From: Dan Whaley <[log in to unmask]>
Date: Sun, Aug 4, 2019 at 11:05 AM

https://sparcopen.org/news/2019/qa-cengage-mcgraw-hill-merger/

Monday July 29, 2019

As opposition mounts to the merger between two of the largest textbook
publishers, SPARC has answers to common questions and an update on what
we're doing to stop it.

Over the past year, one of SPARC’s top priorities has been tracking the
evolution of the academic publishing industry and its implications for the
future of research and education. The urgency of the issues outlined in our
Landscape Analysis was put into sharp relief in May, when Cengage and
McGraw-Hill—the second and third largest college textbook
publishers—announced plans to merge. If approved by federal regulators, the
merger would reshape the U.S. higher education course material market as a
duopoly—with potentially dire consequences in terms of price, access, and
control of student data.

Shortly after the merger was announced, SPARC began to explore avenues for
taking action. Over the past two months, we’ve been working with industry
and antitrust experts to build arguments against the merger, which we
intend to file with the Department of Justice’s Antitrust Division. While
we acknowledge that the current regulatory environment makes opposing any
merger an uphill battle, we think that this is an important opportunity to
educate antitrust enforcers about the unique challenges presented by the
textbook market, and especially the implications of the growing control of
academic publishers over key higher education infrastructure.

Earlier today, student governments and consumer organizations filed letters
opposing the merger with DOJ. SPARC stands with these groups, and we hope
that their calls to action will open a conversation with regulators about
the merger’s negative consequences for students and higher education. As
SPARC continues to work on our own more detailed filing, we wanted to share
some of what we’ve learned by answering some common questions we’ve heard
from the community.

What is the Cengage and McGraw-Hill merger?

On May 1, 2019, the education publishers Cengage and McGraw-Hill Education
announced plans to merge. The deal has been dubbed a “merger of equals,”
and the post-merger company intends to operate under the McGraw-Hill brand
with the leadership of Cengage CEO Michael Hansen. As the second and third
largest companies that dominate the college course material market, the
merger would create a combined firm of more than $3 billion in pro-forma
revenue. This would put them behind chief rival Pearson in terms of overall
size, but more importantly, ahead of them in terms of higher education
market share.

In announcing the merger, the companies have highlighted their plans to
accelerate the transition to digital course materials that will be
leased—rather than sold—to students. The backbone of their plan is
continuing the push for “inclusive access” deals, through which
institutions automatically subscribe students to digital materials upon
enrolling in a course.

Both companies have also signaled intent to expand Cengage’s full-catalog
“unlimited” subscription with McGraw-Hill’s content, which gives access to
the company’s full catalog of digital materials and bundled services. The
companies also indicated to investors that they intend to eliminate the
secondary market within the next 4-6 years by moving to a rent-only model
for print textbooks (Pearson hinted at a similar plan in its recent
“digital first” announcement).

How much of the market would Cengage and McGraw-Hill hold?

According to the Association of American Publishers (AAP), the revenues of
the top six higher education publishers total approximately $3.3 billion.
Pearson has the largest share, estimated at around 40%. Based on their 2018
revenues, Cengage holds 24% share and McGraw-Hill holds 21%. The remaining
15% is divided between Wiley, Macmillan and Oxford University Press. While
there are other publishers who publish higher education course materials,
it is generally assumed that the AAP figure encompasses the vast majority
of the market.

Based on these numbers, the combined company would hold a 45% share of the
market. This is well above the threshold in federal guidelines to consider
the merger anticompetitive. Bottom line, the merger would turn the market
into an effective duopoly.

What does the merger mean for textbook prices?

You don’t need to buy a $250 economics textbook to know that a market with
two large players has less competition than one with three. Textbooks are a
classic example of a “captive market,” where students are required to buy
whatever materials they’ve been assigned. The problem is exacerbated by the
fact that the same three large companies have dominated the market for more
than two decades. As a result, textbook prices have risen more than 700%
over the last decade according to the Producer Price Index, which is nearly
six times the rate of inflation. As Cengage CEO Michael Hansen told CNBC,
“Over time, the industry just ratcheted up the prices — sometimes 10
percent, twice a year — and that has led to an unsustainable model.”

However, recent trends suggest that major publishers are feeling pressure
to compete on price more than ever before. The relentless annual price
increases have started to slow, and in the case of student spending, even
tilt downward. While there are manifold reasons contributing to these
trends (both positive and negative) the changes are in a better direction
than the status quo. Downward pressure from the secondary market and the
availability of OER is having an impact.

If the merger is approved, it would remake the textbook market from an
oligopoly into a duopoly dominated by two massive firms, likely undoing any
progress that has been made toward increasing price competition. As the
market continues its transition away from print and toward digital, it is
not hard to imagine that these two companies will simply split the market
and resume their regular rate of price increases, rather than attempt to
compete. Pearson’s recent intent to go “digital first” and the growth of
Cengage’s “unlimited” model only make this outcome more likely.

What would the merger mean in the long term?

The future of academic publishing is not just about digital content—it also
is about the data that can be collected on users and how it can be
exploited. SPARC laid out in our Landscape Analysis how the industry is
trending in this direction, and in the case of research publishers, is
already there. While data and analytics can be used for good in education,
without the proper policies, contracting terms, and governance structures,
there is also likely to be massive unintended consequences. Even with
federal student privacy laws that afford some protections, the
opportunities for data harvesting and exploitation go far beyond what
lawmakers could ever imagine a few years ago, let alone a few decades ago.

Allowing two large publishers to merge into a single giant with
near-majority share of the market could exacerbate these drastic unintended
consequences. Doubling market share means doubling the amount of data these
companies can collect and control. As the recently-launched Department of
Justice investigation into Google, Apple, Facebook, and Amazon highlights,
monopolistic activities can relate not just to dollars and cents, but also
to data. While the issues raised by data and analytics in academic
publishing are critical with or without the merger, the potential
challenges would be exacerbated by concentrating the student data market
into fewer hands.

How can two such large companies can get away with merging?

The companies may try to convince regulators that the benefit to consumers
outweighs the potential loss of competition. Cengage and McGraw-Hill have
talked a lot about how the merger will expand “inclusive access” and
digital subscriptions, which they say will lower prices for students. This
might seem true compared to the astronomical price of print textbooks,
although it is less clear in comparison to used book and rental prices.
There is also a big question whether switching the whole market to digital
will allow publishers to resume their historical rate of price increases.
How regulators assess these questions will affect the likelihood of the
merger.

Another way that these companies might make the case for the merger is by
trying to expand the definition of the relevant market. If their market
share is measured against a bigger pool of companies, it will not look
quite as large. They might argue that they compete against used
booksellers, learning management system companies, or even try to place an
artificial market value on open educational resources. However, this could
be a tougher case with how federal guidelines are written.

What is the likelihood of being able to block the merger?

If history is any guide, the current regulatory environment tilts the
playing field in the merger’s favor. It is unlikely that the companies
would have proposed the merger unless they had some preliminary
conversations with DOJ and were reasonably confident that it would go
through. However, there is a compelling case that the merger would reduce
competition in the market, so at the very least, the review process is
likely to be lengthy.

The possible outcomes are that DOJ will either approve the merger as-is,
approve the merger on the condition of remedies (for example, selling off
certain pieces of the business), or file a lawsuit to block the merger.
Ultimately DOJ would need to win the case in court to truly block it,
although the threat of a protracted legal battle is often enough for
companies to abandon merger plans. This recently happened in the case of
the Quad/LSC merger.

When will we know more?

Cengage and McGraw-Hill announced the merger in May and have said that they
expect it to be approved in early 2020. For a merger as large and complex
as this one, that kind of timeline for regulatory review is not unusual.
Since this phase of the process tends to take place behind closed doors, it
may be another five to six months before we know more publicly. However,
please know that SPARC and our allies will be actively working on this over
the coming months, and we will keep you as up to date as possible as the
process unfolds.--

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