1 Stock for Higher Education and Higher Profits

In a previous column, I wrote that Pearson (NYS: PSO) is a publisher keeping up with the digital age and a company worth keeping an eye on. Living up to that claim, Pearson has announced a disruptive product that's set to shake up higher education and pave the way for future profits.

The continuing shift to online everything
It used to be that going to college meant showing up for class, taking notes, and keeping track of your paperwork in a binder. Kids, I assume, are still expected to go to class, but much of what they need can now be accessed online. The modern college student simply logs in to his or her Learning Management System, or LMS, and easily accesses course syllabi, lecture notes, and grades. Sometimes there are even chat features.

Colleges pay big money for these systems. Kenneth Green is the director of the Campus Computing Project, an organization that studies the use of technology in higher education. He recently told public radio's Marketplace that colleges spend as much as $1.5 billion per year on LMSes. Much of that money goes to Blackboard, a company that's dominated the LMS market for years.

Making money from a free product
Enter OpenClass, the cloud-based LMS that Pearson is offering to colleges and universities. According to the company, the system is easy to use, scalable, and truly and completely free -- i.e., there are no hardware, licensing, or hosting costs. It's also open-source.

Other companies, like Moodle and Sakai, also offer free, open-source LMSes, but they still end up costing colleges and universities money for the system upkeep, licensing, and hosting fees.

So how does Pearson make money?

Follow the Google model to massive profits
Pearson's profit model for OpenClass is similar to that of Google's (NAS: GOOG) . That is, the primary application is free, but it brings users into a larger world, a world of products they pay for. Unlike the Google model, which sells users other company's products, Pearson's is hoping to sell users on its own products. Matt Leavy, CEO of Pearson eCollege, told Marketplace he's hoping the free OpenClass will drum up business for products like electronic textbooks and tutoring software.

Speaking of Google, Pearson is launching OpenClass in the Google Apps Marketplace, giving it high visibility and making it easy for schools anywhere in the world to access it. "OpenClass is tightly integrated with Google Apps for Education, our free suite of communication and collaboration applications," says Obadiah Greenberg, Google's business development manager for education. "We are happy to offer this complementary learning management system to the millions of students, faculty, and staff already using Google Apps."

Pearson knows online and digital
Pearson is very familiar with digital and online content in all its publications, which include The Financial Times, FT.com, and Penguin books. Dame Marjorie Scardino, Pearson's chief executive, recently told The Financial Times the company is "well placed to exploit accelerating structural changes in its industries, such as the move to digital delivery of content." For example:

  • Pearson's digital education platform and service registrations are up 15%.

  • FT.com subscriptions are up more than 30%, extra impressive considering there's a pay wall.

  • Penguin e-book revenue is up almost 130%.

Further, the company already has partners on board for OpenClass, partners that will not only use the LMS but also help in the ongoing evolution of its design. The list includes such big names as Rice University, Columbia University, and West Virginia University. Many of these institutions are already teaching courses using OpenClass this fall.

Angling for the $1.5 billion prize
Pearson has the size and revenue muscle to execute this idea correctly. At $9.01 TTM, Pearson's revenue is the highest in its peer group. McGraw-Hill's (NYS: MHP) is $6.3 billion. Apollo Group's (NAS: APOL) is only $4.7 billion.

And 68% of Pearson's sales already come from the education side of the business. In this light, consider the $1.5 billion colleges and universities are currently spending on just managing and maintaining their LMSes. With OpenClass, that money is freed up to spend elsewhere, like on other Pearson education products.

Currently, Pearson is trading for slightly more than $18, with a very attractive P/E of 18. Peer Scholastic (NAS: SCHL) has a P/E right now of 20. John Wiley & Sons' (NYS: JW.A) is 17. And Pearson pays a dividend of 3.5%. Growth potential plus a dividend -- what more could you ask for?

By taking on market leader Blackboard, Pearson is making a bold move in its space that, if successful, could significantly increase the company's profits. If the idea of shaking up big sectors is exciting to you, learn about another breakthrough technology that's set to change the dynamics of its own sector, and the company behind it, in this free report.

At the time thisarticle was published Fool contributorJohn Grgurichcould use a learning-management system to help him put together his son's toys, but he owns no shares of any of the companies mentioned in this column. The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of John Wiley & Sons and Google. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool'sdisclosure policyis an absolute page-turner.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.