The Economist

The EconomistJuly 21 st 2018 Business 51

“T

HERE’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.

“Youfight and youtrain to fight. Hopefully

most ofthe time you’re training.” The navy

got Mr Harms hooked on continuous edu-

cation and in his 60 s he felt the need for a

top-up so he took the online MBA pro-

gramme 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 en-

richingportion with class projects.”

When the web started to shake up high-

er education a decade or more ago it was

widely expected that the Massive Open

Online Courses (MOOC s) it spawned

would disrupt universities in the same

way that digital media undermined news-

papers and music firms. But that assump-

tion rested on a misunderstandingofwhat

students are paying for. They are not buy-

ing 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 bycontrast is put-

ting incumbents online. An industry of

“online programme managers” ( OPMs)

who also recruit students has sprung up.

With their help pioneers such as Arizona

State Universityhave 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 pro-

fessional degree or executive education.

The wage premiums for a master’s degree

and a professional degree over a bache-

lor’s are 19 % and 57 % respectively. Techno-

logical change also means that knowledge

acquired years ago may be out of date. “I

wanted to build the skills necessary for the

next phase ofmycareer to remain relevant

to my industry and my clients” says Ann

Cleland a partner in Horne an accountan-

cyfirm who istakingthe 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 cam-

pus—the UoI has 99 MBAstudents on cam-

pus and 1  750 more enrolled online. UoI’s

MBA at $22000 is unusually cheap: most

online degrees are at least as costly as and

often more expensive than on-campus

programmes—usually in the $50000-

100  000 range.

Around a third ofgraduate education in

America is now online according to Rich-

ard Garrett of Eduventures a consultancy.

Many universities take a do-it-yourself ap-

proach but the better-known ones tend to

go into partnership with the OPMs. 2 U 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 pro-

viderof MOOC s). Coursera joined up with

UoI to create its online MBAprogramme.

Ivorypower

Investorsreckon thislookslike a good busi-

ness opportunity. 2 U has a market capital-

isation of $5bn despite losses of $ 29 m on

revenues of $ 287 m in 2017. Putting a pro-

gramme online involves large upfront

costs but the ten-year contracts that 2 U

signs—it takes almost two-thirds of the rev-

enue from tuition fees—are extremely at-

tractive over the long term. Revenues have

risen by over 30 % annually for the past

three years and according to Chip Paucek

2 U’s chief executive they will continue to

do so forthe foreseeable future.

Further opportunities beckon outside

America. In the autumn of 2019 University

College London will launch an online

MBAin partnership with 2 U and London’s

Imperial College will offeran online global

publichealth masterswith 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 2 U and left it in 2012  explains that

he came to feel thatthe 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 $ 10 m- 15 m

when he started but the revenue split has

hardly shifted. That won’t last says Mr

Katzman who has founded a budget op-

tion—Noodle Partners which offers deals

based on a fee as well as a revenue split.

“As students understand they’re payingfor

Wall Street profits as faculty understand

that their work is just fuelling the next bil-

lion dollars ofmarket cap I will end up eat-

ingthe OPMs’ lunch” he says.

Such criticisms chime with broad con-

cerns about for-profit education but 2 U’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 2 U’s numbers will en-

courage competition. OPMs are proliferat-

ing just as student-recruitment costs are

rising. “Student-acquisition costs have

been goingup” says Iwan Streichenberger

president of Pearson Online Learning Ser-

vices “because of the premiums that Goo-

gle and Facebook are charging.” Along

with LinkedIn these are the main market-

ing channels. Over time universities will

surely try to take a larger slice of revenues

themselves. It doesn’t take a master’s de-

gree to workout what these developments

will do to the OPMs’ margins. 7

Higher education and the internet

Learning difficulties

Athird ofAmerica’s graduate degrees are nowtaken online. Butthe bulkofthe

spoils go not to famous universities but to obscure firms