Forecasting is difficult, especially about the future, as the old line goes – but is it quite as hard as John Fallon, chief executive of Pearson, makes it seem?
Two errors in 2016 were understandable, or at least not unique. Most big US educational publishers were too optimistic about the numbers of students enrolling in US colleges and the pace at which all students would opt to rent, rather than buy, their textbooks.
Trickier to explain, however, is Fallon’s relative confidence only three months ago. Last October, when revenues from higher education courseware material were running at minus 13% at the nine-month stage, Pearson spoke of “improving trends”. In the event, revenues plunged 30% in the final quarter of the year.
“We now assume that many of these downward pressures will continue,” warned Wednesday’s statement meekly. Profits for 2016 will still hit the £630m target but 2017 could see a decline. More significantly, the target of £800m for 2018 – which had been a totem of Fallon’s long-term plans – has been abandoned, or “withdrawn” in the cute phrasing. Another ambition was to keep paying dividends at least at the old rate. That, too, has been ditched. Against those upsets and a 27% fall in the share price, the proposed sale of Pearson’s 42% stake in Penguin Random House was almost a side-story for shareholders.
The entire educational market in the US, on which Pearson staked its future a decade ago, has been blasted from many directions. An “unprecedented period of change and volatility” – his description – is accurate, but the question is whether Pearson adapted fast enough in the print-to-digital revolution. Back in February 2014, a year into the job, Fallon reckoned Pearson was “in the middle of what we believe will be a short, but difficult, transition”. Three years later, the transition is having to become faster. Pearson will cut ebook rental prices by up to 50% on 2,000 titles and invest an extra £50m at improving its digital capabilities.
Fallon offered a spirited defence that, when the dust settles, the digital future in education will be stable, reliable and “at least as profitable” as the analogue past. The theory runs that educational publishing in the US is not like the newspaper business: prices for digital content, complete with tailored material and self-assessment features, might be lower but old-style printed textbooks will no longer pass through six hands.
Will Fallon still be at Pearson to see his prophecy fulfilled or not? One doubts it. The share price has halved on his watch and chief executives tend not to survive five profits warnings in four years. Sidney Taurel, the chairman, is new-ish and thus hard to read – but Fallon should probably prepare for a short but difficult conversation.