At the Consumer Electronics Show in Las Vegas, the education-focused division of the McGraw-Hill Companies unveiled the SmartBook, an adaptive ebook that adjusts the reading experience to each student’s pace and mastery level.

Content is still structured somewhat like a textbook but instead of asking students to read it thoroughly from start to finish, it coaches the student on how to read the material and quizzes them on various concepts as they move through each section. Depending on their responses, they’re guided along to different highlighted passages. McGraw-Hill said it expects to release SmartBooks at prices starting at $19.99 for about 90 courses later this Spring.

The program, which is available on computers and tablets, builds on the 12 billion data points on student learning collected from LearnSmart, McGraw-Hill’s adaptive learning platform, the company said. But where LearnSmart is more focused on reviewing material, SmartBook attempts to help students read more efficiently to better retain information.

“To revolutionize learning, you need to revolutionize reading,” said Brian Kibby, president of McGraw-Hill Education. “We’re focused on attacking graduation rates and getting results.”

From a demo, it does seem that the SmartBook aims to provide an adaptive reading experience that adjusts to students with a good deal of granularity, using dynamic text and voice instructions to literally talk them through the program and point out the areas on which they should focus.  But McGraw-Hill’s products are not the only adaptive learning platforms out there. A year ago, at CES, for example, publishing giant Pearson announced that adaptive learning company Knewton would power its digital offerings. Macmillan also offers an adaptive assessment tool in its PrepU program.

The program closely tracks student behavior and, according to the Wall Street Journal, the company may share that data with instructors to improve courses, which could raise privacy questions for students and parents. But the company has said that it takes data protection seriously.

With increasing options for digital content, including open content and self-authoring platforms, McGraw-Hill Education and other textbook publishers are attempting to set themselves apart with products that make textbooks more interactive and smarter. The digital textbook market is still a small piece of the overall textbook universe but it’s expected to become a driver of growth. Kibby has been especially bullish on digital textbooks, arguing that higher education should go totally digital by 2015.

In November, McGraw-Hill announced that it planned to sell its education arm to private equity firm Apollo Global Management for $2.5 billion, but the deal has not yet closed.

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In a conversation at the SIIA Ed Tech Business Forum, Luyen Chou, chief product officer for Pearson’s K-12 technology group, said that as new technology upends the textbook publishing industry, his company needs to become an “Electronic Arts for education.”

Clearly, Pearson and its rivals in education publishing need to reimagine their role as the rise of digital content cripples their business model. But look to Electronic Arts as a model?

Speaking with me later, Chou said that to keep up with the changing environment, traditional publishers can’t just digitize the static textbooks of the past, they need to excel at producing high-quality, interactive digital learning experiences and get them into the hands of students.

“[That includes] digital studios, animators, illustrators, producers, 3-D artists – we need to build that capacity within instructional companies like Pearson and we need the whole end-to-end supply chain to the take that from the studio to the actual users,” he said. “The folks that have done that well are the EAs of the world, digital studios. That’s not a core competency for companies like Pearson.”

Given the company’s wide reach across different corners of the market, from content to testing, at the K-12 and college levels and beyond, one of Pearson’s key assets is the massive amount of data it can use to target and personalize learning for students. And Chou acknowledged that the Electronic Arts parallel wasn’t meant to imply that Pearson only needs to focus on creating high-quality content, and not on other parts of its business.

“I take it for granted that we’re going to have a huge strategic advantage by way of the data we have on our customers, our students,” he said. “But you still have to serve up those compelling experiences. You can have the best data and the best algorithms in the world, but if what it ends up serving up is digitized versions of 2-D static content, it’s not going to sell either. We have to make sure that we’re complementing our data and platform with high-quality interactive learning content.” In getting to that goal, he said, it’s an open question whether the company will build or buy.

Interestingly, the SIIA ed tech conference itself took place at the McGraw-Hill Conference Center   in New York and several speakers commented on yesterday’s news that the publishing giant had sold off its education division to private equity firm Apollo Global Management.

But while McGraw-Hill chose to divest itself of its education arm, Pearson has taken the opposite approach, arming itself with even more education companies in recent years.

In the last twelve months alone, the company has spent $1.6 billion on acquisitions, according to Baran Rosen, president of media investment bank Whitestone Communications. And, given reports that Pearson is exploring the sale of the Financial Times, its push in education will likely only continue.

“They are going to really be a pure-play education company,” Rosen said at the SIIA conference. “That’s where they’re staking their future and they’re doing it in a big way.”

Image by Cindy Minear via Shutterstock.

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The news wasn’t surprising as the company said in September 2011 that it planned to split its more profitable financial services division from its education arm. And earlier this month, the Wall Street Journal, The New York Times and others reported that a deal with Apollo was in the works. According to McGraw-Hill, the deal is expected to close in late 2012 or early 2013.

As the rise of digital content disrupts the publishing business, McGraw-Hill Education has attempted to keep pace with new products like its adaptive learning platform LearnSmart and partnerships with digital distributors like Apple, as well as startups Kno, Benchprep and others. Despite its efforts, the company’s education unit has lagged behind its financial services division. In the last quarter, for example, revenue for the unit fell 11 percent to $836 million. In its quarterly report, the company said the growth in sales of digital products across all product lines and the migration to more subscription-based business models impacted revenue.

Wall Street responded favorably to the news – after the announcement of the sale, shares in McGraw-Hill climbed about 2.35 percent to $52.90. Once the deal is closed, McGraw-Hill will be renamed McGraw Hill Financial.

As Bloomberg notes, McGraw-Hill Education’s sale isn’t the first time private equity has dabbled in education. In 2007, London-based Apax Partners led a $7.75 billion purchase of Cengage Learning Inc. from Thompson Reuters Corp, the financial news outlet reported.

As we and others have reported, tablets and other digital devices, along with the growth in open content initiatives and other textbook creation tools, are dramatically changing the landscape for traditional textbook publishers.

This summer, in a conversation with reporters, Jay Chakrapani, vice president and general manager of digital at McGraw-Hill Higher Education, said that the company wants to be the “Netflix of education.”

Through its digital products, LearnSmart, especially, he said, the company gathers increasing data about its students, enabling them to personalize learning experiences much like Netflix personalizes recommendations over time. Going forward, it will be interesting to see if Apollo takes a similar view on the future of McGraw-Hill Education.

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With each new launch, someone inevitably declares the impending end of physical textbooks, as though those tech giants control the levers responsible for the successful adoption of new technology in schools. But while the tech industry plays a significant role in the transition to digital textbooks, making devices available and affordable is just the beginning. Rallied by leaders at the top, momentum is certainly moving in favor of digital textbooks – earlier this month, US Secretary of Education Arne Duncan declared that “over the next few years, textbooks should be obsolete” – but challenges for states and school districts still remain.

Schools, districts need more flexibility to purchase content

At their best, digital textbooks offer a learning experience that boosts engagement, adapts to student learning, tracks performance and ensures up-to-date content – all while potentially saving costs in the longterm. According to a report from the Digital Textbook Collaborative, which was convened by the FCC and the US Department of Education, the cost of implementing the shift to digital varies from $250 to $1,000 per student per year, but the cost savings from increased teacher attendance, reduced paper costs, online assessments and other factors are estimated to be $600 per student per year. However, some say estimates on cost savings assume tablet prices that are less than actual costs and, without funding support, the upfront costs are difficult for many school districts to manage.

Beyond the initial technology costs of getting to a one-to-one student-to-tablet ratio (from the historic student-to-computer ratio of 3.75 to 1), Geoff Fletcher, deputy executive director for the State Educational Technology Directors Association (SETDA), said the current procurement processes for textbook content aren’t aligned with the dynamics of the digital world. “The business model right now doesn’t take advantage of the enormous flexibility because all the money is locked into one approach,” he said.

As it stands now, in most states, Fletcher said, decision-making power regarding which textbooks should be adopted by schools is centrally held by the states. The textbook publishers, who have long dominated the education content industry, benefit from that model (my colleague Laura Hazard Owen provides a nice snapshot of that market here), but Fletcher said more states need to encourage the development of content marketplaces by giving schools and school districts the flexibility to select the content their students will use.

Aside from the funding challenge, there’s the infrastructure hurdle of expanding broadband services to communities with inadequate Internet connectivity.  According to a 2010 FCC survey, 80 percent of schools say their broadband connections do not meet their needs and FCC reported this year that 19 million Americans still lack broadband access.

The good news is that the FCC and Department of Education are actively pushing change at the federal level and, over the past couple of years, 22 states have adopted policies encouraging digital textbooks, the SETDA reports. But as new digital content starts entering classrooms, the organization says local districts need to ensure that their policies accept the use of new devices and provide adequate professional learning to teachers.

User experience matters

Osman Rashid, CEO of digital textbook startup Kno, said that in addition to making devices and content available, providing a user experience that engages students is critical to the success of digital textbooks. While Apple’s iPad, which supports the use of interactive educational software, leads among new technology in schools, Amazon is trying to make a bigger push with the Kindle, attracting budget-conscious educators with a lower price. But except for the Kindle Fire, Amazon’s devices, which were built mostly around text, don’t offer students a markedly different or more engaging experience. They may lighten the load in students’ backpacks, which is a positive step but hardly the only benefit we should look to digital textbooks to provide.

To help ease the transition to digital, several schools have adopted “Bring Your Own Device” programs that save money by enabling students to use tablets owned by their families in class. But while many BYOD programs are producing encouraging results, schools need to be prepared for additional technological and instructional support. Not only do schools need to add bandwidth to support new devices (of varying ages and types), they need to prepare teachers to work with a range of devices. Most importantly, the programs need to build in safeguards to ensure that students whose parents can’t afford devices aren’t left behind. In the short term, schools can provide tablets to students who don’t have their own. But in the long term, the equity issue could rear its head as wealthier students bring in technology that outstrips their classmates’ in speed and performance, said McGraw-Hill SVP Vineet Madan.

“BYOD looks attractive,” he said. But “you won’t really appreciate the gap or performance difference until you’re two or three years into it.”

With many of these challenges, it’s up to the schools, districts and states, not industry players, to figure out solutions. But the SETDA’s Fletcher said that in addition to providing devices, there is another key role that companies like Apple and Amazon play.

“These are folks who want to show schools what can be, not just respond to the customer,” he said. “That kind of partnership is crucial in helping to make these kinds of changes in educational technology.”

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Amazon says “thousands” of print textbooks are available for rental, compared to “tens of thousands” of Kindle textbook rentals. While students can specify the amount of time they want to rent a Kindle textbook — between 30 and 360 days — Amazon’s print textbooks all rent for 130 days (a semester).

Based on the informal results of my browsing, it looks as though the print book rental price is usually under $70, and in the instances where a textbook was available for both Kindle rental and print rental, the rental prices were roughly comparable.

Students with Amazon Prime get free two-day shipping on textbook rentals and returns are free.

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Inkling’s interactive ebook publishing platform, Habitat, also now supports iPhone.

Inkling is based in San Francisco and backed by Sequoia Capital as well as major textbook publishers like McGraw-Hill and Pearson.

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But now a German company called PaperC is trying something new. It’s running with the idea of try-before-you-buy textbooks and taking it further by offering users not just the chance to buy a whole book, but also a particular chapter or even just a page.

Soon it plans to add a monthly subscription option that gives unlimited access.

The idea of buying a single page may sound odd, but it makes a lot of sense in the context of textbooks, where readers often don’t need the whole manuscript. And PaperC’s approach to free previews is similarly sensible: where Amazon shows you the opening chapter or two, this startup lets its users choose which 10 percent of the book they’d like to see without paying (they have a time limit on how long they can look).

PaperC has a search engine and a web reader that allows annotations and sharing, and has partnered with Sony on optimizing its tablet experience. Most importantly, the Leipzig-based firm already has 120,000 registered users and around 100 content deals with publishers like O’Reilly, Pearson, Wiley and others.

“PaperC is not only a bookstore but a library, offering its users a full suite of tools to facilitate their research,” international content manager Bill Glucroft told me, adding that while PaperC’s market so far is in German-speaking countries and eastern Europe, more than half the service’s content is in English.

All sounds fine so far, but here’s an extra twist: the company’s looking for more funding, which it hopes to obtain through an auction-based crowdfunding platform called Innovestment that’s quite interesting in itself.

Here’s the pitch (in German with English subtitles):

PaperC hopes to raise between €50,000 – €100,000 ($61,000 – $123,000). With the campaign already underway for a week, it has already amassed almost €16,000 through the sale of 14 silent shares – with each share representing 0.04 percent equity, the auction currently has the company’s total valuation at €2.6 million.

But hold up. Investors won’t be getting a share of the existing PaperC.de platform, which is based on PDF technology. They’ll be buying into PaperC.com, its HTML5-based successor (shades of Inkling). This is a bet on future value, rather than a chance to get a chunk of what already exists.

“We need additional resources to continue acquiring high-quality content from major, international publishers,” Glucroft said. “Moreover, we want our from-scratch-built HTML5 platform to be the best platform out there for buying, reading and working with academic eBooks. That means giving it the same set of interactive and study-friendly features that our PDF-based platform at PaperC.de already has, and having the ability to convert PDFs of our choosing to ePub, so they can be compatible with PaperC.com.”

PaperC is also working on raising its profile with U.S. and Canadian universities, he added.

The company fits into two notable strands of the Berlin scene: the e-reading bunch, as typified by Readmill and Txtr, and the academia-facing likes of ResearchGate.

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Eric Goldman and Rebecca Tushnet are both trademark experts and popular bloggers. This week, they offered a new package of course work called “Advertising and Marketing Law: Cases and Material” for sale on Scribd for just $10. In a blog post, Goldman explains the economics behind the $10 price tag:

Compared to 99 cent or free eBooks, a $10 downloadable book may sound expensive. But, compared to the typical law school dead-trees casebook, $10 is a ridiculous bargain. Many print casebooks of comparable size cost $150 or more. … While we could easily justify a higher price than $10, we’re not exactly philanthropists. Here’s how I see the math: a $150 casebook may have a $110 price wholesale (or less). At 10% royalties to the authors, Rebecca and I would share $11. At the $10 download price, Scribd takes $2.25 a download, leaving us author royalties of $7.75. So discounting the retail price 93% perhaps reduces our royalties by less than 30%. Let’s hear it for disintermediation! Plus, just like any demand curve, the lower price point should lead to higher sales, which may, in fact, make our approach profit-maximizing.

The book will be available to read and mark-up on any electronic platform and can be printed as well. The authors are not applying any digital rights management to the book, but are relying instead on the low price and a moral appeal to limit unauthorized sharing.

The book is available on Scribd, a popular document-sharing platform, that has already attracted the interest of the publishing community. In 2009, Simon & Schuster signed a deal to use Scribd as a potential Kindle competitor, offering excerpts and complete works from Stephen King and others.

Interestingly, in his blog post, Goldman blasts Scribd as a “horribly limited platform” and complains that it requires users to provide their Facebook profile to complete the purchase. He adds that he and Tushnet intend to switch to an alternative eBook platform as soon as they can find a better one.

Goldman and Tushnet are part of a larger phenomenon of disruption in the textbook publishing business that is leveraging digital distribution possibilities and eliminating intermediaries. Other examples include sites like BenchPrep and Boundless Learning that offer personalized or open source content via mobile and the web.

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Rafter CEO Mehdi Maghsoodnia said the company has expanded its footprint to more than 260 active schools (500 have signed up), but the one thing campus administrators continue to ask for is more sophisticated analytics around pricing, price comparison features, as well as better tools for adoption. With HubEdu, the company will gain an inventory analytics system to optimize store pricing, tracking systems to monitor student purchase behavior and price comparison capabilities.

“The cost of tuition and education is getting higher and higher… one of our primary cost factors outside of tuition is the cost of textbooks and content,” said Maghsoodnia. “We’re trying to find the cheapest content on behalf of the students.”

For individual schools, the process of navigating the complicated textbook industry (which is become increasingly complicated as more of it becomes digital and interactive) is expensive and time-consuming. But with Rafter’s platform, he said, school administrators and students can more easily weigh their content options – which range from traditional textbooks to more exotic interactive content – and make the selections that work best with their budgets.

It’s worth noting that open educational resources (read: free) are becoming more available. In April, Boston-based Boundless Learning announced that it raised $8 million to bring a free textbook alternative to students. But they’re not without challenges and, regardless, Maghsoodnia’s bet is that education will continue to be a major area of expenditure. The San Mateo, Calif. company, which launched as Bookrenter in 2006, has raised $56 million.

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Titles include popular undergraduate textbooks as well as specialized MBA, medical and scientific titles. Students can purchase the entire textbook or “‘Pick 3′: a cost-saving alternative that allows students to buy just three chapters for a fraction of the price of a full textbook.” Then they can read the textbooks on the Inkling iPad app or on Inkling’s soon-to-be-launched web platform.

Inkling, based in San Francisco and backed by Sequoia Capital as well as major textbook publishers like McGraw-Hill and Pearson, recently launched its own e-book publishing platform and sells consumer titles as well as textbooks.

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