The real reason behind the SAT revamp

March 7, 2014, 12:21 AM UTC

FORTUNE — When the College Board announced on Wednesday that it was overhauling the SAT, president David Coleman said the changes were aimed at aligning the exam with what students were learning in high school, eliminating the test’s trickery, and deemphasizing the importance of expensive test-prep services.

As of 2016, the SAT will revert to a 1600-point scale by making the essay portion optional. It will also stop detracting points for wrong answers, which had, in essence, penalized students for guessing. The College Board is also teaming up with Khan Academy to create free online test-prep courses it says will help even the test-prep playing field.

“If we believe that assessment must be a force for equity and excellence, it’s time to shake things up,” Coleman said on Wednesday.

That’s all well and good, but make no mistake, the decision to alter the SAT is a calculated business move. The SAT has fallen behind its rival, the ACT, in popularity, and its new format is an attempt to claw its way back to dominance.

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The SAT, or Scholastic Aptitude Test, had long been the preferred method of measuring high school students’ college readiness. Its inception at Princeton University and its initial popularity on the East Coast automatically associated it with elite education. It first hit the 1 million test-takers mark in 1957, and its popularity continued to grow during the rest of the 20th century. In 2000, 1,260,278 students sat for the exam.

Soon after its birth, the SAT found a fierce opponent in the ACT, which stands for American College Testing. The ACT was created by an Iowa State professor in 1959 to assess students’ practical knowledge. While the ACT has always been a legitimate competitor to the SAT, it lacked the SAT’s prestigious reputation, and, for a time, its popularity was limited mostly to the Midwest. Just over 1 million students took the ACT in 2000.

But after 2000, the ACT began to gain ground over the SAT. One major factor gave it that boost: the statewide administration of the ACT.

To fulfill commitments to college readiness and to meet the requirements of the 2001 No Child Left Behind act, which requires high schools to test students in math, reading, and science at least once during their secondary education, states adopted the ACT as an achievement exam. Just a few years prior, the ACT had introduced college readiness standards, which tied students’ scores to actual skills. Before that, a student’s score only meant something when compared to a peer’s results. “States came to us looking for a better solution to statewide exams,” says Ed Colby, spokesman for the ACT. “They were looking for a way to assess their state curriculum and learning standards and motivate students to do their best, and they knew that the ACT was curriculum-based.”

Colorado and Illinois signed on to administer the test statewide in 2001. Michigan and Kentucky committed to it in 2007, and Wyoming had done so by 2009. Now, 13 states administer the ACT to public high school students, with Missouri, Wisconsin, and one additional state (whose commitment is not yet public) expected to do so next year. The SAT, meanwhile, is administered by three states — Maine, Delaware, and Idaho.

The statewide administration of the ACT is a win across the board for all parties involved. Students in those states are automatically signed up for the test for free and can use their results on college applications. (The ACT normally costs $36.50; the ACT with optional essay is $52.50. It currently costs $52 to sit for the SAT.) Included in the pool of test-takers are students who might not have enrolled on their own.

“It raises college awareness,” says Paul Weekly, the ACT’s vice president of customer engagement.

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Students are more motivated to do well on the ACT as compared to a general statewide exam since admission to the college of their choice is at stake. And, of course, it gives the ACT more relevance and a leg up on its competition. After all, if your child is signed up to take the ACT for free by default, why would you as a parent pay for the SAT when most universities accept either score?

The end result is that more students than ever are taking the ACT. It surpassed the SAT in popularity in 2012 when 1,666,017 students sat for the exam, compared to the 1,664,479 who took the SAT, according to data collected by The National Center for Fair and Open Testing. Last year the number of ACT test-takers reached 1,799,243 — a figure that included for the first time students who needed special accommodations — while the number of students who took the SAT actually dropped by about 4,000.

By changing its format, the SAT is trying to regain market share. “If you want to see the new SAT, take a look at the ACT — there’s no guessing penalty or esoteric words and the essay is optional,” says Bob Schaeffer, the director of public education at Fair and Open Testing. “The SAT has fallen from first place. It’s been overtaken by the ACT that has more market appeal, is more consumer friendly, and has sharper salesmanship.”

Both the College Board and ACT, Inc. are non-profit organizations, but there’s plenty of money at stake in this battle of the tests. The College Board reported total revenue of $759 million in 2012 when it filed its most recent 990 form. ACT Inc. brought in $302.5 million that same year, according to its 990 form.

During its early days, the SAT was intended to measure young people’s aptitude, says Nicholas Lemann, a professor at the Columbia School of Journalism and author of The Big Test: The Secret History of the American Meritocracy. “But as soon as the College Board got super-sized because of the success of the SAT, it had to think about how many customers it had in addition to its lofty nonprofit mission.”