The On-Line Education Bubble

by Joshua Green

Like many administrators, Edward Blakely doesn’t need to
be convinced of the Internet’s importance to the future of
his university. As the new dean of the Graduate School of
Management and Public Policy at the New School University
in New York, he seems primed to capitalize on it. Blakely’s
school was among the first to go on-line. Forbes magazine
once ranked its on-line learning program as one of the 20
best in the country. The New School is situated in a major
metropolitan area where its flexible class schedule caters
to the busy professionals who make up the bulk of on-line
students.

Blakely is encouraging his professors to put every class
on-line. He is beefing up the school’s distance learning program
and trying hard to attract new students. He is struggling
with phrases like “cheaper modalities,” and at age 62, he
is teaching his first on-line class. Yet despite all this,
the New School’s on-line market share is diminishing. Blakely
is suddenly competing with schools from across the country
and around the world, schools that wouldn’t have registered
on his radar five years ago. He is under increasing pressure
to distinguish his program from the growing list of on-line
competitors. “We’re surprised at how quickly we’ve gotten
big-name competition,” he says. He is spending more on marketing
than he’d prefer. But like most university administrators,
he is afraid of being left out of a rapidly changing field.
“There is going to be a displacement effect in on-line education,”
Blakely warns. “Those schools that aren’t ready will be left
behind.”

In the hype over on-line education, this is the side that
often gets overlooked. On-line education has many forms and
many more providers. Traditional institutions like the New
School, which came to prominence as a socially conscious commuter
school for part-time adult students, are competing with for-profit
universities like the University of Phoenix and virtual-only
universities like Jones International University and Capella
University. The term itself encompasses everything from master’s
degree programs to corporate and military training.

Most on-line students are not typical undergraduates (only
16 percent are 18-to 22-year-olds). They tend to be working
professionals as well as dropouts completing a degree, older
than traditional college students and less interested in traditional
graduate and undergraduate degrees. Often, they are full-time
workers looking to improve their skills: to train in the latest
software, qualify for professional advancement, or participate
in some other form of continuing education that will fit their
busy schedule. They are the people who, 10 years ago, would
have gone to night school.

On-line education’s biggest drawing point-it can be done
on one’s own time and from home–means that students who can’t
attend a regular class can continue their education. The on-line
model promises schools a potentially limitless market minus
the hassles of a physical campus–overcrowded classrooms,
campus maintenance costs, even the need for a local faculty.
On-line education was only a $2.6-billion market last year,
about 1 percent of the $259-billion American higher-education
market and a fraction of the $700-billion overall market for
education and training. About 700,000 students took on-line
courses last year; that number is expected to triple by 2002.

Enter Wall Street

Proponents hope that much of traditional teaching and training
will eventually shift to distance learning by computer. In
terms of sheer market size, education ranks second only to
health care, accounting for about 10 percent of the gross
domestic product. In many ways, it is a more appealing investment.
True to its stodgy image, higher education has complacently
resisted efforts to improve productivity. “If you’re looking
for models of inefficiency, look no further than traditional
education institutions,” says Bob Tucker, president of InterEd,
an on-line education consulting company. “It’s the last great
industrial sector to emerge from the guild class.” Wall Street
analysts believe that through on-line learning, higher education
finally may be poised to enter the high-tech age. Projections
for the market reach hundreds of billions of dollars.

The attraction of a new revenue stream coupled with the fear
of being left behind is driving colleges and universities
on-line, in droves. Today, 75 percent of two- and four-year
colleges offer some form of on-line education. By next year,
that number will reach 90 percent, with on-line programs competing
for many of the 100 million Americans expected to take part
in continuing education by 2004. What was once a debate over
the viability of Internet learning has become a race to get
on-line. As more schools adopt the gold-rush mentality, questions
of whether sufficient demand exists and concerns of who will
survive in a crowded market have fallen by the wayside.

Wall Street fell in love with on-line education several years
ago. Buoyed by the Internet’s seemingly unstoppable momentum,
E2C, as it was dubbed (short for “education-to-consumer”),
has become one of the hottest sectors in the Internet economy.
“It’s red hot. I’ve never seen anything like this,” says Andy
DiPaolo, a Stanford University dean who oversees the school’s
on-line master’s degree program. It has attracted big-name
investors. Herbert Allen and MicroStrategy CEO Michael Saylor
each have announced plans to finance a major on-line university.
And onetime junk bond king Michael Milken has a company, Knowledge
Universe, that aims to serve them. Elite universities like
Columbia, Stanford, and Northwestern have spun off for-profit
companies to capitalize on the trend. On-line learning companies
like Learnframe and Blackboard.com are quickly building market
share. A recent Forbes article made it official: “[Business-to-consumers]
is yesterday’s story. Education-to-business and education-to-consumers
is tomorrow’s.”

But if recent history is any guide, that’s a terrifying proposition
for educators. In the past two years, Wall Street investors
have moved conspicuously from one red-hot Internet sector
to the next, leaving many companies devastated when investors’
tastes changed or expectations proved exaggerated. On-line
retailers, or business-to-consumer companies, were the first
to experience this. The B2C fallout occurred shortly after
the Christmas shopping season. Business-to-business companies
were next. The NASDAQ’s plunge last spring thinned the B2B
ranks considerably. More recently, corporate training–dubbed
education-to-business, or E2B–has gained currency on Wall
Street, spurred by favorable comments from business gurus
like Peter Drucker and projections of a market potentially
worth hundreds of billions of dollars. On-line higher education
is fast on its heels, with private companies eagerly funding
everything from Ivy League schools to virtual university start-ups.

Wall Street’s interest has ratcheted up expectations for
on-line education and planted the bug among school administrators.
Some of the projections are breathtaking. The for-profit University
of Phoenix, one of the earliest on-line universities, already
reaches 10,000 students and hopes to reach 200,000 in the
next decade. (In a revealing bit of positive reinforcement
from Wall Street, the stock of Phoenix’s parent company, Apollo
Group, Inc., has soared more than 1,500 percent since 1994.)
Lured by numbers like these, many educational institutions–particularly
those struggling with financial woes–see on-line education
as an easy way to cash in.

Ripe for a Fall

Many schools seem blissfully unaware of the risk associated
with moving on-line. On-line education could be the latest
in a string of overhyped Internet concepts in which an excess
of giddy supply overestimates the demand. The venture capitalists
driving the Internet boom are generally thrilled if one in
five investments hits big. What happens to the four in five
schools that don’t pay off receives considerably less attention.
The dirty little secret about on-line education, said one
dean, is that no one is making money. Several high-profile
ventures, like Western Governors University and California
Virtual University, have been notable failures.

Many schools, especially the elite ones, think they’ve discovered
a business model that allows them to leverage their prestige
on the Internet without diluting the value of their degree.
They do this by forming partnerships with private Internet
companies or with on-line universities, who offer the actual
degree. In the past year, Harvard, Duke, and the University
of Pennsylvania have agreed to such an arrangement with the
Silicon Valley courseware design company Pensare, exchanging
course material for revenue and company equity. Other schools,
such as Stanford, Columbia, and the University of Chicago,
have formed similar alliances with companies like UNext.com.
This formula benefits both parties: UNext.com gets the cachet
of a brand-name school. In return elite schools get on-line
exposure with minimal risk and gain a new revenue stream without
diminishing the value of their own degrees. The schools that
signed with UNext.com received an estimated $20 million over
five years. In effect, by licensing their faculty’s work,
elite schools make money the same way they would through a
research patent.

But these partnerships raise a troubling conflict of interest.
“The vendors are the ones putting the pressure on here,” says
Dr. Michael Zastrocky, a technology analyst who follows higher
education. David Noble, a professor at York University in
Toronto and an outspoken critic of on-line learning, has suggested
that dollars, not pedagogical interest, are behind these partnerships.

Simple economics suggests that if the supply of on-line education
outweighs the demand, conditions are ripe for a shake-out.
Most analysts and educators I spoke to acknowledged this (though
none admitted to me that his own school was vulnerable). One
characteristic of the Internet economy–the Web’s ability
to host numerous competitors while rewarding only a few–seems
likely to help this along. “The Internet is all about
disproportionate gain to leaders,” says Michael Moe,
director of research at Merrill Lynch. “Eventually it
is going to turn the higher-education market on its head.
The 100 or so leading universities will do great; the 3,400
others are going to have to figure out a way to make themselves
relevant to the new economy.”

Prestigious brands like Stanford and Duke see profit centers
in on-line education. Second-tier schools like Blakely’s keep
plowing money and resources into a market that’s ripe for
a crash, for fear of falling behind or seeming out of touch
in the digital age.

For schools that traditionally have served part-time working
students–community colleges, extension schools, public commuter
universities–going on-line is a natural extension of their
mission and the only way to keep students. In the 1980s, many
struggling schools discovered that adult and continuing education,
particularly night classes, could boost their dwindling enrollment.
Many of these same students are now jumping into on-line education
for the same reason: flexibility. Yet by diverting conventional
attendees to on-line programs, community universities are
in effect competing with themselves.

Another danger is that many schools don’t understand the
extent of what is required to create, market, and maintain
a viable on-line program that will hold up to competition.
“The investment required to do this well is not congenial
to traditional schools,” says Kay Kohl, executive director
of the University Continuing Education Association, an organization
of more than 400 schools. “But few of them realize this.”

Developing an on-line course is far more complicated than
simply posting a professor’s lecture notes on-line. Software
development companies like Cognitive Arts, which recently
agreed to design 80 courses for Columbia, can spend up to
a full year and $1 million to develop a single course. Schools
that want to compete in Internet education must also offer
an array of student services on-line–registration, academic
advising, a library, financial aid, tutorials, and 24-hour
technical support. But what many don’t understand, adds Kohl,
is that they’ll also need to hire sales and marketing teams
just to attract students to these programs. Marketing has
turned out to be extraordinarily costly. “We’ll have
to spend most of our resources on marketing, not product,”
Blakely predicts. Marketing will become more costly as the
field grows and name recognition becomes ever-more difficult
to establish. This raises the question of whether on-line
learning providers, particularly smaller or unknown ones,
can compete for attention with larger schools. Harvard can
bank on its 364-year tradition of academic excellence; Learnframe
sponsors the rear quarterpanel of a NASCAR-series race car.

More Money, More Competition

For schools the major attraction of on-line education is
the ability to reach a student market that isn’t hemmed in
by geographical boundaries. But this is also likely to be
the downfall for many on-line programs. While traditional
campuses like the New School’s serve a niche market and compete
only with local institutions, their on-line programs will
soon compete with hundreds of similar–possibly better–institutions
from around the world, each capable of serving students as
easily as an on-line school just down the block. Early success,
in other words, doesn’t guarantee continued viability. Who,
after all, is going to attend Virtual U when they can go to
Harvard on-line instead?

Maintaining market share is becoming increasingly costly.
“Many mid- and lower-tier institutions are actually underinvesting
in their on-line programs,” says Jim Ryan, vice president
for outreach and cooperative extension at Penn State University.
“In some cases, they’re providing a very low-quality curriculum.
But we may not see the effects of this for a little while.
Any school can make a dollar from convenience initially, but
that won’t hold up. As the market becomes flooded with more
quality choices, these schools will get hurt.”

The Internet economy favors large schools with extensive
resources and punishes schools that can’t differentiate themselves.
Many of the early on-line contenders fit this second category–state
schools, community colleges, and extension schools that focus
on general or introductory classes. In what could become a
model for other state schools, this fall the University of
Texas will begin pooling the resources of all its campuses
into one on-line program to bolster its strength and avoid
redundancies. “It’s all about scaling to recover your
costs,” says Ryan. But as the best on-line schools up
the ante with better courses, resources, and visibility, the
type of scaling necessary to compete may not be an option
for smaller or struggling schools.

“Right now on-line education has reached its peak on the
‘hype cycle,’ and we’re looking at the downward trend,” says
education analyst Zastrocky. “The rationale two years ago
was ‘everybody’s doing it,’ but that’s starting to change.
Some institutions that projected big numbers are realizing
that demand isn’t that great, that this may not be the salvation
for their budget woes. We’re going to see some profit disillusionment
very soon.”

Academic observers, too, are skeptical of projections based
on a new and largely undeveloped market. “The early entrants
to on-line education like Jones International and Phoenix
are going after the ‘low-hanging fruit’–degrees in education
and management, which translate easily onto the Web,”
says Ryan. But there is no guarantee that teaching Shakespeare
or studying art history will be nearly as Web-friendly or
profitable. Because employers foot the bill for many of the
students who take business courses on-line, schools can get
away with charging hefty tuitions. Minus that subsidy, on-line
education becomes less attractive to schools and the businesses
that finance them. It is therefore no surprise that the humanities
have had much less success making the transition on-line.
Another pitfall of early forecasting is failing to account
for future competitors. “Right now, the Phoenix MBA program
might have 15 competitors in its niche,” Ryan says. “Five
years from now, there will be 100 competitors. Is their name
brand going to hold the market?”

Survival of the Fittest

Many of the mid- and lower-tier institutions will be the
hardest hit because they have few superstars and there is
little to differentiate their curricula. Economics 101 is
likely to be the same at most community colleges. There is
no reason to believe that 500 versions of the same course
could be sustained in a global market. A more likely scenario
is that a single course–say, the software version of Columbia’s
Economics 101–will become the industry standard, and students
who once might have attended the local state school branch
or its on-line equivalent will instead flock to Columbia’s
on-line course, with obvious results for other programs: “You’re
going to get hammered in the marketplace if you try to do
fundamental, basic college courses,” warns Stanford’s
Andy DiPaolo.

Ultimately, schools that are able to find a niche and attract
students from around the world will be the ones that succeed
in on-line education. The best schools have the advantage
of desirability, but there will be room for others who can
fill a niche. Odd as it may seem, in the on-line future, Harvard
may be right alongside Bob Jones University, one meeting the
need for elite on-line education, the other the market for
net-based fundamentalist Christian teaching.

Others likely to prosper include schools with existing distance-learning
infrastructures and strong reputations, such as Penn State
and the University of Maryland. Many western schools, like
the University of Colorado and Colorado State, have a leg
up because state government has traditionally funded distance
learning to rural areas and has a network in place. In the
meantime, programs like the New School’s will struggle to
maintain their position and attract new students.

Once
again, the free market model offers an uneasy coexistence
with a social good–in this case, education. In principle
on-line education is a natural extension of distance learning
and continuing education–services that have been the traditional
mission of nonprofit community institutions offering upward
mobility to working-class students. But as entrepreneurs and
national brands flock to on-line education, it is precisely
these institutions that are at risk of being squeezed out.
Computer-mediated distance learning is a complement and not
a simple substitute for a human teacher, especially for students
who need extra help. On-line education may provide windfalls
to some well-situated schools but divert funds from others.
The most deserving universities may not get the money–in
fact, those that depend most heavily on continuing-education
students are also the most likely to be hurt by overcommitting
to on-line education. In the entrepreneurial race to pluck
ripe fruit, community institutions that serve deprived populations
may find themselves denuded of already thin resources.