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College for $99 a Month

The next generation of online education could be great for students -- and catastrophic for universities.
 
 
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Like millions of other Americans, Barbara Solvig lost her job this year. A fifty-year-old mother of three, Solvig had taken college courses at Northeastern Illinois University years ago, but never earned a degree. Ever since, she had been forced to settle for less money than coworkers with similar jobs who had bachelor’s degrees. So when she was laid off from a human resources position at a Chicago-area hospital in January, she knew the time had come to finally get her own credential. Doing that wasn’t going to be easy, because four-year degrees typically require two luxuries Solvig didn’t have: years of time out of the workforce, and a great deal of money.

Luckily for Solvig, there were new options available. She went online looking for something that fit her wallet and her time horizon, and an ad caught her eye: a company called StraighterLine was offering online courses in subjects like accounting, statistics, and math. This was hardly unusual—hundreds of institutions are online hawking degrees. But one thing about StraighterLine stood out: it offered as many courses as she wanted for a flat rate of $99 a month. “It sounds like a scam,” Solvig thought—she’d run into a lot of shady companies and hard-sell tactics on the Internet. But for $99, why not take a risk?

Solvig threw herself into the work, studying up to eighteen hours a day. And contrary to expectations, the courses turned out to be just what she was looking for. Every morning she would sit down at her kitchen table and log on to a Web site where she could access course materials, read text, watch videos, listen to podcasts, work through problem sets, and take exams. Online study groups were available where she could collaborate with other students via listserv and instant messaging. StraighterLine courses were designed and overseen by professors with PhDs, and she was assigned a course adviser who was available by e-mail. And if Solvig got stuck and needed help, real live tutors were available at any time, day or night, just a mouse click away.

Crucially for Solvig—who needed to get back into the workforce as soon as possible—StraighterLine let students move through courses as quickly or slowly as they chose. Once a course was finished, Solvig could move on to the next one, without paying more. In less than two months, she had finished four complete courses, for less than $200 total. The same courses would have cost her over $2,700 at Northeastern Illinois, $4,200 at Kaplan University, $6,300 at the University of Phoenix, and roughly the gross domestic product of a small Central American nation at an elite private university. They also would have taken two or three times as long to complete.

And if Solvig needed any further proof that her online education was the real deal, she found it when her daughter came home from a local community college one day, complaining about her math course. When Solvig looked at the course materials, she realized that her daughter was using exactly the same learning modules that she was using at StraighterLine, both developed by textbook giant McGraw-Hill. The only difference was that her daughter was paying a lot more for them, and could only take them on the college’s schedule. And while she had a professor, he wasn’t doing much teaching. “He just stands there,” Solvig’s daughter said, while students worked through modules on their own.

StraighterLine is the brainchild of a man named Burck Smith, an Internet entrepreneur bent on altering the DNA of higher education as we have known it for the better part of 500 years. Rather than students being tethered to ivy-covered quads or an anonymous commuter campus, Smith envisions a world where they can seamlessly assemble credits and degrees from multiple online providers, each specializing in certain subjects and—most importantly—fiercely competing on price. Smith himself may be the person who revolutionizes the university, or he may not be. But someone with the means and vision to fundamentally reorder the way students experience and pay for higher education is bound to emerge.

In recent years, Americans have grown accustomed to living amid the smoking wreckage of various once-proud industries—automakers bankrupt, brand-name Wall Street banks in ruins, newspapers dying by the dozen. It’s tempting in such circumstances to take comfort in the seeming permanency of our colleges and universities, in the notion that our world-beating higher education system will reliably produce research and knowledge workers for decades to come. But this is an illusion. Colleges are caught in the same kind of debt-fueled price spiral that just blew up the real estate market. They’re also in the information business in a time when technology is driving down the cost of selling information to record, destabilizing lows.

In combination, these two trends threaten to shake the foundation of the modern university, in much the same way that other seemingly impregnable institutions have been torn apart. In some ways, the upheaval will be a welcome one. Students will benefit enormously from radically lower prices—particularly people like Solvig who lack disposable income and need higher learning to compete in an ever-more treacherous economy. But these huge changes will also seriously threaten the ability of universities to provide all the things beyond teaching on which society depends: science, culture, the transmission of our civilization from one generation to the next.

Whether this transformation is a good or a bad thing is something of a moot point—it’s coming, and sooner than you think.

I met Burck Smith in his office on L Street in downtown Washington, D.C., in the spring of 2008. Thirty-nine years old, with degrees from Williams and Harvard, Smith looks remarkably like what you’d expect an Ivy League alum named “Burck Smith” to look like: Michael-Lewis-minus-ten-years handsome, open-collar shirts and sport coats, the relaxed confidence of privilege. He talked like someone who’d seen the future and was determined to be there when it arrived.

Smith was full of optimism about StraighterLine, which he planned to debut in September of that year. It would be the realization of an idea he’d been dreaming about since he was a graduate student at Harvard’s John F. Kennedy School of Government in the late 1990s. In 1999, after finishing his master’s degree, Smith wrote a “looking back from the future” article, set in a hypothetical 2015. By that time, the higher education landscape would look “dramatically different than it did at the turn of the millennium,” he predicted.

Technological change was the spark that ignited the wildfire of change. Like a hole in a dike, cheap and instantaneous Internet-based content delivery and communication nibbled away at barriers to institutional competition… . Suddenly, a student seeking an introductory statistics course could choose from hundreds of online courses from anywhere in the world… . Feeling the effects of low-cost competition, site-based education providers started cutting course costs and prices to attract students.

That same year, Smith took the first steps toward achieving this vision, launching an Internet startup company called Smarthinking, which he cofounded with Christopher Gergen, the son of well-known Washington insider David Gergen. Smarthinking provided on-demand, one-on-one tutoring in a range of introductory college courses, twenty-four hours a day, seven days a week. The tutors, people with bachelor’s and master’s degrees in their fields, communicated with students via computer, using an onscreen, interactive “whiteboard.” Math students typed in questions, graphed equations, and interacted with their tutors in real time from their own PCs. Writing tutors gave feedback on essays within twenty-four hours.

Smarthinking survived the dot-com crash because, unlike most of their entrepreneurial peers, Smith and Gergen had actually come up with a working business model. Their clients were colleges and universities which, looking to cut costs, outsourced tutoring in the same way companies farm out IT work, back-office support, and customer service to call centers overseas. Smith and Gergen knew that tutoring could take advantage of the same powerful economies of scale that made call centers profitable. It would be cost prohibitive for a single college to provide on-demand 24/7 tutoring for a few sections of, say, organic chemistry—the college would have to hire teams of full-time workers to work in eight-hour shifts, and much of their time would be idle. Smarthinking pooled the demand from hundreds of colleges and tens of thousands of students while hiring credentialed tutors in places like India and the Philippines. As long as “on demand” was defined as a high likelihood of being served within a few minutes, economies of scale and cheap foreign labor could be combined to drive per-student service costs to unheard-of lows.

As a result, colleges could buy multihour blocks of 24/7 tutoring in subjects like biology and calculus from Smarthinking for much less than it would have cost them to provide that service on their own. By 2008, the company had 386 clients, ranging from big research universities to community colleges and the U.S. Army. Major publishers like Pearson and Houghton Mifflin packaged hours of Smarthinking tutoring with college textbooks and instructional software.

But Smarthinking still fell short of Smith’s ambitions. He had built a particularly efficient cog in the mammoth, long-established higher education machine—but he hadn’t yet transformed it.

To be sure, much had changed in higher education. Technology had indeed altered how people went to college—that much Smith had gotten right back in 1999. Broadband access had become ubiquitous, and textbook companies had converted their standard introductory course content into inexpensive, Web-friendly form. While college students in 1999 were still making the transition to a Web-dominated world, 2008’s undergraduates had never known anything else. Both traditional colleges and for-profit companies like Kaplan and the University of Phoenix were diving headfirst into the online market, and students—especially people with day jobs like Barbara Solvig—were signing up in record numbers. Over four million college students—one-fifth of the total nationwide—took at least one online course last year.

But the other shoe had yet to drop. Even as the cost of educating students fell, tuition rose at nearly three times the rate of inflation. Web-based courses weren’t providing the promised price competition—in fact, many traditional universities were charging extra for online classes, tacking a “technology fee” onto their standard (and rising) rates. Rather than trying to overturn the status quo, big, publicly traded companies like Phoenix were profiting from it by cutting costs, charging rates similar to those at traditional universities, and pocketing the difference.

This, Smith explained, was where StraighterLine came in. The cost of storing and communicating information over the Internet had fallen to almost nothing. Electronic course content in standard introductory classes had become a low-cost commodity. The only expensive thing left in higher education was the labor, the price of hiring a smart, knowledgeable person to help students when only a person would do. And the unique Smarthinking call- center model made that much cheaper, too. By putting these things together, Smith could offer introductory college courses à la carte, at a price that seemed to be missing a digit or two, or three: $99 per month, by subscription. Economics tells us that prices fall to marginal cost in the long run. Burck Smith simply decided to get there first.

To anyone who has watched the recent transformation of other information-based industries, the implications of all this are glaringly clear. Colleges charge students exorbitant sums partly because they can, but partly because they have to. Traditional universities are complex and expensive, providing a range of services from scientific research and graduate training to mass entertainment via loosely affiliated professional sports franchises. To fund these things, universities tap numerous streams of revenue: tuition, government funding, research grants, alumni and charitable donations. But the biggest cash cow is lower-division undergraduate education. Because introductory courses are cheap to offer, they’re enormously profitable. The math is simple: Add standard tuition rates and any government subsidies, and multiply that by several hundred freshmen in a big lecture hall. Subtract the cost of paying a beleaguered adjunct lecturer or graduate student to teach the course. There’s a lot left over. That money is used to subsidize everything else.

But this arrangement, however beneficial to society as a whole, is not a particularly good deal for the freshman gutting through an excruciating fifty minutes in the back of a lecture hall. Given the choice between paying many thousands of dollars to a traditional university for the lecture and paying a few hundred to a company like StraighterLine for a service that is more convenient and responsive to their needs, a lot of students are likely to opt for the latter—and the university will have thousands of dollars less to pay for libraries, basketball teams, classical Chinese poetry experts, and everything else.

What happens when the number of students making that choice reaches a critical mass? Consider the fate of the newspaper industry over the last five years. Like universities, newspapers relied on financial cross-subsidization to stay afloat, using fat profits from local advertising and classifieds to prop up money-losing news bureaus. This worked perfectly well until two things happened: the Internet made opinion and news content from around the world available for nothing, and the free online classified clearinghouse Craigslist obliterated newspapers’ bedrock revenue source, the want ads. Suddenly, people didn’t need to buy a newspaper to read news, and the papers’ ability to subsidize expensive reporting with ad revenue was crippled. The result: plummeting newspaper profits leading to a tidal wave of layoffs and bankruptcies, and the shuttering of bureaus in Washington and abroad.

Like Craigslist, StraighterLine threatens the most profitable piece of a conglomerate business: freshman lectures, higher education’s equivalent of the classified section. If enough students defect to companies like StraighterLine, the higher education industry faces the unbundling of the business model on which the current system is built. The consequences will be profound. Ivy League and other elite institutions will be relatively unaffected, because they’re selling a product that’s always scarce and never cheap: prestige. Small liberal arts colleges will also endure, because the traditional model—teachers and students learning together in a four-year idyll—is still the best, and some people will always be willing and able to pay for it.

But that terrifically expensive model is not what most of today’s college students are getting. Instead, they tend to enroll in relatively anonymous two- or four-year public institutions and major in a job-oriented field like business, teaching, nursing, or engineering. They all take the same introductory courses: statistics, accounting, Econ 101. Teaching in those courses is often poor—adjunct-staffed lecture halls can be educational dead zones—but until recently students didn’t have any other choice. Regional public universities and nonelite private colleges are most at risk from the likes of StraighterLine. They could go the way of the local newspaper, fatally shackled to geography, conglomeration, and an expensive labor structure, too dependent on revenues that vanish and never return.

By itself, the loss of profitable freshman courses would be devastating. And in the long run, Web-based higher education may not stop there. Companies like StraighterLine have the hallmarks of what Harvard Business School Professor Clayton Christensen and entrepreneur Michael Horn describe as “disruptive innovation.” Such services tend to start small and cheap, targeting a sector of the market that established players don’t care much about—like tutoring in introductory courses. “This allows them to take root in simple undemanding applications,” Christensen and Horn write. “Little by little, the disruption predictably improves… And at some point, disruptive innovations become good enough to handle more complicated problems and take over, and the once-leading companies with old-line products go out of business.”

The pattern has played out in industries ranging from transistors to compact cars. When Japanese companies like Honda first began selling small, fuel-efficient cars in America, the vehicles were markedly inferior to the chrome- festooned behemoths rolling off the assembly lines of invincible Detroit giants like Ford and General Motors. But they were also inexpensive—and, when gas prices skyrocketed in the 1970s, suddenly more attractive as well. Japanese cars gradually improved while American companies lapsed into complacency, and the rest is history.

Econ 101 for $99 is online, today. 201 and 301 will come. It’s no surprise, then, that as soon as Burck Smith tried to buck the system, the system began to push back.

 

The biggest obstacle Smith faced in launching StraighterLine was a process called accreditation. Over time, colleges and universities have built sturdy walls and deep moats around their academic city-states. Students will only pay for courses that lead to college credits and universally recognized degrees. Credits and degrees can only be granted by—and students paying for college with federal grants and loans can only attend—institutions that are officially recognized by federally approved accreditors. And the most prestigious accreditors will only recognize institutions: organizations with academic departments, highly credentialed faculty, bureaucrats, libraries, and all the other pricey accoutrements of the modern university. These things make higher education more expensive, and they’re not necessary if all you want to do is offer standard introductory courses online. To compete, Smith needed StraighterLine courses to be as inexpensive as they could be.

So he devised a clever way under the accreditation wall, brokering deals whereby a handful of accredited traditional and for-profit institutions agreed to become “partner colleges” that would allow students to transfer in StraighterLine courses for credit. After the credits were accepted—laundered, a cynic might say—students could theoretically transfer them anywhere else in the higher education system. The partner colleges stood to benefit from the deal as well. They all had their own online endeavors, but those required hefty marketing investments to keep new students enrolling. The schools reasoned that the StraighterLine relationship would introduce them to potential new students, with some StraighterLine customers sticking around to take their more advanced (and expensive) courses.

One of StraighterLine’s original partner colleges was Fort Hays State University, just off I-70 in Hays, Kansas. Smith had met the school’s provost, Larry Gould, at a higher education technology conference back in 2001. Soon after, Fort Hays became one of the first clients for Smarthinking’s tutoring services. When Smith approached Gould in late 2007 with the StraighterLine concept, the provost paid four faculty members to review StraighterLine’s curricula and course materials—a level of scrutiny, he notes, that far exceeds that given to most credits students transfer in. “Right now students can bring in up to sixty credits from community colleges,” Gould told me, “even though we often don’t know who taught those courses or even what the syllabi look like. The StraighterLine people we know, and the course materials are there to see.”

But as word of the StraighterLine deal spread around the Fort Hays campus, professors and students began to protest. By early 2009 a Facebook group called “FHSU students against Straighter Line” had sprung up, attracting more than 150 members. “Larry Gould,” they charged, “has taken steps that will inevitably cheapen the quality and value of a degree from Fort Hays State University by placing our university in bed with a private corporation… . [T]he end result of this move is that FHSU would have a viable reason to eliminate faculty positions in favor of utilizing services like Straighter Line.” The English Department announced its displeasure while a well-known academics’ blog warned of the encroaching “media-software–publishing–E-learning-complex.” Gould was denounced in the Fort Hays student newspaper.

Soon the story was picked up by the national higher education trade publication Inside Higher Ed, which caught the attention of the accreditor that oversees Fort Hays. The accreditor began asking questions, not just of Fort Hays but also of some of the other partner colleges, including for-profit Grand Canyon University and Ellis University. This prompted more news coverage and Internet chatter; one blog led with the headline, “Something Crooked About StraighterLine?”

Within months, Grand Canyon and Ellis had ended their involvement with the company. The controversy eventually took a toll on Fort Hays as well; in June the university informed StraighterLine that it was considering bringing the relationship to an end. Smith had to recruit several new partner colleges to stay afloat.

When I spoke with Smith again in June, the whole experience had left him frustrated. “A couple of posts from grad students who’ve never even seen or taken one of the courses pop up on Facebook,” he said, “and North Central [the accreditor] launches an investigation. Meanwhile, there are horror stories about bad teaching at regular universities on RateMyProfessors.com”—a popular student feedback site—“and they don’t give it a second look.” Since traditional colleges provide virtually no public information about how much students learn in their introductory courses and won’t even agree on a common standard for how such results could be measured, there was no way for Smith to prove the quality of his courses in the face of accusations. And Smith’s Facebook critics weren’t looking all that closely at their own institution; even as they warned, “If we don’t fight against Straighter Line, it will be the death of the awesome, face-to-face education that FHSU has provided students for decades,” the university was itself teaching thousands of students online through the Fort Hays “Virtual College,” and using Smarthinking tutors to do it.

Meanwhile, Smarthinking’s executive management team (the company is privately held) began questioning why they were spending so much time and effort beating against the accreditation wall. StraighterLine enrolled a few hundred students in its first year of operation, accounting for only a marginal piece of Smarthinking revenues. The company’s core business was serving colleges and universities, they reasoned, not competing with them. By the end of July, Smith had stepped down as company president and was finalizing negotiations to take over StraighterLine as a separate business.

Smith’s struggle to establish StraighterLine suggests that higher education still has some time before the Internet bomb explodes in its basement. The fuse was only a couple of years long for the music and travel industries; for newspapers it was ten. Colleges may have another decade or two, particularly given their regulatory protections. Imagine if Honda, in order to compete in the American market, had been required by federal law to adopt the preestablished labor practices, management structure, dealer network, and vehicle portfolio of General Motors. Imagine further that Honda could only sell cars through GM dealers. Those are essentially the terms that accreditation forces on potential disruptive innovators in higher education today.

There’s a psychological barrier as well. Most people are so invested in the idea of education-by-institution that it’s hard to imagine another way. There’s also a sense that for-profit schools are a little sleazy (and some of them are). Because Web-based higher education is still relatively new, and the market lacks information that allows students to compare introductory courses at one institution to another, consumers tend to see all online courses in the same bad light. “The public isn’t good at discriminating,” says Larry Gould. “They read ‘online course’ and they think ‘low quality,’ even when it’s not true.”

But neither the regulatory nor the psychological obstacles match the evolving new reality. Consumers will become more sophisticated, not less. The accreditation wall will crumble, as most artificial barriers do. All it takes is for one generation of college students to see online courses as no more or less legitimate than any other—and a whole lot cheaper in the bargain—for the consensus of consumer taste to rapidly change. The odds of this happening quickly are greatly enhanced by the endless spiral of steep annual tuition hikes, which are forcing more students to go deep into debt to pay for college while driving low-income students out altogether. If Burck Smith doesn’t bring extremely cheap college courses to the masses, somebody else will.

Which means the day is coming—sooner than many people think—when a great deal of money is going to abruptly melt out of the higher education system, just as it has in scores of other industries that traffic in information that is now far cheaper and more easily accessible than it has ever been before. Much of that money will end up in the pockets of students in the form of lower prices, a boon and a necessity in a time when higher education is the key to prosperity. Colleges will specialize where they have comparative advantage, rather than trying to be all things to all people. A lot of silly, too-expensive things—vainglorious building projects, money-sucking sports programs, tenured professors who contribute little in the way of teaching or research—will fade from memory, and won’t be missed.

But other parts of those institutions will be threatened too—vital parts that support local communities and legitimate scholarship, that make the world a more enlightened, richer place to live. Just as the world needs the foreign bureaus that newspapers are rapidly shutting down, it needs quirky small university presses, Mughal textile historians, and people who are paid to think deep, economically unproductive thoughts. Rather than hiding within the conglomerate, each unbundled part of the university will have to find new ways to stand alone. There is an unstable, treacherous future ahead for institutions that have been comfortable for a long time. Like it or not, that’s the higher education world to come.

Kevin Carey is the policy director of Education Sector, an independent think tank in Washington, D.C.
 
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