Big Money Makes a Long-Term Bet on New Software for Electronic Teaching
Predicting the future is easy. It’s investing in it that’s risky--and making it work that’s a challenge.
Big money is being thrown at creators of educational computer programs, in a long-term bet on electronic teaching and a shrewd assessment of human nature in the short run.
British publisher Pearson paid $462 million in March for Software Toolworks, which has systems that teach piano and typing, among other programs. Video game producer Electronic Arts paid $400 million in February to acquire Broderbund Software, creator of the Carmen Sandiego character featured on public television.
Deals are flying. Paramount Communications last month pledged $50 million to a product development venture with Davidson & Associates, a company founded by a schoolteacher who created the popular Math Blaster instructional program.
Davidson, which trades on Nasdaq at about $22 a share, sports a sky-high price-earnings ratio of 62; another software producer, Learning Co., developer of the preschool Reader Rabbit program, trades at 32 times earnings.
The prices seem overripe for companies that form only a small fraction of the $4.5-billion educational publishing industry. In fact, major textbook publishers such as Houghton Mifflin, Harcourt Brace and McGraw Hill are having a mediocre year, because the next cycle of school purchasing programs in many states won’t kick in until 1995, explains analyst Peter Appert of Alex Brown & Sons.
So why the excitement now? Parenthood and pride. A baby boomlet continuing from the 1980s guarantees rising school-age populations into the next century. And parents eager to give their offspring every advantage are making learning software a hot ticket. “It’s a market driven by guilt,” says analyst Keith Benjamin of Robertson, Stephens & Co., a San Francisco investment bank.
In past generations, sets of encyclopedias answered such urges; now it’s Compton’s Interactive Encyclopedia on computer.
The market is already sizable. There are roughly 30 million home computers in the United States, perhaps 6 million of them with advanced CD-ROM equipment.
And visions of an expansive future drive today’s deals. “They’re looking five years out to the day when centralized software will be beamed into the schools on closed cable networks,” says John G. Taylor, a Portland, Ore.-based analyst for the investment firm L.H. Alton & Co.
But fulfilling such visions requires progress: Educational software must prove it can really teach youngsters in new and better ways, not merely make learning more entertaining. Critics note that so far computers in schools have not lifted test scores.
“Progress is evolutionary, but I do believe it’s going to come faster than most people think,” says Janice Davidson, president of Davidson & Associates in Torrance. Her company today markets 20 of its own software programs and distributes 1,200 others to dealers and schools through a subsidiary; its sales last year totaled $58.6 million.
Davidson started the company 12 years ago with $6,000 from funds she and her husband were saving to send their three children to college. Then 38, with 16 years of experience in teaching, Davidson had created a speed reading program for college-bound youngsters.
When she couldn’t find a publisher for the program, she set up her own company and next created Math Blaster, which uses space adventures to teach arithmetic. A spoonful of sugar makes the medicine go down.
But she sees computers as central to education, not merely accessories. “Computers work because they allow children to learn at their own pace,” says Davidson. “They are patient and interactive and do not frustrate children. So they make successful learners right from the beginning, and that can be very important in life.”
That’s a powerful perspective. Computers are doing for individuals today what books began to do in the 15th Century: greatly expanding the capacity for learning.
And computers are not isolating. “Children of different social groups and races work easily together on projects. Computers facilitate communication,” Davidson says.
The technology is evolving; new programs demand more thought and logic. “They impart skills students will need to work in the Information Age,” says Davidson, who has a doctorate in American literature from the University of Maryland.
Yet these advances are occurring not in academic centers or government laboratories but in a rough-and-tumble marketplace, where competition is intense. Producing innovative software is essential, of course, but broader capabilities are needed as well. One reason software firms are selling out in the current merger wave is to gain size and capabilities.
It was to help on the business side that Robert Davidson--an engineer and lawyer with an MBA, and Jan’s husband--left Parsons Corp. in 1989 to join the family company. Since then, Davidson’s has acquired, among others, Educational Resources of Chicago, the largest seller of software to schools, and Learningways Inc., a Cambridge, Mass., firm with capabilities in on-line transmission.
And it has made the deal with Paramount, under which Davidson will be able to add 200 people and develop advanced programs, some aimed at college-level markets.
The educational software “business is going to boom,” says Bob Davidson, an easy prediction for a business already growing 40% a year.
Such growth attracts competition. Book publishers, including Davidson’s partner Paramount, already have budding operations in software; giant Microsoft is turning out educational programs.
But competition is part of a good business, and small companies can do very well indeed. Davidson & Associates, founded on $6,000 from family savings, is now worth more than $360 million.
Investing in the future is invigorating. Making it work can be incredibly rewarding.
