Pearson prepares to enter the metaverse
Pearson's CEO, Andy Bird, dropped some hints about the company's plans to use Web 3.0 technology. What does it mean? And how do other publishers keep up?
To paraphrase Jane Austen: It is a truth universally acknowledged, that a man of a certain age in possession of a Substack, must be in want of writing about crypto.
You can blame Pearson’s CEO for this one.
Andy Bird joined Pearson from Walt Disney with a brief to focus the company’s commercial drive on digital and profit. In the August 2020 press release announcing Bird’s appointment, Sidney Taurel, Chair of Pearson, said:
Andy brings a wealth of international consumer experience, as well as significant expertise in building brands, transformational change and driving digital innovation. […] Because of his experience and skills, he is extremely well placed to continue the transformation of Pearson, leading it to a new era of growth and enhancing value for all our shareholders.
On 1 August 2022, two years after his appointment, Bird announced a strong financial performance for the first half of the year with adjusted operating profits up 22% to £160m on sales of £1.8bn. After a tricky few years of profit warnings and an attempted acquisition by Apollo Global Management, Bird was rewarded with a 10% uptick in the share price.
And, as CEOs of publicly traded companies are obliged to do, he promised that more was to come. There was at least another £100m of efficiencies to be made. And by harnessing the power of the blockchain, Pearson would be able to finally tap into the previously-unharnessed second-hand book market. And he revealed that there’s a team dedicated to exploring “the implications of the metaverse and what that could mean for us”.
These seemingly throwaway comments – light in details, heavy in buzzwords – have been widely reported across business papers and the tech industry. But what do they mean?
Web 3.0? NFT? WTF?
Education (and, let’s be honest, publishing too) is often hyping things that came off the boil elsewhere about ten years ago. Even in 2022, education policy is full of bold ambitions for students to develop 21st century skills. Announcements are peppered with curious references to the Internet of Things and 3D printing, as if a policymaker googled “digital innovation” back in 2012 has yet to get round to updating their slide deck.
This supposed lag to incorporate new technologies isn’t necessarily a bad thing. Bleeding-edge technology needs to prove its utility and application in the wider world before it takes up valuable classroom time.
But publishers are businesses. Our imperative for understanding and adopting new technologies goes beyond content for lessons. To gain a competitive edge, we need to understand the utility of new technologies, the opportunities they present, and whether they can enhance our commercial operations.
So, what are these new technologies?
Unless you’ve been hiding under a rock this last year, you’ve probably heard about the metaverse. In October 2021 Facebook’s parent company changed its name to Meta and unveiled a 10-minute video setting out its vision for the internet’s future (playing poker in space, apparently). In May 2022, Microsoft announced its metaverse strategy, built around Teams. [Hard eye-roll.] Apple and Google, meanwhile, are rumoured to be focusing their metaverse offer on wearables and augmented reality.
There’s a battle underway to define the metaverse, but it’s one of the pillars of Web 3.0. Web 3.0, like all sequels, is best understood in sequence with its predecessors:
Web 1.0 was all about connecting to websites and downloading content.
—Hey, here’s my video FunnyCat.wmvWeb 2.0 was all about user-generated content, media and comments that could be viewed online.
—Hey, here’s my FunnyCat reaction video
—Ya boo, you suck!Web 3.0 is poised to be all about ownership and payment.
—Hey, I bought FunnyCat NFT for 10 ETH and now want to sell it for 100 ETH
Web 3.0 is woven from the perceived potential of the blockchain. The whatchain you might ask? Blockchain technology has a golden-era-of-Marvel-style origin story.
In 2008, mid-financial crisis, Satoshi Nakamoto, the nom de plume of an anonymous developer released a white paper establishing a model for a decentralised database – the blockchain. In 2009, this model would become the basis of bitcoin, the most well-known crytocurrency.
Nakamoto had lost faith in the integrity of central bankers, who had turned on money printing machines for massive programmes of quantitative easing that had eroded the real value of wages and savings. The premise of the blockchain was a totally transparent public ledger – no one person would be able to make changes to the database unless there was consensus amongst a majority of the nodes. Hard limits would be baked in. While central banks printing more money was deflationary, the blockchain meant that there could only ever be 21 million bitcoin. Bitcoin would be mined by computers racing to solve increasingly complex algorithms, an activity that required so much computing power it would go on to result in global shortages of graphic chips and annually produce more carbon emissions than Greece.
Then, in late December 2010, Nakamoto pretty much vanished, his identity unknown. All that remained was Nakamoto’s bitcoin wallet, which remained untouched with a fortune that touched $73bn thanks to the cryptocurrency’s notorious volatility. Like Excalibur in the Arthur myth, the pot of digital gold is available for all to see. The test for anyone who wants to prove themselves to be the real Satoshi Nakamoto is accessing the wallet. A few have publicly tried to claim to be the man the legend, but none have succeeded.
Although the original use case for blockchain was to create an alternative financial system, other applications were soon found.
In 2014, digital artists Kevin McCoy and Anil Dash created the first non-fungible token (NFT) on the Namecoin blockchain. An NFT is, for want of a better description, a public record of ownership an item. Most often digital images, audio, video, or text, but there’s a lot of interest from boosters in tying NFTs to physical assets.
NFTs are a bit opaque, so let’s take an example. You might have heard of the Bored Apes Yacht Club – it’s “a collection of 10,000 […] unique collectables living on the Etherium blockchain.” No? Bored Apes are better known for being owned by such luminaries as Justin Bieber, Snoop Dogg, Madonna, and Paris Hilton. The average sale price for one of these NFTs is $200,000. And what do you get for your wad of Benjamins? Well…
Now, here’s the thing with NFTs. I don’t own the jpeg above, but there’s nothing to stop me copying and pasting it because it’s a jpeg. The NFT itself is merely a record of a transaction on the blockchain, kind of like a certificate of ownership. That certificate is tradable, if you can find someone willing to buy it from you. And if you make that sale, there may be a clause within the NFT that entitles the original creator to a portion of the proceeds. NFT boosters highlight this as a way for artists to be paid for their work through resales as well as original sales.
The mantra of previous generations of the internet was “information wants to be free”, a handy excuse used by a generation of hackers and pirates. However, those hackers and pirates have grown up and got bills to pay and families to feed and they’re now trying to create digital scarcity.
So, is there any intrinsic value in NFTs? Hell no. The man who paid $2.9m for an NFT of Twitter-founder Jack Dorsey’s first tweet in March 2021 put it back up for sale in April 2022 for £48m. The highest bid he received was $6800. A fool and his money and all that.
Pearson’s digital-first drive
Pearson was talking about being “digital first” back when I worked for them a decade ago. This was in the days of Marjorie Scardino, who between 1997 and 2012 whittled Pearson down from an eclectic portfolio that included Madame Tussauds’ waxworks, the irl bored apes of Chessington Zoo, trade publisher Penguin, the Financial Times, and the educational publisher Longman to become a company sharply focused around education.
This shift in focus came with a risk, however, in the publishing side of the business.
For schools publishers, curriculum change drives sales. When a curriculum is new, teachers need whole new class sets of textbooks. But when the curriculum remains the same, buying is often limited to small top-ups to replace damaged stock. A wave of substantial curriculum change would be followed by a spike in revenue, which then flattens out for several years once the original cycle of purchasing is complete.
The transition to online digital in the mid-2010s opened the gates to subscriptions. What if schools bought licenses each year, rather than one big order in the first year? The lumpy revenue problem would be flattened out. Not least because revenue recognition from annual subscriptions is spread evenly over the period of the subscription.
Lumpy revenue wasn’t the only problem that digital could help solve.
Pearson’s Higher Education segment has been in trouble for a while. In 2017 the business issued a two-year profit warning triggered by decline in the US College sector. Then, in 2020, the company issued another profit warning as the pandemic shut colleges, cratering demand. To give you a sense of the scale of this problem, about a fifth of Pearson’s revenue comes from Higher Education.
There has also been a long-rumbling controversy over the cost of College textbooks, particularly in the US where student debt is soaring. Each book can be eye-wateringly expensive, which has resulted in a healthy second-hand market.
“In the analogue world, a Pearson textbook was resold up to seven times, and we would only participate in the first sale.”
Pearson’s first attempt to make college textbooks more affordable – and take a bite out of the second-hand market – was through the launch of Pearson+ in 2021. Announced roughly a year after Bird left Disney, it bears a certain similarity to Disney+. Pay a fixed price ($14.99) each month for all-you-can-eat access to a buffet of Pearson ebooks.
Utility or futility?
The problem all publishers are trying to solve is: how do I make money? Profit, surplus, call it what you will, we all need to bring more money back into the business than we spend in the act of publishing.
New technology is emerging all the time, but the key question publishers must ask is: can I use this technology to make money? To have utility, technology must:
enhance an existing service (for competitive advantage or a higher price)
do something more efficiently (and thus cut production costs), or
tap into a new revenue stream (open up a new channel or product class).
It can be difficult to assess the utility of new technology when there’s a lot of enthusiastic tech utopianism obscuring the detail of how it works and what it’s capable of doing. Particularly when pushers of new tech are incentivised to over-hype.
With this in mind, I strongly recommend watching this four-minute clip for a model of analysing a use-case with logic and precision.
I came across this clip a little while ago via Charlie Warzel’s excellent Galaxy Brain newsletter. He neatly summarises the problem with Web 3.0 boosers:
I talked with Shapira about why he’d become such a public critic of the Web3 crowd, and especially of the venture-capital firm Andreessen Horowitz. He said that he sees the crypto world as emblematic of a fundamental problem in startups, where founders and venture capitalists become so enamored with a vague initial idea that they never stop to consider its utility. “They think they’re onto something visionary, but their product actually fails a basic logical test,” he told me. “There’s a starting bar at the beginning of the journey, and you’re supposed to step over it to go on the journey, and they never do. They trip at the beginning but go on to work on it for five years and deploy billions of dollars.” When it comes to Web3, he argued, “it’s not just the financial shenanigans; it’s the hollow abstraction of it all.”
There is an endemic problem in the hustle-worshipping world of tech start-ups where the mantra of “fake it till you make it” churns out Wizard of Oz-like high-concept innovations, a significant majority of which disappear without so much as a puff of smoke. Although sometimes they collapse in a more dramatic fashion.
This was going to be the point where I was going to suggest an answer, drawing together what we know about NFTs and Pearson’s plans like suspects at the end of a Poirot. I wasn’t convinced. I thought there was no real NFT plan.
But I was beaten to the punch…
After days of speculation about what Andy Bird’s comments might mean, Business Insider got a scoop on 6 August when they quizzed a spokesperson on Pearson’s NFT plans:
“At this point, Pearson doesn't have specific plans related to this technology,” a Pearson spokesperson told Insider. “However, we are certainly interested in how it can make learning better for students and bring more value for other stakeholders.”
But, the spokesperson said technology like blockchain would provide “transparency to everyone and has the potential to be good for authors and students.”
Wait, what? “No specific plans”?! (And yeah, I use an interrobang pointedly here.) So, did Andy Bird mis-speak? Or was he sticking to his Disney roots and telling a fairy tale?
We’ve got so far, so here’s a theory…
In February 2022, Pearson announced plans for a £350m share buyback. One month later, Pearson announced that it had rejected two takeover attempts from Apollo Global Management, a private equity group. When Pearson rejected Apollo’s third and final offer of £6.7bn later that same month, claiming that the offer significantly under-valued the company’s long-term prospects, its share price dropped by 12% stripping £750m off the company’s market value. And after announcing its interim update at the beginning of August, the share price bounced back up 10%.
Did Pearson buy the dip? Did Bird use the opportunity of good financial results to mix in some Web 3.0 boosterism to lure investors? Maybe… A higher share price means access to cheaper money. And if there are any other private equity companies looking to snap up a bargain, well, they’re going to need to bring a bigger chequebook.