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Mike Silagadze, Top Hat CEO, is photographed in Toronto on June 30, 2020.

Peter Power/The Globe and Mail

Toronto online company Tophatmonocle Corp. is stepping up efforts to transform the postsecondary textbook trade into a digital business.

On Wednesday the company, known as Top Hat, will announce its purchase of textbook publisher Fountainhead Press of Dallas for an undisclosed sum, its third acquisition of the past year. That follows its purchase last May of the university textbook publishing business of Nelson Education Ltd., Canada’s largest education publisher, and a deal in August for Minneapolis-based science lab and course material publisher bluedoor. Each transaction is believed to have cost Top Hat US$20-million to US$30-million.

Top Hat’s strategy is to consolidate the textbook industry by buying conventional publishers, offering their titles in digitally distributed versions and eventually stopping publication of physical formats. It has typically paid $1 to $1.50 for every dollar of revenue it picks up, then cuts prices for digital versions because it no longer needs to pay for printing, physical distribution or retailer margins.

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The company obtained minority stakes in both Fountainhead and bluedoor in partnership deals in 2019. It bought them out after conversion to digital went faster than expected, aided by students transitioning to learning remotely during the pandemic, said Top Hat chief executive Mike Silagadze. About 68 per cent of Fountainhead’s revenue now comes from digital, he said.

Top Hat has now added 1,300 titles in the three deals, in addition to hundreds more written by professors who use the platform. Its course materials are used by millions of students at hundreds of higher-education institutions across North America. Annual revenues, including subscription fees to access its platform, exceed US$50-million.

Mr. Silagadze said Top Hat will complete another acquisition or two this year and continue at that pace. “We want to be eventually a one-stop shop that provides a department or university with everything they need across core course user materials,” he said.

To fund its rollup, Top Hat last year raised US$55-million in equity and debt from existing backers Georgian Partners, Inovia Capital, Union Square Ventures, Emergence Capital, Leaders Fund and Bank of Montreal. It is now working to secure new funding to fuel its growth for the next two years.

Mr. Silagadze said his strategy is different from other Canadian technology consolidators. “It’s not like we’re just buying random businesses and duct-taping them together,” he said, adding the deals “give us more product and more content to sell” to a growing number of customers.

Boris Wertz, founding partner of Version One Ventures, an early Top Hat investor, said “consolidation strategies have worked out very well in fragmented markets. Nobody has done it so far in the textbook industry, which is very fragmented. Top Hat has an excellent position to succeed given they also have the software to wrap it around. It’s a consolidation play, but in the process they’re also augmenting the asset by moving it from the old technology – print – to the new technology.”

Board member and iNovia partner Shawn Abbott said the higher-education sector “that has been incredibly resistant to change. It’s amazing that in 2020 we haven’t gone from physical books to a completely digital experience for students. It’s up for grabs who emerges as the category leader in that experience for professors and students. Top Hat is in the lead position to own that.”

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Mr. Silagadze co-founded Top Hat in 2009 with a plan to build an iTunes for higher-education content. He believed textbook publishing was ripe for the same kind of disruption as the music industry experienced when online services enabled widespread pirating while encountering resistance from established players who eschewed digital distribution.

Similar dynamics have played out in publishing. Since 2007, prices for new textbooks in the U.S. have risen at a faster pace than used versions while students spend less on course materials, according to the U.S. Association of College Stores. Publishers including Pearson PLC have seen sales and profits stagnate.

Top Hat initially offered to digitize large publishers’ textbooks for them, but the firms only wanted PDF versions for which they charged full prices. Mr. Silagadze was dissatisfied with the result, so he shifted strategy to market the platform to professors to publish their own interactive, multimedia online textbooks. Top Hat made the content available to others, offering authors a higher cut than they earned writing conventional texts, while charging students less than industry norms.

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