The Test Tutors Try To Settle A Score

You've seen plenty of these battles before. A scrappy and aggressive newcomer takes on a sleepy and overconfident industry giant and snatches market share--at least until the giant finally wakes up. It's a scenario that has played itself out in virtually every industry, from computers to ice cream. Now the fight has moved to test-preparation, the business of helping students cram for those standardized tests for admission to college and graduate and professional schools.

As David-and-Goliath struggles go, this one has been unusually fierce. It pits longtime leader Kaplan Educational Centers, the king of the test-prep market, against Princeton Review Inc., a smaller, highly aggressive rival that is growing nearly four times as fast. The pair has been slugging it out over the past two years, trading letters from lawyers, public barbs, and accusations. Sample: "Everything they do, we did a year ago, and that's a very good place to have your competitor, no matter how big it is," snipes John S. Katzman, Princeton Review's 35-year-old president and co-founder. Retorts Jonathan N. Grayer, Kaplan's 29-year-old CEO and president: "It's such a hypocritical thing for a company that created itself in Kaplan's image to say."

O.K., time out. Kaplan created the test-prep industry in a Brooklyn basement in 1938. By claiming it could improve students' scores on the Scholastic Assessment Tests and other admission exams, Kaplan built a business with more than 100 centers by 1985, when the company was acquired by Washington Post Co. But Post Co. paid scant attention to its newly acquired sideline.

That made Kaplan's market an enticing target for a young, ambitious entrepreneur. Katzman, who got into Princeton University with a combined SAT score of 1500 out of 1600, quit his first job as a computer programmer on Wall Street after only six months. He then set up shop, in 1981, in his parents' New York City apartment with 15 students and $3,000 from his mom and dad. By enlisting youthful, dynamic teachers and claiming big increases in test scores, Katzman became a formidable challenger to Kaplan. This year, Princeton Review says it will help 64,000 students cram for their exams at $395 to $945 a pop. Add in revenues from 45 book titles and software products, and the private company claims revenues will grow by 18% this year, to $48.5 million, with pretax profits of over $10 million.

BOISTEROUS CLAIMS. Kaplan, meanwhile, was ignoring the competition. Its course offerings were growing stale, and it failed to expand into book publishing, as its rival was doing. "We were walking around like a wounded Goliath," Grayer concedes. Kaplan wasn't roused from its torpor until the early 1990s. While Post Co. doesn't release separate financial results for its Kaplan unit, the parent reported a total of $15 million in losses in the past two years for the division of which Kaplan is a major part. Kaplan says another unit in the same division is responsible for most of the losses. And it asserts that Princeton Review is overstating its revenues by $10 million.

Enter Grayer. While he declines to provide his own SAT score, he must have been no test-taking slouch. Armed with a pair of Harvard University degrees, including an MBA, Grayer joined Post Co. in the marketing department of Newsweek Inc. in 1990. The company asked him to move to Kaplan as regional operations director in 1991, and he climbed his way to chief executive last July.

He hired a slew of similarly ambitious MBAs from such unlikely places as American Express, Goldman Sachs, McKinsey, Morgan Stanley, and RJR Nabisco. Grayer's team is hatching new plans to turn the tables on Kaplan's tough nemesis. They are reinvesting millions of dollars to update the core test-prep courses and are finally extending the product line into books, on-line services, and software.

Just as critical, however, Kaplan is trying to muzzle the boisterous advertising claims of its rival, which has contended among other things that its average score improvements range from 110 to 160 points on the SAT. Grayer says Kaplan threatened to sue Princeton Review for misleading advertising unless the company yanked its claims and agreed to new ground rules on future promises. Katzman says that for a while, both companies were threatening legal action.

"NOT DAUNTED." Rather than get entangled in a messy court fight, Katzman says, he signed a private pact. The agreement requires both sides to back claims of test-score improvements with independent studies and to settle future disputes between them by submitting to arbitration.

Katzman hardly views the settlement as a setback, since it imposes the same restrictions on Kaplan as it does on Princeton. "These are skirmishes that happen in business," he says. "So far, I'm not daunted by their accomplishments." He shouldn't be. By many measures, Kaplan is still playing catch-up. The company, for example, didn't launch a line of books until 1993 because it feared cannibalizing its SAT courses. That was a eight years after Princeton Review went to market with its first title, Cracking the SAT. Now, Princeton is the No.2 publisher in this market, behind Barron's Educational Series Inc.

Kaplan expects its revenues to grow by about 5% this year, to $80.5 million vs. the Review's more impressive 18% annual growth rate. Mary Ann Winter, an analyst at Brown Brothers Harriman & Co., thinks Kaplan might break even or post a slight profit this year. That would be an early sign that things are improving but would hardly be cause for celebration. Grayer agrees: "We have taken major steps to turn around this organization, and we've done some really good things, but by no means is Kaplan turned around." If similar battles in other industries are any indication, it may be a number of years before Kaplan moves out in front. But at least this aging Goliath is finally fighting back.

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