At last week's UBS Warburg annual media week conference, executives from three of the nation's largest educational publishers admitted that the short-term outlook for the elhi market is murky, but all said the long-term prospects for the industry remain strong.

Budget pressures faced by the states is the main cause of the publishers' concerns about the market in 2003. Reed Elsevier CEO Crispin Davis said he "was taken aback" by the slowdown in state spending over the last several months, and predicted that sales in the elhi segment will be down by about 5% this year. Pearson Education president Peter Jovanovich agreed that revenues were likely to be down by about 5%, and he cited not only a slow adoption schedule this year but also softness in the open territories for the weak market.

Although there are more state adoptions for 2003 than for 2002, and federal funding is expected to increase, Davis said he was "hesitant" to predict how the market will perform in 2003, given the budget pressures states will continue to face next year. He added, however, that he was confident the long-term prospects for the market remain solid. Jovanovich and McGraw-Hill Cos. chairman Terry McGraw were slightly more bullish than Davis for 2003 and equally as bullish for the long term. Jovanovich noted that educational spending traditionally lags the economic cycle, and that the decline in states' tax receipts that hurt spending in 2002 will temper the rebound in 2003 by 1%—2%. Federal monies to fund the No Child Left Behind Act and more adoption opportunities will help offset softness in state spending, Jovanovich noted. McGraw was also counting on money in the NCLB Act to boost the elhi market in 2003.

Although McGraw said that the combination of tight state budgets and timing issues connected with federal funds make it difficult to predict how the el-hi market will perform next year, he said the company is currently expecting an increase of 2%—4% in the market in 2003. He added that McGraw-Hill's el-hi group will do better than industry averages. Jovanovich is looking for a modest gain in elhi sales next year and forecasted 3%—5% growth for Pearson's elhi unit; while growth could be modest again in 2004, Jovanovich predicted that in 2005, el-hi sales will grow 6%—8%.

Both McGraw and Jovanovich said their optimism about long-term growth for the elhi market was based in part on new federal standards and testing requirements. Jovanovich said he has always used testing requirements as a barometer for the industry, observing that if schools are required to test students, they will buy more materials. He said he was also encouraged by the attitude of officials in Washington who believe in the value of basal textbooks, an attitude Jovanovich said he had never before experienced in his career.