,242 -40,306,958 -39,717,100Marketing 0 -3,090,658 -6,894,242 -12,350,929 -17,211,040 -17,005,256 -16,793,635 -16,576,081 -16,352,497 -16,122,783 -15,886,840COGS (162,686,620)$ (215,705,762)$ (325,519,060)$ (325,146,586)$ (73,092,468)$ (72,465,761)$ (71,819,562)$ (71,153,541)$ (70,467,369)$ (69,760,707)$ (69,033,216)$ Depreciation 15,768,662 35,189,358 63,068,572 87,925,967 86,915,754 85,876,544 84,807,858 83,709,211 82,580,110 81,420,056 80,228,543EBIT -146,917,958 -153,351,714 -153,244,552 28,377,239 524,724,429 510,526,208 495,991,200 481,114,089 465,889,486 450,311,930 434,375,884EBIT*(1-tax) -105,780,930 -110,413,234 -110,336,078 20,431,612 377,801,589 367,578,870 357,113,664 346,402,144 335,440,430 324,224,590 312,750,637CF (90,012,268)$ (75,223,876)$ (47,267,505)$ 108,357,579$ 464,717,343$ 453,455,414$ 441,921,522$ 430,111,355$ 418,020,540$ 405,644,646$ 392,979,180$ NPV 1,337,853,377$