The John William Pope Center for Higher Education Policy (logo)
RSS feeds

Commentaries
Disrupting College? Lessons from iTunes

So far, online education has failed to transform higher education. An entrepreneur explains why.

By Burck Smith

Comments

March 22, 2011

Perhaps the most distinctive trait of mankind is to make tools. Usually, a new tool or technology is a small enhancement of a previous technology—like using a better-burning type of wood for a campfire or adding rubber tires to a wooden wheel. But sometimes the new technology disrupts the old technology completely—like discovering fire or the wheel—and overturns an industry or a culture.

Is online education an enhancement or a disruption? Clayton Christensen—author of The Innovator’s Dilemma, which explains disruption theory—has applied his thinking to K-12 and, most recently, to higher education. His new monograph, “Disrupting College,” published by the Center for American Progress, was written with Michael B. Horn, Louis Soares, and Louis Caldera. It suggests that disruption may be near.

Indeed, at first blush, online learning appears to have disruptive characteristics. The Internet and digital content dramatically reduce the cost and increase the convenience of the building blocks of education, content delivery and inter-personal communication. Also, given the popularity of online learning among students, the vast number of colleges that offer courses online, and the lack of distinction between online and face-to-face courses on college transcripts, it appears that colleges and their accreditors implicitly accept online learning as equivalent to face-to-face learning.

Yet the effects of disruption—vastly lower prices for consumers, new course providers, struggling old providers, and disaggregation of products—are not evident in higher education. Prices continue to rise and, with the possible exception of for-profit colleges, nobody new has appeared on the education landscape to deliver college courses. In practice, it seems as though online learning is simply a “feature enhancement” (like adding rubber tires to wooden wheels) that allows colleges to make their offerings attractive to more people.

The major reason for the absence of change is that higher education, like other highly regulated markets, does not behave like the freer markets upon which The Innovator’s Dilemma is based. Consider the personal computer. It was dismissed as a “toy” by the providers of powerful and expensive mainframe computers. In 1977, Ken Olsen, the founder and CEO of Digital Equipment Corporation, the largest provider of mainframe computers, infamously said, “There is no reason for any individual to have a computer in his home.” He never thought that the price and convenience of the personal computer would appeal to a whole new consumer market. These new consumers bought the new products that spurred innovation in the personal computer market. By “voting with their dollars,” previously un-served consumers created the personal computer market, which soon dwarfed the market for mainframes. Today, almost none of the mainframe computer makers are still in business.

Unlike the computer industry, higher education is heavily self-regulated and taxpayer supported. Students cannot easily “vote with their dollars.” Prospective students depend on a range of taxpayer subsidies—state grants to colleges, tax-favored status, students’ grants and subsidized loans—to finance their education. The only way students—and thus the schools they attend—can get access to grants and loans is to enroll in a nationally or regionally accredited institution. Thus, accreditation is the gateway to federal financial aid and the cornerstone of today’s post-secondary regulatory system.

To be accredited, a college must meet a variety of criteria, but most of these deal with a college’s inputs rather than its outcomes. Furthermore, only providers of entire degree programs (rather than individual courses) can be accredited. And even though they are accredited by the same organizations, colleges have complete discretion over their “articulation” policies—the agreements that stipulate the credits that they will honor or deny when transferred from somewhere else. This inherent conflict of interest between the provision of courses and the certification of other’s courses is a powerful tool to keep competition out. In short, by controlling the flow of funding, accreditation insures a number of things: all colleges look reasonably similar to each other, the college can’t easily be “disaggregated” into individual courses, and coursework provided by those outside of accreditation can’t easily be counted as credible.

Lastly, to further tip the scales toward incumbent providers, accreditation bodies are funded by member colleges, and accreditation reviews are conducted by representatives from the colleges themselves. The “iron triangle” of input-focused accreditation, taxpayer subsidies tied to accreditation, and subjective course articulation ensures that almost all of the taxpayer funds set aside for higher education flows to providers that look the same.  And by keeping innovations out, colleges can maintain their pricing structures.

A more accurate characterization of today’s higher education is that individual colleges offer online learning as a “feature,” but use their regulatory clout as a group to resist disruption. This explains why most online courses are priced the same or higher than face-to-face courses despite massive cost efficiencies.

The Example of iTunes

In a freer market, competition would drive the price of online courses down to something approximating their cost to deliver. In time, those willing to price courses more cheaply would outperform those that weren’t, resulting in a new set of winners and losers in the college market. Consider a recent disruptive technology—single-song downloads. iTunes disrupted a music industry that relied on CDs, records, and cassettes by disaggregating music—breaking apart the 10-song album and dropping the price dramatically. The combination of the Internet and advances in computer memory enabled songs to be delivered and stored in an exponentially cheaper manner.

Something like that could happen in higher education, but it hasn’t. Colleges only spend about $100 in direct instructional costs to deliver the most popular college courses like those taught in the first year of college. Yet they are able to generate between $1,000 and $2,000 in revenue from such a course. This revenue comes in the form of state support, tuition, and fees. The “margin” (the difference between the actual cost and the revenue) goes to support the remainder of the college infrastructure—buildings, security, low-enrollment majors, upper-level courses, climbing walls, marketing, profit, and others. Arguably, this is money well spent in a face-to-face environment. However, online students do not benefit from this infrastructure at all.

In theory, online courses should not be saddled with the subsidies necessary to perpetuate a face-to-face infrastructure. In practice, such disaggregation is difficult because, according to the accreditors, providers of individual courses cannot be accredited, and the form of new competitors must be comparable to the form of the existing providers. If such a system were applied to the music industry, only companies that produced and distributed CDs would be allowed to sell and deliver songs electronically. And the fact that colleges have complete discretion to award or deny credit transferred from somewhere else is comparable to declaring non-proprietary file formats ineligible.

For-Profit Colleges

While offering a powerful theory for the so-far unfulfilled disruptive potential for online learning, “Disrupting College” argues that for-profit colleges, by serving new populations like adult learners and by offering online education at scale, are early disruptors in higher education. I disagree. I believe that they are closer to a feature extension of the accreditation system than a disrupter of it. Just like their public and non-profit brethren, for-profit colleges are accredited and rely on the flow of taxpayer funds to finance their businesses. Further, when the impact of state subsidies and differential tax status are accounted for, their price points are comparable with those of public institutions. Thus they have little incentive to cut their prices—and they don’t.

Though for-profit colleges are not disruptors themselves, they do point to a new, and potentially explosive, dynamic in higher education—competition. Historically, many students, especially working adults and those who didn’t have the funds to travel far, had few options for enrollment. Only in the largest metro areas could students choose from three or more colleges. Today, however, the growth of online learning presents students with thousands of enrollment options. The competition for the online student is suddenly very fierce.

So far—because college tuition is usually set by the state or roughly pegged to financial aid limits—colleges have yet to compete directly on price. But they do compete on items that affect the actual price paid, such as the number of credits that can be transferred, the level of scholarships, and other items. Ultimately, this competition will push the effective price of college down, disaggregate and redefine “college,” and allow new providers to enter—like StraighterLine, the company I founded and run.

StraighterLine

Rather than offer full degrees, StraighterLine offers 21 online freshman- and sophomore-level courses and charges a price that is close to the true cost of online delivery. For instance, StraighterLine offers courses for $99 per month plus $39 per course started or, alternatively, $999 for 10 courses for one year (freshman year for less than $1,000). Because we offer online courses, not full degrees, we are not allowed to be accredited—and therefore neither our students nor StraighterLine receives a cent of taxpayer funds. However, as college prices soar, as federal and state support for students drops, and as credits continue to become more portable, students will increasingly look for ways to bring the overall price of college down.

To provide a path to credit and quality assurance, we have entered into articulation agreements with over 20 colleges, all of which will award credit for our courses to students who enroll at one of those colleges. Further, StraighterLine has received recommendations from a variety of third-party course-review agencies, further expanding the universe of colleges awarding credit for our courses. By offering courses, rather than a full degree, at a price that is closer to the cost of delivery, StraighterLine delivers the benefits of technological innovation directly to the student and taxpayer rather than have it captured by the college.

As might be expected, many colleges would prefer not to consider StraighterLine’s courses for equivalent or transfer credit because they are wary of price competition. For those colleges that actively seek transfer students, however, StraighterLine provides significant benefits—free marketing to a group of students who will arrive in college already having completed one or more college courses. Not only is this cheaper and less financially risky for the student, but the college gets a student who is effectively “pre-qualified” and is thus more likely to complete his or her degree.

Solutions To Rising College Prices

Public policymakers concerned about the rising price of college would do well to view higher education as a market that has undergone profound change in the last 15 years. The conditions upon which today’s regulatory structure was created—a world of limited providers of college courses and high fixed costs of provision—have changed. A new regulatory structure that enables greater competition could drive the price of college down, increase the efficiency of college, and expand the group of students who can access it. Ideas to consider are:

  • Set Common Academic Standards. Like open-source operating systems, states should award equal credit for equal courses, no matter where the course is taken. This could be accomplished by setting uniform outcome standards for commonly taken courses and/or creating an independent review mechanism for unaccredited course providers. Also, the evaluation of student work could be done by people other than those who deliver it, particularly for high- enrollment courses that are common across multiple institutions.
  • Accredit the Course—and the Institution.  The coin of the academic realm, particularly among lower division offerings, is the course. These are the building blocks of degrees and they are transferred among colleges. However, the institution is the entity that undergoes an accreditation review. Currently, accreditation provides little or no information about an individual course’s quality.
  • Fund the Course, Not the Institution. Currently, a student’s financial aid is tied to the institution, not to the course. A student who finds a cheaper course at another college must pay for it with out-of-pocket funds (and make sure that it transfers into the original college). Such a policy stifles price competition among colleges.

Competition among providers will result in price competition, which will in turn result in a more productive educational delivery system. However, until the state and federal regulatory and financial aid structure catch up to the educational world enabled by technology, we will continue to talk about technology’s disruptive potential.

Editor's note: You can see a video of Burck Smith discussing StraighterLine.

 


Please observe the Pope Center's commenting policy.


blog comments powered by Disqus

Return to the Commentaries Archive

Copyright © 2014 The John William Pope Center for Higher Education Policy | Site Map

Website design and development by DesignHammer Media Group, LLC. Building Smarter Websites.