Higher education and the internet

Learning difficulties

July 21,  2018

A third of America’s graduate degrees are now taken online. But the bulk of the spoils go not to famous universities but to obscure firms

“THERE’S only two things you do in the navy,” says Vice-Admiral Al Harms, former commander of the USS Nimitz, a nuclear-powered aircraft carrier that is one of the world’s biggest ships. “You fight, and you train to fight. Hopefully, most of the time you’re training.” The navy got Mr Harms hooked on continuous education, and in his 60s he felt the need for a top-up, so he took the online MBA programme of the University of Illinois (UoI), alongside his son. “I found it a very cool way to learn. You have the self-directed portion, working by yourself, and the enriching portion with class projects.”

When the web started to shake up higher education a decade or more ago, it was widely expected that the Massive Open Online Courses (MOOCs) it spawned would disrupt universities in the same way that digital media undermined newspapers and music firms. But that assumption rested on a misunderstanding of what students are paying for. They are not buying education for its own sake, but rather a certificate from a respected institution.

If the value created in a business is an incumbent’s stamp of approval, it follows that the business will be hard to disrupt. Providers of MOOCs have thus struggled to make much money. What has turned out to be a real business, by contrast, is putting incumbents online. An industry of “online programme managers” (OPMs), who also recruit students, has sprung up. With their help pioneers such as Arizona State University have been followed by big guns like Berkeley, Yale and Harvard, which focus on graduate education.

For universities the internet opens up a vast new market: professionals who can’t leave jobs and families but would like to boost their careers with a master’s, a professional degree or executive education. The wage premiums for a master’s degree and a professional degree over a bachelor’s are 19% and 57% respectively. Technological change also means that knowledge acquired years ago may be out of date. “I wanted to build the skills necessary for the next phase of my career, to remain relevant to my industry and my clients,” says Ann Cleland, a partner in Horne, an accountancy firm, who is taking the Harvard Business Analytics Programme while still leading a disaster-recovery compliance programme in Puerto Rico. For her, as for many, an on-campus course was not an option.

Going digital also frees universities from the physical constraints of their campus—the UoI has 99 MBA students on campus and 1,750 more enrolled online. UoI’s MBA, at $22,000, is unusually cheap: most online degrees are at least as costly as, and often more expensive than, on-campus programmes—usually in the $50,000-100,000 range.

Around a third of graduate education in America is now online, according to Richard Garrett of Eduventures, a consultancy. Many universities take a do-it-yourself approach, but the better-known ones tend to go into partnership with the OPMs. 2U, a ten-year-old startup, led the way, and has been followed into the business by, among others, Pearson, an educational publisher, and Coursera (which started off as a provider of MOOCs). Coursera joined up with UoI to create its online MBA programme.

Ivory power

Investors reckon this looks like a good business opportunity. 2U has a market capitalisation of $5bn, despite losses of $29m on revenues of $287m in 2017. Putting a programme online involves large upfront costs, but the ten-year contracts that 2U signs—it takes almost two-thirds of the revenue from tuition fees—are extremely attractive over the long term. Revenues have risen by over 30% annually for the past three years and according to Chip Paucek, 2U’s chief executive, they will continue to do so for the foreseeable future.

Further opportunities beckon outside America. In the autumn of 2019 University College London will launch an online MBA in partnership with 2U, and London’s Imperial College will offer an online global public health masters with Coursera. Since announcing the course in March, Imperial has had 10,000 expressions of interest from 170 countries for 75 places.

Some think the OPM business is a bit too good, and that universities are giving up too much revenue. John Katzman, who founded 2U and left it in 2012, explains that he came to feel that the company, like other OPMs, had tilted towards shareholders and away from students. Full-service OPMs, he says, are too expensive. Better tech means it now costs $2m-3m to put a programme online, against $10m-15m when he started, but the revenue split has hardly shifted. That won’t last, says Mr Katzman, who has founded a budget option—Noodle Partners, which offers deals based on a fee as well as a revenue split. “As students understand they’re paying for Wall Street profits, as faculty understand that their work is just fuelling the next billion dollars of market cap, I will end up eating the OPMs’ lunch,” he says.

Such criticisms chime with broad concerns about for-profit education, but 2U’s Mr Paucek is unmoved. “It’s not going into Wall Street pockets. It’s going into a long-term engine of social mobility.” He has never lost a customer, he says.

Nonetheless, 2U’s numbers will encourage competition. OPMs are proliferating, just as student-recruitment costs are rising. “Student-acquisition costs have been going up,” says Iwan Streichenberger, president of Pearson Online Learning Services, “because of the premiums that Google and Facebook are charging.” Along with LinkedIn, these are the main marketing channels. Over time universities will surely try to take a larger slice of revenues themselves. It doesn’t take a master’s degree to work out what these developments will do to the OPMs’ margins.