To put this number in perspective, at Apple's education keynote on January 19, 2012, Apple Senior VP of Worldwide Marketing Phil Schiller stated there are over 1.5 million iPads being used in education institutions' programs, with over 1,000 in one-to-one programs, where each student in a class has his or her own iPad.
In the education keynote, Apple announced plans to sell iBooks textbooks targeted at high school students. However, the fact that Apple sold twice as many iPads in several days as are being utilized in educational institutions since the introduction of the original iPad in 2010, demonstrates the relative slow pace of getting iPads into classrooms versus selling to individual consumers. Should investors care about the digital textbook market?
The high school text market faces numerous obstacles, including budgetary constraints in America and elsewhere in the world, and the complexity of procuring textbooks in many state public elementary and secondary schools, where funding for textbooks is based on state adoption calendars. Further, if iPads can be adopted on a wider scale in high schools on a one-to-one basis, there is the foreseeable problem that the devices can be lost, damaged, or stolen.
That said, students can possibly deter theft by putting passcode locks on their iPads, and may find it easier to take care of one item instead of a backpack full of textbooks. As for the financial obstacles, the price-drop to $399 in the U.S. for the 16GB iPad 2 announced at the introduction of the new iPad on March 7, 2012, may entice more educators to get the devices into their schools. Further, the New York Times reported early last year that at that time, Apple was giving about 10% education discounts on iPads to school officials that it interviewed. So Apple knows how to use incentives if need be to get their devices in schools.
Further, we've seen in the corporate world that large companies are allowing employees to bring personal iPhones and iPads to work. Perhaps schools could follow this example, giving students with iPads the option to use digital books (perhaps at their own expense), freeing up funds that otherwise may have been spent providing traditional texts to these students, to help purchase traditional textbooks, iPads, or competing tablets for other students. A current obstacle to the latter is that Apple's iBooks Author publishing system only creates texts for iPad, not competing devices.
One of the companies that stands to benefit from greater iPad sales to consumers and educational institutions is Pearson PLC (PSO). Pearson has three main divisions: education (including textbook publishing); book publisher Penguin; and the FT Group, publisher of the Financial Times and owner of a 50% stake of the Economist Group. Pearson was named in Apple's education keynote, along with McGraw-Hill (MHP) and Houghton Mifflin Harcourt as three textbook manufacturers making high school texts for iPad.
When Pearson reported its Preliminary 2011 results on February, 27, 2012, the company stated that students using its digital programs increased 23% year-over-year to 43 million students. The company also noted that digital revenue as a percentage of sales for the entire company increased steadily from 2006 through 2011, as I've summarized in the chart below (source of data: slide 27 of Pearson's 2011 Preliminary Results Presentation).
Digital Revenue As A Percentage of Sales
McGraw-Hill stated in its conference call presentation following release of its 2011 and fourth quarter earnings, that at its education division, for U.S. higher education, digital revenue accounted for about 20% of revenue. This represented a growth rate in excess of 40% for digital services for higher education, according to the company. As for high school and elementary school, the company said that the "digital evolution is moving more slowly," but "is picking up speed."
The electronic high school texts will sell at $14.99 or less, according to the keynote. McGraw-Hill declined to comment in the Q&A portion of its conference call what margin it would be making on these books, however stated that at "the $15 price point, if we get the scale and if we get the volume, we'll be in fine shape with this. But it's really early on with this one."
How large a potential market is this? According to the National Center of Education, 850,750 students were enrolled in private secondary schools in the United States in 2007-2008, with 221,210 enrolled in schools with tuitions of $10,000 or more. In comparison, 15,568,281 students were enrolled in regular public secondary schools in 2008-2009.
Of course, the market is not limited to America. According to the Korea Times, South Korea implemented a pilot project testing digital textbooks in 2009, but had problems with high prices requested by their contractors HP (HPQ) and LG at the time of the article. South Korea's experimentation with digital texts is worth noting, as it was recently reported by CNET that iPad has a 70-80% market share of tablets in South Korea, compared to South Korean iPad-component-maker and Apple rival, Samsung (SSNLF.PK).
Apple's share price has hit all-time highs routinely over the past few weeks. Its sale of 3 million new iPads since the launch is impressive. As digital text makers describe their digital business as growing, investors may want to consider if they believe Apple can make material inroads into the high school text market given the challenges it faces. Some investors may conclude that Apple can do well just selling iPads even if they don't make significant inroads into the high school text market. Also, investors who may question the viability of the high school digital text market may want to look closer at a company like Pearson, who publishes an array of digital media and may benefit from 3 million new iPad owners.
Disclosure: I am long AAPL.