Universities are betting big bucks on Internet learning. But there aren't enough customers to go around. What happens to schools caught in the shakeout?
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 online. Forbes magazine once ranked its online 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 online students. Blakely is encouraging his professors to put every class online. 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 online class. Yet despite all this, the New School's online 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 online 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 online education," Blakely warns. "Those schools that aren't ready will be left behind." In the hype over online education, this is the side that often gets overlooked.
Online 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 online 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.
Online 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 online 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. Online 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 online 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 online education consulting company. "It's the last great industrial sector to emerge from the guild class." Wall Street analysts believe that through online 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 online, in droves. Today, 75 percent of two- and four-year colleges offer some form of online education. By next year, that number will reach 90 percent, with online 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 online. 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 online 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 online 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 online 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. Online 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. Online 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. Online 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 online education and planted the bug among school administrators. Some of the projections are breathtaking. The for-profit University of Phoenix, one of the earliest online 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 online education as an easy way to cash in.
RIPE FOR A FALL
Many schools seem blissfully unaware of the risk associated with moving online. Online 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 online 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 online 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 online 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 online learning, has suggested that dollars, not pedagogical interest, are behind these partnerships.
Simple economics suggests that if the supply of online education outweighs the demand, conditions are ripe for a shakeout. 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 online 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 online 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 online education for the same reason: flexibility. Yet by diverting conventional attendees to online 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 online 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 online course is far more complicated than simply posting a professor's lecture notes online. 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 online--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 online 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 online 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 online programs. While traditional campuses like the New School's serve a niche market and compete only with local institutions, their online programs will soon compete with hundreds of similar--possibly better--institutions from around the world, each capable of serving students as easily as an online 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 online instead?
Maintaining market share is becoming increasingly costly. "Many mid- and lower-tier institutions are actually underinvesting in their online 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 online 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 online program to bolster its strength and avoid redundancies. "It's all about scaling to recover your costs," says Ryan. But as the best online 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 online 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 online 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 online, schools can get away with charging hefty tuitions. Minus that subsidy, online 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 online. 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 online equivalent will instead flock to Columbia's online 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 online 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 online future, Harvard may be right alongside Bob Jones University, one meeting the need for elite online 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 co-existence with a social good--in this case, education. In principle online 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 online 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. Online 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 online education. In the entrepreneurial race to pluck ripe fruit, community institutions that serve deprived populations may find themselves denuded of already thin resources.
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Last fall Harvard Law School professor Arthur Miller taped a series of 11 lectures and sold them to the Concord University School of Law, a virtual university founded by Kaplan Inc., the test-preparation company. Miller was stunned when Harvard administrators told him he had violated university policy by providing course material to another school without permission. He argued that he had done nothing wrong since he hadn't technically "taught" Concord students. Furthermore, he claimed, videotaping lectures was no different than publishing a textbook. As a Harvard professor, Miller had without conflict been the legal editor of Good Morning America, hosted his own public television show, sold taped lectures, and written textbooks, all for profit. But Harvard drew the line at Internet teaching. The university has since rewritten its guidelines to prevent others from following Miller online. Many professors, including Miller, were outraged over their sudden limitation. "This is a radical change in policy that restricts our academic freedom," Miller told The Harvard Crimson.
Miller's case is the most visible example of how the issue of online learning is pitting professors against universities. Schools like Harvard fear that their faculty will design Internet courseware or provide content that might compete with the institution's own online interests. But online learning raises concerns beyond those of academic freedom: Will Web courses count as teaching credits? How will they affect tenure? As universities move toward profit-driven Web enterprises, who will own the intellectual property rights to online courses? And finally, is the trend toward online education really in professors' best interests?
While professors are generally understood to own the copyrights to their lectures and textbooks, many universities hesitate to extend that right to online work. In some cases, they are simply claiming it as their own. The National Education Association (NEA) has posted new guidelines for contract negotiations that address professors' Internet copyright ownership. Christine Maitland, the NEA's higher-education coordinator, says, "We're advising professors not to sign away intellectual property as a condition of employment." But many--especially part-timers and those without union backing--will have difficulty bargaining for their online rights.
For every Arthur Miller jousting with Harvard over outside income, there are hundreds of lowly adjuncts worrying more about their very survival, and state universities worrying about deep budget cuts. Many administrators view online education as a cost-effective way to justify cuts in public educational funding. In 1998 Washington Governor Gary Locke suggested that through online education universities might wean themselves off public funding entirely and replace many professors with Internet classes or CD-ROMs. Nine hundred faculty members at the University of Washington responded with a letter of protest.
"There is some concern that administrations are capitulating to this business interest in online education and making up for budget shortfalls by tapping into the lifelong learning market, essentially turning themselves into commercial institutions instead of educational institutions," says Gary Chapman, who directs a research project on computers and education at the University of Texas. At the University of California, he adds, the faculty association threatened to sue when it discovered that the school might have sold access to the faculty's work to a for-profit company outside the institution to develop online courses.
Governor Locke's suggestion that computers replace professors may seem outlandish, but online education is already making multiple professors redundant. Most virtual universities hire part-time adjuncts or "teaching associates" rather than full-time professors. The University of Maryland University College (UMUC), the state school's online branch, offers a sobering glimpse of the online future. Although UMUC is the largest online school in the country, only about 20 percent of its faculty are full time. Even full-timers produce--but do not own--the school's hundreds of online courses. No single faculty member designs a course, nor do those who design courses necessarily teach them. Instead, that duty generally falls to adjuncts, who are largely interchangeable. This system gives UMUC maximum power and copyright control over intellectual property. "We wouldn't do it any other way," says UMUC's President Gerald Heeger. "We don't want to lose the course if a professor isn't available to teach it or moves on to another university."
This idea of wresting academic control from the faculty is at the heart of many business models. "The senior decision makers at universities realize they have to have a structure that is managed rather than governed," explains Bob Tucker, president of the online education consultant firm InterEd. "The question that schools will need to answer to compete online is. Can we make decisions in business time rather than university time?" Tucker convinced Arizona State University to build its online program outside the reach of the faculty so it can be run like a business and avoid "the enormous bureaucratic red tape" that faculty participation necessarily entails.
The tech-driven business culture clashes with the traditional liberal arts ideal in other ways. The consulting firm Coopers & Lybrand, for instance, created a stir when it issued a report claiming "instructional software could easily substitute for campus-based instruction." Furthermore, technology companies have the reputation of being anti-union and anti-tenure. "Tech companies feel that there is an economic rationale for transforming these institutions," says Chapman. "They believe that the university system is antiquated, that it's a bottleneck for the high-tech work force. They would like it to be remodeled in the form of a private high-tech company. In a lot of ways, it is a culture war."
These conflicts could pull universities apart, intensifying the trend toward a two-class professoriate and making the full on-campus experience a remnant for a small student elite. The very function of education is also in play. Many technology companies see an economic rationale for transforming institutions into job-training programs that favor skills over degrees. While a few academic superstars may ride this wave, the traditional model of a university community is at risk.