Chief Executive's Review

It pays to think big,
as long as you pay attention to the details.

1998 was one of the best years in Pearson’s history. Looking at the big picture, in virtually every country trends continued to move in the direction of our businesses – the focus on public education; the rise of the English language; the shift of power from sellers to customers, who can increasingly design for themselves the information packages they want. We put our money on these trends, reshaping Pearson into four related businesses with commanding market positions, and the results so far have been rewarding.

To prepare the way, we sold almost £1bn of our assets, many of them fine businesses in their own right that were simply worth more to others. We regretted, for instance, the need to part with The Tussauds Group, a business that had added to both Pearson’s charm and its bottom line for the last 20 years.

But these disposals created room for us to complete the largest acquisition in Pearson’s history, paying £2.9bn for the Simon & Schuster businesses. This tripled the size of Pearson Education and jumped us to the front of the expanding worldwide education market, a business that will produce healthy growth and profits for many years. But profits are not our only goal. As a result of this acquisition, Pearson Education now has emerged as the world’s leading supplier of the tools for education.

Education hasn’t been the only business in which we’ve achieved the scale we need to succeed. As we’ve slimmed down, we’ve built up quite a bit of muscle. In two years, the FT Group has increased its profits by 33% while doubling the investment in its future growth. Penguin and Pearson Television are both half as big again as they were two years ago.

Attending to the details counts for just as much as size, of course. Big ideas and market scale are no good if we don’t turn them into profits, make our shareholders wealthy and create a company that will last. In 1998 we made progress on all counts. We promised to deliver double-digit growth in earnings and we did. In the process, the value of the company – measured by the share price – grew strongly.

The operating success in 1998 was not accidental. We had promised the year before that we would concentrate on running things better, on making better products and on taking better advantage of the brands and assets we have. We did, and the progress has been encouraging.

In the Financial Times Group we made headway through international and electronic expansion. The initial instalments of our £100m commitment to invest in the FT over the last two years have begun to help the newspaper grow faster. In the US, for instance, the circulation grew from 32,000 at the beginning of 1997 to 70,000 at the end of 1998. Money spent on our electronic information services also began to produce results. FT.com expanded its service and reach and is now one of the most visited business websites in the world. Meanwhile, cost reductions and economies of scale around the FT Group further helped improve margins.

At Penguin, we continued to take advantage of the revolution in book publishing. As we built up our pipeline of great books of tomorrow, we also continued to strengthen the business, making our production and distribution more efficient by improving information systems. In the process, we reduced the number of unsold books returned by retailers in the US to a level not achieved by Penguin for many years. We also made real progress in our UK business and set up a stronger global footing to launch us into 2000.

For Pearson Television, its integration with All American Communications now complete, the story was better margins and more new products. One of the new shows, First Wave, will be seen in 1999 in some 30 countries around the world. Our game shows are back on US television, too (though our biggest, The Price is Right, never went away). And we are making new serial dramas in Germany, Sweden, Hungary and Finland. As a result, less than 40% of our television business is now in the UK.

But our success in acquiring the Simon & Schuster education business drew the most attention last year. The deal didn’t close until the very end of the year, but Addison Wesley Longman’s results are evidence that people didn’t stop working while they were waiting. Both our school and our higher education businesses began to take off. We were hit hard by inclement economic weather in Asia, but we worked to make sure lost sales didn’t translate into lost profits.

All these efforts, large and small, in 1998 created wealth for Pearson’s shareholders, a group that increasingly includes Pearson’s staff. Over the last 18 months we’ve given everyone – in all 53 countries in which we have offices – the chance to save to buy shares in Pearson. About a third of us (myself included) have now taken that opportunity. In addition, this year for the first time the Company-wide bonus plan paid 15 shares, plus a small cash award, to each qualifying employee. We welcome these colleagues to the growing ranks of Pearson employee-owners.

All around the Company, people are inventing ways to enter new markets, win new readers, sign new authors, commission new programmes and seize the potential of new media. In the process, we are creating a more durable, exciting Pearson for tomorrow with compromising today.