NBR Complete Transcripts-February 18, 2008
Monday, February 18, 2008The New Business of Education-Standardized Testing
SUSIE GHARIB: Most people don't realize that spending on education now accounts for a larger share of the gross domestic product than any other service sector except healthcare. The No Child Left Behind Law, passed six years ago, is one of the reasons that spending on education has increased dramatically. One part of NCLB, as the law is known, requires frequent testing of students in public schools in order to measure their progress. As Suzanne Pratt reports, that's given a big boost to firms involved in all aspects of standardized tests, as well as related materials.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: For most U.S. schools, frequent test-taking is a way of life. As more students seek higher education, the need to assess their progress grows. But perhaps an even bigger driver is the government's push for accountability in public education. That led to the passage of the No Child Left Behind law six years ago. President Bush sees the landmark legislation as one of his most important accomplishments.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Members of Congress, the No Child Left Behind Act is a bipartisan achievement. It is succeeding.
PRATT: NCLB mandates annual state testing of public school children in math and reading beginning in third grade and continuing in high school. Some science testing is being added this year. Individual states, however, are permitted to customize tests and choose their own suppliers. Adam Newman of the research firm Outsell says the NCLB requirements plus other standardized tests mean big business for companies that design, score and supply the materials.
ADAM NEWMAN, VP & SERVICE DIRECTOR, OUTSELL: The testing business this year is about a $2.6 billion business in the United States and that focuses on K-12 testing. And that's had fairly strong, high single digit growth to low double digit growth over the past several years since the passage of NCLB.
PRATT: Outsell says NCLB tests account for about a third of the overall testing business. The major players in the business include McGraw-Hill's CTB division, Pearson and Houghton Mifflin's Riverside unit. Recently, Pearson bought another player, Harcourt Assessment. All three companies declined to discuss their testing business with us. Because states are spending more money on testing, also known as assessment, more companies are getting in on the action, including Educational Testing Service. Non-profit ETS is best known as the publisher of the SAT college entrance exam, but it also holds NCLB contracts with California and New Jersey. And ETS' CEO Kurt Landgraf believes more contracts may be on the way.
KURT LANDGRAF, PRES. & CEO, EDUCATIONAL TESTING SERVICES: I think more and more states are recognizing that due to the high risk aspect and the accountability nature of these assessments, they have got to go for the highest quality assessment that they can bring in.
PRATT: Nevertheless, Landgraf and others say the big money is not in testing contracts, but in so-called wraparounds. Those are text books, teaching manuals and practice exams that schools buy to help students prepare for the mandated tests. Columbia University Professor Hank Levin explains winning a state-testing contract opens the door to more lucrative test-prep sales.
HENRY LEVIN, PROFESSOR, TEACHER'S COLLEGE, COLUMBIA UNIV.: If you use company X and company X has one of the major texts in the area, that text will be aligned to the test that the company is providing as well. And that's not a secret; everyone knows that.
PRATT: Meanwhile, other firms are taking advantage of increased demand for test prep services. New York based Kaplan, which has its roots in readying kids for college and graduate school entrance exams, is the world's largest test prep company. Kaplan also offers a variety of other test-related and educational services and its growth has been phenomenal. So phenomenal that CEO Jonathan Grayer says Kaplan is now the largest source of revenue for its parent, the "Washington Post."
JONATHAN GRAYER, CEO, KAPLAN: Kaplan was a $70 million company in 1991 and last year it had $2 billion in sales on the back of testing growth of all kinds. That trend is continuing.
PRATT: Most experts are confident the testing and test-prep business will continue to grow. That's in part because No Child Left Behind is expected to be renewed, but also because our society is becoming more competitive. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
The New Business of Education-Tutoring Services
SUSIE GHARIB: More and more these days, elementary and secondary education is extending beyond the classroom. For example, tutoring is now a $4 billion industry with millions of students signing up for tutoring services every year. Dana Greenspon tells us what's driving that part of the education industry and how companies, large and small, are benefiting.
DANA GREENSPON, NIGHTLY BUSINESS REPORT CORRESPONDENT: When ninth grader Amy Newman began struggling in math, her mother Anne added tutoring to the after-school equation. Newman says now Amy is getting an "A."
ANNE NEWMAN, AMY'S MOTHER: When you have somebody who is really just sort of hitting a bump, I knew it was going to probably be solved pretty quickly. Now they've moved on and started working on study skills, because her habits aren't that great.
GREENSPON: More and more students like Amy are getting help outside the classroom. It's a trend Newman encounters daily -- she's an education counselor at TutorFind, a small tutoring company in Manassas, Virginia. The 15-year-old firm has seen significant growth in its business over the past decade. Executive Director Debbie Bergeron says one major driver is busy kids and even busier parents.
DEBBIE BERGERON, EXECUTIVE DIRECTOR, TUTORFIND: So the pockets of time to actually do schoolwork are thinner and a lot of parents don't want to spend the time that they have with their kids fighting over schoolwork. And it's just easier to hire somebody who knows what they're doing, who can focus on something and get that job done and then when they're together, it's just much less stressful.
GREENSPON: Another factor that has propelled the entire industry is the No Child Left Behind Act. The law allows low-income children in failing schools to receive tutoring services, with the local government picking up the bill. The law has spurred growth across the industry. Major tutoring provider Sylvan Learning Centers has devised a program called "Ace It," specifically designed for students receiving government- sponsored tutoring. CEO Peter Cohen says the NCLB law has provided new opportunities for those operating a Sylvan franchise.
PETER COHEN, PRES. & CEO, SYLVAN LEARNING: It's a different business model. It requires a special focus and some of our franchisees have embraced that opportunity and have built a business that's as big as their Sylvan consumer business in the "Ace It" program.
GREENSPON: Another factor helping Sylvan is its reliance on local franchisees. The company has more than 1,100 centers in the United States and about 85 percent are franchises. Sylvan is now in the process of moving to a 100 percent franchise model. As college admissions become more competitive, Cohen says local ownership helps students succeed.
COHEN: When you have people who have grown up in a community or live in the community, may have their own children in the school system, they really understand the challenges of that school system, the challenges of those neighborhoods.
GREENSPON: Yet, as tutoring centers pop up in shopping centers across the country, the competition is also mounting, from both local operators and online companies, based as far away as India. That competition has been both a challenge and a blessing for small firms like TutorFind. While national companies like Sylvan and Huntington Learning Centers may be more visible, Debbie Bergeron says independent operators also benefit from their efforts.
BERGERON: Companies that can afford to advertise on TV, for example, well, they're pushing tutoring. And if somebody just goes to the phone book or to the Internet, they're going to find me. So there's a great possibility they're actually driving the tutoring industry and helping us grow.
GREENSPON: And with 10 percent growth in tutoring revenues expected this year, there is room for companies both big and small to multiply. Dana Greenspon, NIGHTLY BUSINESS REPORT, Manassas, Virginia.
The Business of Education-David Hoff of "Education Week" on the Future of NCLB
SUSIE GHARIB: We've seen how the No Child Left Behind law has been a significant factor in the growth of testing and tutoring services over the past six years. But now the law is up for review by Congress and it's not clear whether it'll continue in its present form. I talked with David Hoff, associate editor at "Education Week." He covers issues concerning the law's reauthorization and I began by asking him whether he expects major changes.
DAVID HOFF, ASSOCIATE EDITOR, EDUCATION WEEK: There will be some major changes, but at this point, things are really up in the air. We're going to see a big debate over how students are testing and tested and exactly what is going to be expected of them into the future.
GHARIB: So, David, tell me, do you expect any changes on the emphasis of meeting performance targets?
HOFF: No, I don't expect that they'll back away from performance targets. They may push back a deadline for students trying to reach proficiency, but in the end I think Congress is really committed -- and a lot of the national policymakers -- are really committed to having students meet some level of proficiency, at least in reading and math, as the law currently says.
GHARIB: The law didn't mandate any national tests or achievement levels and as you know that was really good for the testing companies, because businesses then could design a different test for students in every state. Do you think that there's going to be a push to replace that system with a single nationwide test?
HOFF: No, I don't think so. There may be some people who bring it up as an option, but in the past, whenever Congress has been presented with a question of creating national standards or national tests, it has backed away from it pretty quickly. You know, the local districts out there throughout the country do not want Washington coming down from above and saying, this is what you should make your students learn. And I think Congress, members of Congress hear that pretty loudly. They've had opportunities to create a single, national test twice in the past 20 years or so. Under President Clinton, it was rejected when the Republicans controlled Congress, And then when the first President Bush proposed it in 1991, the Democratic Congress rejected it.
GHARIB: Right.
HOFF: So I don't see the dynamics on that changing much.
GHARIB: Speaking of politics in Washington, we know that a new administration will be coming to Washington next year. From what you've been hearing, will that change results in a rethinking of education policy?
HOFF: I think it's clear that although the presidential candidates -- many of them -- are critical of No Child Left Behind, but when you look beyond their initial rhetoric, you se that they, I think, buy into a lot of the important elements of it and that is the bottom line of accountability. So when it comes down to it, I think testing is still going to be part of this law in the end.
GHARIB: Hoff also noted that although there was a big rise in Federal spending on education immediately following the passage of No Child Left Behind, the rate of increase has since slowed. And as a result of budget pressures on Congress, he doesn't expect Federal funding of education to rise dramatically in the coming year.
The New Business of Education-Charter Schools
PAUL KANGAS: NCLB's focus on school performance has motivated parents to look for more public school choices. That's led to a boom in the formation of charter schools. As Midwest bureau chief Diane Eastabrook reports, charter schools are built on the premise that they can educate children for the same amount of money as standard schools, but with better results.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hi, Destiny, I'm Diane Eastabrook. The 500 students at Chicago's Noble Street college prep are used to classroom visitors. They are also used to stricter rules, a stricter dress code, longer school hours and a longer school year than students at Chicago's other public schools. Noble Street is one of Chicago's five charter schools. It was authorized by the city's public school system and receives about $7,000 a year per pupil from the system. That's slightly less than the public schools receive. But as a charter school, Noble Street doesn't have to follow the same rules and regulations as Chicago's public schools. Superintendent Michael Milkie says that gives him a lot more budgetary and academic freedom.
MICHAEL MILKIE, SUPT., NOBLE STREET CHARTER HIGH SCHOOL: We have a college counseling course that wouldn't be allowed under the union contract where a non-certified college counselor is really the teacher of that class and guides the students through every step of the college application process.
EASTABROOK: There are about 3,000 charter schools nationwide. Their supporters claim that having greater flexibility allows charter schools to tailor curricula that better meets the needs of their students. But in exchange for that flexibility, the schools must meet stricter student performance standards than public schools or face possible closure. Liz Howard is the associate director for the Center for Nonprofit Management at Northwestern University's Kellogg school of management. She says charter schools are the product of the school reform movement of the 1980s.
LIZ HOWARD, ASSOC. DIRECTOR, CENTER FOR NONPROFIT MNGT.: They are a different method of educating children in the sense that the vast majority of charter schools are very small schools. They may focus on a particular curricula or age group which enables them to have a more laser-like focus.
EASTABROOK: In Chicago, charter schools are run by non-profit organizations. But elsewhere, for-profit service and support companies advise and operate charter schools. In Florida, privately-owned charter schools U.S.A. operates schools. The firm gets a portion of the public dollars its charter schools receive.
Another for-profit firm, Academica, manages 30 charter schools in Florida and makes money by charging schools a management fee. Academica President Fernando Zuelueta says his company does everything from designing schools to hiring teachers to maintaining records.
FERNANDO ZULUETA, PRESIDENT, ACADEMICA: You don't want your principal spending his or her time doing this kind of work. You want them focusing on ensuring that the students are getting the best education possible.
ESTABROOK: Corporate America has played a central role in the development of many charter schools here in the U.S. Family foundations established by business leaders like Bill Gates and Michael Dell have contributed millions of dollars to the charter school effort. Chicago's Rowe-Clark math and science academy is named after Exelon Corporation CEO John Rowe and Commonwealth Edison Chief Executive Frank Clark. Exelon and the two executives collectively donated more than $4 million to cover the school's start-up costs. Rowe thinks corporations have an obligation to serve their communities.
JOHN ROWE, CHAIRMAN & CEO, EXELON CORPORATION: What I want is to help more kids well, to learn well, to get what they need so they can earn their way into college and be part of the successful part of America rather than always (ph) behind.
EASTABROOK: Experts say in the past decade about five percent of the nation's charter schools have been closed for poor performance. The hope is that better data will help states and school districts better track the progress of charter schools and reduce failure rates. But until that happens, questions will remain as to whether charter schools can offer a better product for the same taxpayer dollars as public schools. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
The New Business of Education-Educational Technology
SUSIE GHARIB: Many school administrators are turning to technology as a way to increase school quality and teacher efficiency. And it so happens that there's plenty of new educational technology available. As Jeff Yastine reports, many high-tech companies see education as a market with tremendous potential for their products.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: When it comes to education and technology, there's old school -- a teacher and a class -- and there's new school, with devices like this high-tech active board, displaying lessons electronically, while students write directly on the screen. In fact, here at Nob Hill elementary school in Broward County, Florida, technology is in heavy use nearly everywhere, from wireless Internet nodes in each classroom to laptops bought and paid for by the school district right down to the Internet portals dedicated to use by teachers and students.
Computers of course, have been used in schools for years. The difference now is the variety of software and hardware that's available to enhance teaching and learning in the classroom. It amounts to nothing less than a revolution that's being embraced by larger numbers of school districts and supplied by an increasingly robust education technology marketplace.
And a glimpse of that marketplace is seen at conferences like this, where companies across the tech spectrum -- from giant names like Hewlett-Packard, Dell and Adobe to niche education providers like Vernier Software and technology -- pitching software and hardware of all kinds to educators. This year, one of the hottest areas in educational tech is test-taking software. It enables wireless devices like these to be used to quiz entire classes electronically and the results tabulated instantly. A company called Qwizdom has gone a step farther in its software by making correct answers the fuel to power race cars in a competitive car racing game.
And if that's not enough, the quiz results are then stored and correlated, so that teachers and administrators can see if classes are making enough progress to meet state standards on the subject. Not long ago, teachers were thought too stodgy to take advantage of such advanced technology. But Mike Eason, executive director of the Florida Educational Technology Conference, says there's a changing of the guard going on, as technology-literate educators take over.
MIKE EASON, EXEC. DIR., FL EDUCATIONAL TECHNOLOGY CONF.: As that population, that bubble goes of all these kids that have grown up with the technology, that they become educators and become part of that education community and they have embraced the technology already, they're going to use the technology more and more in that education process.
YASTINE: But technology involves big dollars in fiscally conservative school boards and they need to analyze what technology to buy, how quickly it will become obsolete and whether it's truly effective for teaching and learning. Schools also need infrastructure and support services. Advisers like Dr. Jeanine Gendron say school boards need a strategic plan and a commitment for technology in the classroom to be truly effective.
JEANINE GENDRON, DIR., INSTRUCTIONAL TECH., BROWARD CTY. PUBLIC SCHOOLS: You really have to look at what your vision is in the district and where as a whole you want teaching and learning to go. And that vision will actually drive the decisions that are made and take you to the new learning environment.
YASTINE: Right now, annual sales of educational technology are estimated to be worth up to $5 billion. But as schools and teachers become more comfortable using technology, the educational market could be the next big frontier for high tech. Jeff Yastine, NIGHTLY BUSINESS REPORT, Sunrise, Florida.
The New Business of Education-Trace Urdan of Signal Hill Explains Investment Opportunities
PAUL KANGAS: So with all of the new trends in education, are there opportunities for investors to make money? To help us look at investment possibilities in the education business, joining us from New York is Trace Urdan, senior analyst with Signal Hill, who specializes in the for-profit education sector. And, Trace, welcome to NIGHTLY BUSINESS REPORT.
TRACE URDAN, SR. ANALYST, SIGNAL HILL: Thanks, Paul. Good to be here.
KANGAS: Right now, would you recommend education as a good place for investors who are looking for a recession-proof industry?
URDAN: I would say so. Generally speaking, education stocks do very well when the economy is weaker. The companies that sell into Federal funds are pretty well protected. Federal spending is pretty well divorced from revenue collection. The state-funded programs sometimes feel a little bit of pressure when state and local tax receipts are down, but it tends to be pretty mild relative to what we otherwise might see in the corporate environment. And, generally speaking, when you're talking about consumer stocks, you even see a tendency for consumers to want to spend on education when they're feeling anxious about the job outlook.
KANGAS: Yeah, makes sense. What about the fact that we'll have a new occupant in the White House next year? Do you think that could impact education spending?
URDAN: Well, it will either be good or it will be better. Very few politicians ever get elected by promising to cut spending on education, so even the candidates that are critical of the Bush No Child Left Behind program, really what they want to do is to increase the spending for it and so-call fully fund it. So, like I said, it really looks pretty good as far as future occupants of the White House are concerned.
KANGAS: Now, in this program we've looked at four specific areas: testing, tutoring, charter schools and educational technology. Do you like any of these sectors and are there any companies whose stocks you can recommend as ways to play off of them?
URDAN: Sure. Those are all areas where you're seeing a lot of interesting trends taking place. They don't all necessarily have public stocks that you can invest in. What we know about the testing market right now is that a lot of the winning companies there are still private. The big players -- McGraw Hill and Pearson -- from what we can tell, are getting nibbled at by some smaller competitors that are coming on as new tests are being introduced, largely as a result of No Child Left Behind. So, I would say, for investors, maybe stay tuned in that space. In the charter school market, you know, charter schools are politically controversial, and that tends to sometimes be problematic from a public market standpoint, Edison schools being a good example when it was a public company. But now there's a new company in this space called K-12. This is -- the ticker there is LRN and it's a newly public company. It was a very hot IPO.
KANGAS: Right, I remember.
URDAN: There's a lot of-- right-- a lot of enthusiasm because what they're offering is charter schools online and that's an area that is growing very rapidly still right now.
KANGAS: OK. Well, Trace, there are many other parts of the education business that we didn't have a chance to cover, ranging from pre-school to higher education. Can you identify briefly some other areas with growth potential?
URDAN: Sure. In the K-8 school market, there's a company called Nobel Learning Communities. Ticker there is NLCI.
KANGAS: OK.
URDAN: And they run, actually, private, for-profit pre-K and K- 8 schools. And what you're seeing there is that as the children of the baby boomers -- the echo boom, sometimes called- - are just getting into child- bearing age now. And so you're going to have a real, sort of, demographic story to tell as far as that market is concerned.
KANGAS: I do have to ask you, do you or Signal Hill have any ownership positions or investment banking relationships with the companies you've mentioned?
URDAN: Not in the one -- not in the stocks I've mentioned today.
KANGAS: OK. I want to thank you so much for helping us to learn about investment possibilities in this new business of education.
URDAN: Thanks, Paul.
KANGAS: My guest, Trace Urdan, senior analyst with Signal Hill.
