The next generation of online education could be great for students—and catastrophic for universities.
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.”
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