HOP, LLC

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HOP, LLC

310 Bristol Street, Suite 150
Cosa Mesa, California 92626
U.S.A.
Telephone: (714) 429-2223
Toll Free: (800) 544-7323
Fax: (714) 429-2294

Wholly Owned Subsidiary of Educate Inc.
Incorporated: 1986 as Gateway Educational Products, Ltd.
Employees: 150 (est.)
Sales: $45 million (2001 est.)
NAIC: 611699 All Other Miscellaneous Services. Not Elsewhere Classified.

A subsidiary of Educate Inc., HOP, LLC, produces the "Hooked on Phonics" brand of educational products, including cassettes, CD-ROMS, flash cards, books, and parent guides. Although the Costa Mesa, California-based company is best known for its learn-to-read programs that relies on phonics—associating letters or letter groups with the sounds they represent—it also offers step-by-step learning systems to teach critical reading, math, and study skills. In addition, HOP operates more than 600 reading centers in KinderCare Learning Centers and at other day care providers as an add-on service. HOP's corporate parent also operates the well-known Sylvan Learning Centers, North America's largest network of tutoring services.

"WHOLE-LANGUAGE" APPROACH TO READING EMERGES: EARLY 20TH CENTURY

Teaching children to learn how to read by sounding out letters was hardly a new concept when Hooked on Phonics was created in the 1980s. In fact, it was the predominant way reading was taught at the start of the 20th century. "By the 1930s," according to Success magazine, "progressive professors of education from Harvard and Columbia declared that phonics, with its rote memorization of sounds and symbols, was drudgery. They denounced the practice of sounding out words and said children could learn to read as naturally as they learned to talk—if they were allowed to peruse simple words in context. This 'whole-language' philosophy was the basis of the 'Dick and Jane' readers." The approach was controversial and was attacked in the 1950s by the book Why Johnny Can't Read, yet it was staunchly defended by mainstream educators who, spearheaded by the International Reading Association (IRA), also spent a great deal of energy over the course of several decades to discredit phonics and implement whole-language reading programs. However, as whole-language gained prominence there was no appreciable gain in literacy. Rather, literacy levels began to steadily slip following World War II, and many children who did learn to read struggled in their efforts, much to the concern of their parents.

One parent frustrated by his son's difficulty in learning to read was John M. Shanahan. He grew up in Boston, educated at a Catholic school where, as a child, he learned to read relying on drills from a tried and true phonetic system. He became a musician, moved to California, and wrote film scores and commercial jingles. He also became an entrepreneur, starting a business in 1983 called Smart Tapes, producing educational cassettes that among other subjects taught vocabulary and how to prepare for the SAT college entrance exam. He turned his attention to the problem of emerging reading when his son, Sean, became so anxious about learning to read that he begged not to go to school. Shanahan tried to sound out words with his son, the way the nuns had taught him, but Sean had no idea what he was talking about. Deciding to take matters into his own hands, Shanahan took his grade school lesson plans and spiced them up by writing catchy jingles to accompany the drills. He created a study tape for Sean to use and in short order the boy learned to read and caught up with his classmates.

Impressed by Sean's turnaround, Shanahan's neighbors, whose own children were having trouble reading, asked if they could borrow the tapes he made. Shanahan recognized a business opportunity and in late 1986 started Gateway Educational Products Ltd. in Orange, California, to market a learn-how-to-read system he called "Hooked On Phonics." He had a partner, John H. Herlihy, who provided the bulk of the $150,000 in seed money, but Shanahan was the driving force behind the growth of the business, overseeing every aspect of the company. He elected to market the Hooked on Phonics tapes through direct marketing, as he had done with Smart Tapes, but eschewed the services of an ad agency and opted not to outsource the telemarketing and order fulfillment operations. He set up his own telemarketing center, handled the creative work, and bought the media time. It was his idea to use a memorable telephone number for customers to call: 1-800-ABCDEFG. To find out who held that number, he simply dialed it and was connected to a fence company, whose owner had been unaware that his number spelled out the first seven letters of the alphabet. Nevertheless, the man refused to part with the number—until he was persuaded by Shanahan's $10,000 offer.

STRONG GROWTH: 1987–1994

In 1987, its first full year in operation, Gateway generated $100,000 in revenues, but that number would begin to grow exponentially as Shanahan increased his marketing budget, spending heavily on radio and television. According to the Network Radio Marketing Guide, Gateway was the 16th biggest spender on radio by 1990. A year later the company's total radio and television budget topped $41 million, split equally between the two media. In 1992 Shanahan began producing 30-minute infomercials. The media saturation paid off, as sales reached $150 million by 1994. Along the way he made changes to the Hooked on Phonics system and added new products, including Hooked on Math; a Hooked on Phonics Writing Kit; the Hooked on Phonics Classic Achievement Series, which used well-known stories to be read in a family setting; the "We the People" history and civics lesson; and foreign languages programs (German, French, Italian, Japanese, and Spanish) produced with Passport Books. In addition, Shanahan established the Gateway Prison Literacy Project to teach reading to California prison inmates, who experienced a high illiteracy rate. He also made a stab at the retail trade by opening a Hooked on Phonics Store in the heart of Los Angeles' inner city, where he also sold educational toys from Sesame Street, Fisher-Price, and Playskool. Along the way, according to an article published in Success magazine, "his success earned Shanahan some powerful enemies in the education establishment."

Writing for Success, Duncan Maxwell Anderson and Michael Warshaw reported that "Shanahan faced a powerful adversary [in] the National Education Association (NEA)," which they maintained was a "core constituency of the Democratic Party." The authors suggested that with Democratic President Bill Clinton in the White House, politics was behind the Federal Trade Commission's (FTC) 1992 request for information on Gateway's products and advertising. Wrote Anderson and Warshaw, "Shanahan wasn't alarmed at first; the FTC almost never questioned anyone's right to sell an educational product. But the agency kept coming back for more information. When the FTC requested background information on all the principals in the company, Shanahan retained a lawyer in Washington."

COMPANY PERSPECTIVES

Company Perspectives: We know how important it is for our children to master basic math and reading skills, and we're passionate about providing the right educational products to make that happen.

Responsible for regulating advertising, the FTC took on Gateway, claiming that the company did not provide statistical evidence to back their claims that Hooked on Phonics could teach anyone to read. Instead, Gateway relied on testimonials, primarily children who had used the product. In August 1994, Shanahan took the advice of his attorneys and agreed to a consent order from the FTC so that his advertising no longer made claims that could not be backed up by scientific studies. Although Gateway did not admit to any wrongdoing and the company was not fined, agreeing to the consent order was a decision Shanahan would soon regret.

On the eve of the FTC announcement of the agreement in December 1994, the prime-time news show "Dateline NBC" aired a segment that promised "the real story behind Hooked On Phonics." According to Success, "It was obvious that the FTC had broken its agreement not to discuss its consent order for Gateway." Moreover, "Dateline" maintained that the FTC had charged Hooked On Phonics with deceptive and misleading advertising, a mischaracterization that was then repeated by other news outlets.

The fallout was immediate and devastating as many Hooked on Phonics customers began to return their products. A number of other customers, on the other hand, supported Gateway during the 60-day period the FTC solicited public comment before issuing a final order. Many people, especially conservative politicians, saw the affair as an attack on home-based education. Although the backlash forced an FTC spokesperson to announce that the agency challenged Gateway's advertising claims, not the product, the admission offered cold comfort for Shanahan, who had already locked in place many media buys before business suddenly dried up.

To make matters worse, the O. J. Simpson murder trial became a television obsession with American viewers and everybody involved in the infomercial trade felt its impact. Shanahan attempted to become less reliant on direct marketing by making the Hooked on Phonics products available through bookstores, educational stores, and other specialty retailers, but an expansion of outlets could not prevent a collapse in sales. In 1995 the company posted sales of just $20 million, an amount that did not come close to covering the bills. Media outlets began demanding payment, and fearful that they might seek liens against Gateway's income, Shanahan filed for Chapter 11 bankruptcy protection in October 1995.

OWNERSHIP CHANGE: 1996

Shanahan sold Gateway to buyout firm Rosewood Capital, LLC in 1996 and turned his attention to other endeavors, in particular a radio network he set up and a half-interest in a media buying agency. He scored another hit by launching the radio talk show of Dr. Laura Schlessinger.

Rosewood was founded in 1986 by Chip Adams as a traditional venture capital firm that began investing in buyouts. A former employee of Bain & Co., a high-powered consulting firm, Adams was familiar with the Hooked On Phonics system because it helped his son, Doug, to learn how to read. Adams liked the product but thought it could be improved. The company became Gateway Learning Corporation and the Hooked on Phonics program was redeveloped with the help of educators and others. In the meantime, phonics received a boost when a study sponsored by the National Institute of Child Health & Human Development at the University of Houston contended that not only did phonics work, it was the best way to teaching reading. In June 1996 Forbes called the findings "a slap in the face of the education establishment." The magazine reported that in California, where the whole language approach had had a long history in the public schools, parents "were shocked by recent test results that placed their kids last among the nation's students, tied with Louisiana." As a result, California ordered that phonics be taught in every first- and second-grade classroom. Educational publishers and others now began developing their own phonics-based materials.

The new Gateway unveiled its revamped Hooked on Phonics Learn to read Program in 1998. It was well received, quickly earning the National Parenting Center Seal of Approval. A year later the company introduced a new Hooked on Math edition, which included games and other activities. Hooked on Phonics was revised further in 2000 when the company brought out the new Hooked on Phonics Classroom Edition. A year later a Deluxe Edition was offered that included an interactive CD-ROM. Also in 2001 Gateway forged an alliance with KinderCare Learning Centers to offer Hooked on Phonics tutoring programs at KinderCare locations across the country. That same year, Gateway expanded beyond basic reading and math, releasing Hooked on School Success to help teach children reading comprehension, study skills, and test-taking strategies.

KEY DATES

1986:: Gateway Educational Products, Ltd., is founded to market Hooked on Phonics Program.
1990:: Hook on Math is introduced.
1995:: Gateway declares bankruptcy.
1996:: Rosewood Capital acquires the company.
1998:: A revised Hooked on Phonics program is introduced.
2005:: Educate Inc. acquires Gateway.

Gateway had another run-in with the FTC in the early 2000s, accused of selling information about its customers to marketers, renting the information for $95 per 1,000 names, despite promising to keep the data confidential. In July 2004 the company settled the matter by agreeing to pay a fine of $4,600, the amount of money it earned in renting out the data—hardly worth the bad press and legal expenses that resulted.

Rosewood sold Gateway to Baltimore-based Educate Inc. in January 2005 for a reported $13 million. Educate was formed from the tutoring portion of Sylvan Learning Systems, which ran into trouble funding Internet education-related businesses. In 2003 the kindergarten-through-12th-grade tutoring businesses had been sold to insider R. Christopher Hoehn-Saric, who then became Educate's chief executive officer and chairman. What made Gateway attractive in addition to the Hooked on Phonics brand were the company's 600 reading centers in KinderCare and other daycare centers. Gateway was subsequently renamed HOP, LLC, and folded into the Educate operation. The company's new corporate parent decided to expand the retail distribution of Hooked on Phonics products, turning to such outlets as Wal-Mart, Target, and Amazon.com. It also began to add to the Hooked on Phonics product offerings. In December 2005 the company unveiled Hooked on Phonics "Get Ready to Read," a program aimed at the preschool market of three- to five-year-olds.