Top Hat Buys Canadian Textbook Business to Compete With Publishers in Digital Courseware
Top Hat got its start in the “clicker” business, offering a web-based and mobile classroom response tool that lets instructors gauge whether students understood the lesson (or paid attention). The term comes from the physical devices that other companies used to sell, where students literally pressed buttons to respond to multiple-choice questions.
The Toronto-based company once relied on textbook publishers to distribute its technology. But now it wants to compete with them in their core business of course materials. And it just may have found a key piece to make that strategy click.
Today, Top Hat announced it has reached an agreement to acquire more than 400 higher education textbooks from Nelson, one of the biggest educational publishers in Canada. Those assets amount to Nelson’s entire domestic higher-ed textbook business in the country.
The deal is set to close in the next couple weeks, says Top Hat CEO and co-founder Mike Silagadze. He declined to disclose the value of the deal, but said the price reported by The Globe and Mail—under $30 million—is in the ballpark.
The deal marks the biggest acquisition announced by Top Hat, and it comes on the heels of a $55 million Series D fundraise led by Georgian Partners and iNovia Capital, announced in February. To date, the company has raised $105 million in venture capital.
Top Hat has been steadily expanding its suite of tools ever since the company was founded in 2009, and in recent years has charted a course to “create the next generation of interactive courseware,” says Silagadze in an interview. From bundling its clicker technology with course materials from other publishers, the company now offers a marketplace and authoring tools for people to build their own courses on the platform.
It has even tried partnering with publishers like Pearson to digitize their print materials, according to Silagadze. But some of those deals didn’t pan out, he claims, because “they mostly wanted to convert their materials into PDFs and that wasn’t what we envisioned.”
Top Hat says the textbooks it will be acquiring are used in more than 80 percent of Canadian colleges and universities. But don’t expect to see them on screens just yet. These 400-plus titles are all print, and the company will convert them to digital so that they are compatible with the polls, quizzes and other interactive features that the Top Hat platform offers.
That means, at least for a few years, Top Hat will find itself supporting the print business for Nelson customers that haven’t made the transition to digital. “There’s going to be a transition agreement, where [Nelson] will help us work with their customers and help them migrate onto our platform,” says Silagadze. “Nobody is going to be forced to convert from print to digital.”
Top Hat has similar arrangements underway with two other publishers—Fountainhead Press and Bluedoor Publishing—to digitize their materials. Should the Nelson deal pass, Top Hat will boast more than 1,000 titles in its library.
The company says its materials are used by over three million students across 750 of the top 1,000 higher-ed institutions in North America. More than 90 percent of its users are in the U.S., says Silagadze, although that proportion will be lower should the deal pass.
From Tech Company to Publisher?
The acquisition of Nelson’s higher-ed titles marks Top Hat’s biggest move yet into higher-ed courseware. And with that comes challenges that traditional publishers have long wrestled with, namely: How do you not just convert print to digital, but also do it at scale and profitably?
Top Hat is “partially becoming a publisher—the thing that they’ve long wanted to compete with,” observes Phil Hill, an education industry analyst and consultant. “It’s not that the publishers don’t know how to digitize materials,” he adds. “The question is: ‘How well can Top Hat do it?’”
Unlike traditional publishers that are trying to retool themselves as technology companies, Top Hat has the advantage of being a tech company first, says Silagadze. At top speed, he claims, his team can convert a print title into interactive, digital courseware in seven days, at a cost of less than $2,000.
And unlike publishers that field in-house editorial teams to refresh materials, Top Hat relies on a community of subject-matter experts to provide feedback. Silagadze likens his model to GitHub, the project collaboration tool popular among the tech industry, whereby users can collaborate and contribute updates. He says textbook authors still get final say in vetting and approving suggested changes.
Of the major publishers in his crosshairs, Silagadze says he’s watching Cengage most closely, seeing the most similarities with the features available on Cengage’s MindTap courseware platform.
Aside from the usual suspects, a host of other companies and upstarts now also compete with Top Hat. There’s Wiley, better known in academia and research, which recently acquired Knewton and zyBooks, to sell online higher-ed courseware. For openly-licensed materials, there’s Lumen Learning and OpenStax.
For Nelson, this sale marks its first step in its “strategic decision to withdraw from the post-secondary market,” it said in an announcement. Over the coming weeks, the publisher added that it will “finalize” its exit from the higher-ed market after reaching a second deal with another organization.
Nelson says the sale will allow it to focus its efforts on the K-12 market. The company acquired the K-12 publishing business of McGraw-Hill Ryerson in 2017.
To Hill, this decision “feels very much like a distress sale” for Nelson, which had been struggling financially in recent years. The publisher, which dates back to 1914, was acquired and became part of Thomson Corp. in 1962. In 2007, Thomson’s higher-ed publishing division was acquired for $7.75 billion by a group of private equity firms, which split the business into two: Cengage and Nelson.
Estimated revenue for the U.S. print textbook publishing market has been declining for several years, to about $8.8 billion in 2018. Based on publishers’ recent earnings reports, Hill says he anticipates further “reduction in annual revenues as the market shifts to digital, and as we see the full impact of OER, inclusive access and new business models take effect.”
The terms of Nelson’s pending sale of its Canadian higher-ed assets were hashed out fairly quickly. Silagadze says the publisher first reached out his team about a possible sale around a month ago.