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Published: January 1, 2000

 
 

E-Education Is the New New Thing

Cisco C.E.O. John Chambers calls it "the next big killer application." At stake: a $740 billion industry.

In the 17 years since the publication of "A Nation at Risk" (National Commission on Excellence in Education, 1983), Americans have grown steadily more anxious about the quality of their public schools. Business leaders have complained that high school graduates are often unable to perform even rudimentary tasks, and parents have clamored in ever greater numbers for reform - longer school days, stricter disciplinary standards and a greater emphasis on traditional skills such as reading, writing and mathematics.

Fortunately, as the late economist Herbert Stein famously observed, things that can't go on forever tend not to. And that is just about to be proven again with education in America.

In the last few years, hundreds of companies have sprung up to compete for their piece of the $740 billion Americans spend annually on education and training. Some companies are using Internet technology to overhaul the way schools procure books and manage their financial records. Others are trying to build nationwide chains of private, for-profit branded schools. Still others are niche players, focusing on some small segment of the education industry (such as I.T. training), or devising new applications they hope to see embedded in the technologies of other companies' products (such as adaptive learning technologies).

But the most ambitious of these companies are the ones that want to create via the Internet a learning environment that might actually dispense with the teacher - at least in the conventional, classroom sense of the word. The education industry provides a perfect example of how the Internet is transforming the United States economy by enabling the birth and development of new companies that could never exist without it.

No one yet envisions a world where children or young adults are effectively taught by intelligent machines, but it is easy to imagine how computers, audiovisual technology and the Internet will reshape the classroom experience. Think of how cellular phone technology revolutionized telecommunications access in many third world countries, eliminating the financial burden of extensive investments in wiring, stations, etc. In much the same way, Web-based content and technology are destroying the barriers - fiscal and structural - to the reform of education and training at every level: K-12, college, post-graduate and professional. Some of this reform will entail futuristic, gee-whiz technology still on the drawing board. And much of it is awaiting a further drop in the cost of computing power and an expansion of available bandwidth. But a big part of that future learning technology is already available in the most advanced tools and applications used to train I.T. professionals.

There is certainly ample financial incentive for these developments. Eduventures.com L.L.C., a Boston-based consulting firm, puts total 1998 revenue for the for-profit education industry at roughly $82 billion ($24 billion for products, $30 billion for services and $28 billion for schools of various types). Even so, Merrill Lynch & Company estimates that whereas education and training accounts for perhaps 10 percent of the nation's G.D.P. ($700 billion-plus), the stock market value of education industry firms is just $16 billion. That figure is less than two-tenths of 1 percent of the $10 trillion domestic stock market. Health care, by contrast, accounts for roughly 15 percent of both the stock market and the G.D.P. - a fact that education industry entrepreneurs seldom fail to point out.

As John T. Chambers, C.E.O. of Cisco Systems Inc., a network hardware manufacturer, recently observed, "the next big killer application for the Internet is going to be education. Education over the Internet is going to be so big it is going to make e-mail usage look like a rounding error."

INTERNET PORTALS

Several education companies now use Internet portals to sell conventional products and services - desks and chairs, office and classroom supplies, even payroll services. Cash-strapped schools with relatively fixed resources are increasingly outsourcing non-educational services in order to retain dollars for the classroom. By using the Web to put the product squarely before the customer, companies are able to compete nationally in an area that was previously balkanized along local or regional lines. A school shopping for desks in California was once limited to four or five familiar furniture makers; soon, it will be able to choose among a vast network of suppliers across the country.

A typical example is the Epylon.com Corporation, which is launching a "business-to-education" Web site to link buyers and sellers of products and services in the K-12 market (textbooks, school furniture, food, etc.). The company will make its money by charging the seller a transaction fee ranging from 2 percent to 15 percent, depending on the size of the purchase. Epylon.com, which has financial backing from the Intel Corporation, is beta-testing its portal with 25 California school districts, and hopes to extend its reach to the rest of the state's school districts - and perhaps others nationwide - within a year. If that works, the company hopes to use the same approach to break into the market for state and local government purchasing.

A more modest example of how education is being transformed by the Internet is Ecampus.com Inc., a discount bookstore for college texts launched by former Kentucky governor Wallace Wilkinson, who had already founded a successful chain of bookstores. If Ecampus.com can gain access to lists of required books at a sufficient number of colleges - a very big "if" - it could provide ferocious competition for conventional college bookstores, 70 percent of which are owned by the schools themselves.

Internet technology is also being used to market educational content produced by schools, individual instructors and private firms. One company - ZapMe Corporation - actually provides schools with free computers and high-speed Internet access in exchange for a school's agreement to place its students before an ad-laden portal for a certain number of hours each day. ZapMe uses its own network and interface to provide access to thousands of pre-selected, indexed educational sites, applications and services for students aged 13 to 19. The arrangement enables participating schools to increase their educational offerings at a relatively low cost, while ZapMe collects a fee for delivering a generation of young consumers to its advertisers.

The lack of public controversy over this arrangement shows how much has changed in the decade since Christopher Whittle proposed bringing his "free" television network, Channel One, into the nation's public schools. Then, the newspapers were filled with indignant complaints over the fact that Channel One's television programming would include a few minutes of commercials in addition to its news coverage and other educational content. Today, with school cafeterias plastered with Pizza Hut logos and children's clothes covered with designers' insignia, a few hyper-linked ads at the edge of a computer screen seem oddly inoffensive.

ONLINE LEARNING

But cybereducation portal companies are not just profiting passively on spreads and fees. Click2learn.com Inc., in which both Intel and Microsoft Corporation co-founder Paul Allen are major investors, is designing Web-delivered courses for corporate and individual customers on behalf of New York University's for-profit spin-off, NYUonline Inc.

Mr. Allen has also made a large investment in Mr. Whittle's for-profit public-school management company, Edison Schools, which returned the favor by investing in Mr. Allen's Apex Online Learning Inc., a company that specializes in computerized versions of the Advanced Placement (A.P.) courses high school seniors take to gain college credits. Apex's "virtual classes" consist of up to 25 students from various parts of the country and an online teacher who interacts with students via e-mail and telephone. Apex also provides other students with free access to study materials, whether they are Apex customers or not. The benefit for Edison: This sort of technology will allow it to offer a far broader range of instructor-led A.P. courses than its schools could otherwise afford. The benefit for Apex: A partnership with Edison Schools gives it access to Edison staff and content, as well as the cachet of the Edison brand name.

One of the largest online education companies is Knowledge Universe (K.U.), the privately held conglomerate assembled by former junk-bond czar Michael R. Milken, his brother Lowell Milken and Lawrence J. Ellison, founder and C.E.O. of the Oracle Corporation. One of K.U.'s first acquisitions was MindQ Publishing Inc., the leading developer of interactive, Java-based software for adult I.T. training. MindQ's teaching technology has all the bells and whistles of cutting-edge multimedia - audio, scrolling text, graphics, animation and video clips. Its interactivity allows the user to expand individual lessons, and customized self-assessments are built into the lesson plans. MindQ also creates content for other K.U. subsidiaries, with an emphasis on multimedia software to advance the quality of Internet-based education and testing - fields in which K.U. is making large investments. And K.U. has spawned Teacher Universe Inc., a subsidiary that provides I.T. training to classroom teachers who will presumably use K.U. software in their classrooms.

K.U. has also taken a 32-percent stake in Nobel Learning Communities Inc., a private-school operator, with 139 for-profit schools in 13 states - preschools, elementary and middle schools, corporate-sponsored schools and special schools for children with learning disabilities. K.U. can be expected to use the Nobel schools as a testing ground for its products and services, which would include Internet-based technologies. One can even envision K.U. moving Nobel's focus away from cookie-cutter schools in freshly built suburban sudivisions and toward technology-intensive, corporate-based charter schools - similar to the one recently established by Ryder System Inc. at its Miami headquarters. The market for work-site charter schools is potentially even more lucrative than that for suburban schools (private or charter) - particularly if they can be sold to the nation's high-tech community. Imagine how much easier it would be to lure talented professionals to remote, low-cost areas if employers could guarantee a first-rate school for their children. Florida expects 50 companies to follow Ryder's lead within the next year.

Although the federal government claims that 99 percent of all public K-12 classrooms will be wired for the Internet by the year 2000, the reality is that most schools in urban and poor rural areas cannot provide enough computers or instructors to make good use of that access. According to a survey conducted by the U.S. Department of Education, only one teacher in five feels qualified to use computer-based learning technologies in the classroom. And those teachers who are technologically competent are heavily concentrated in affluent suburban school districts. In an effort to bridge the gap between cyber-haves and -have-nots, state and federal agencies, together with businesses like Intel, Microsoft, and Hewlett-Packard, are spending millions to accelerate teacher training. But however effective those efforts might someday be, in the short run, poor urban and rural school systems are certain to fall farther and farther behind their affluent public and private counterparts.

HIGHER EDUCATION

According to a recent study by the International Data Corporation, the number of college students enrolled in distance-learning courses will triple by 2002 - reaching 2.2 million, or 15 percent of all higher education students. I.D.C. also projects that by 2002 the proportion of four-year colleges offering some form of distance-learning program will rise from 62 percent to 84 percent; at community colleges, the proportion will rise from 58 percent to 85 percent. (See Exhibits I and II.)

Knowledge Universe has dipped its toe into this growing market through an investment in UNext.com, which has established partnerships with universities like Stanford, Chicago, Columbia, Carnegie Mellon and the London School of Economics to develop course material for a "global virtual university." The goal is to enable elite universities, most of which are in the United States or Western Europe, to distribute their services worldwide. In 1998 alone, foreign students attending American universities, for example, contributed $9 billion to the United States G.D.P. Just imagine the market for an elite university education were students not required to travel to obtain it. Would students in South America or Africa settle for outdated courses and second-rate degrees if they could be "graduates" of Stanford University or the University of Chicago? Would a multinational company in Taiwan or Mexico prefer its middle managers to study finance according to a North American Ivy League curriculum or according to a local university? Although UNext won't offer a full online M.B.A. degree for several years, its virtual Cardean University has already snagged its first customer - the International Business Machines Corporation, which has agreed to participate in a pilot program that will provide on-site finance courses for key employees.

In exchange for providing curriculum and credentials to UNext, each university has been promised returns of $20 million or more over the next five to eight years, according to a story in The New York Times. The universities also have the option of acquiring pre-I.P.O. shares in UNext, which could be worth far more. A similar relationship exists between Harvard, the Wharton School, Duke University's Fuqua School of Business and Pensare Inc., a Silicon Valley startup that creates online M.B.A. courses for corporate clients. In addition to royalties, Pensare gives the universities stock warrants.

The prospect of such returns has driven the nonprofit College Board, which administers the bulk of the nation's college admissions tests, to set up its own online, for-profit subsidiary, collegeboard.com, to compete with The Princeton Review, Kaplan Educational Centers and other test-preparation services. As with Channel One, ZapMe and others, collegeboard.com will sell advertising on its Web site. It will also try to go head-to-head with Apex Online Learning by offering online versions of Advanced Placement courses.

This raises a number of awkward issues. First, it forces the College Board to explain why the test-preparation services it has long derided as ineffectual are now worth buying. Second, by putting itself in competition with others offering such services, it opens itself up to conflict-of-interest charges: If students using the Board's online services perform worse than students using The Princeton Review's courses, the Board will have difficulty attracting new customers. If, on the other hand, they do better, the Board will be accused of using proprietary information to improve its own service. Either charge will besmirch an organization that is prized for its impartiality.

These sorts of conflicts do not arise when Harvard, Stanford or Duke licenses its course material. First-rank American business schools are overwhelmed with qualified applicants for their M.B.A. and executive education programs. But since there are limits on how many students they can accept, they need to find new ways of retailing their school's intellectual property. Once upon a time, universities left that to professors who wrote books the university's students would buy. No more. Today, universities are desperate to reclaim this intellectual property. And the fact that there are still a great many gray areas involving work done for Internet distribution gives school administrators an advantage over academics who want to retain their intellectual property's full value.

In August 1999, the Harvard Law School revised its faculty handbook to force any instructor wanting to do work for an Internet-based university to get approval from both the dean of the law school and the university's governing corporate body - a move widely regarded as a slap at the ubiquitous Arthur Miller, a Harvard Law professor and television personality who had recorded videotaped lectures for the new Concord University School of Law. (See "Focus: Concord Law School," page 113.)

The universities grasp a key aspect of the coming revolution in education services. When you manage a for-profit school, you are lucky to maintain margins of 5 percent - and much can and will eat into that. If you are selling education-related products through an Internet portal, you may be lucky to achieve margins of 10 percent - and even that may require supplemental revenues from advertising links and other, non-core sources. New technologies can be profitable if they are widely adopted, but in the education industry, the bulk of these are still either on the drawing board or limited to use in I.T. training courses. The real money is in providing "content," which can be effortlessly replicated at close to no incremental cost.

The dream of the educational technology revolution is to increase access to high-quality instruction and content while enabling students - at whatever level - to fulfill their maximum potential. One can imagine Knowledge Universe using the same adaptive learning technologies with the children's toys it installs in its preschools as it does with its I.T. training classes. One can see Apex Online Learning employing Paul Allen's vision of a vast network of "wired" public schools to give every child access to first-rate content. In each case, the business logic is essentially the same - faster learning, lower costs and greater accountability, combined with the ability to adjust to changes in demand at "Internet speed."

In technical education, where standards and goals are clear and measurable, it is relatively easy to define content. In professional education, questions about content are more complex, but ultimately resolvable. It is at the college level that content questions start to get truly awkward. America has many fine colleges and universities. But it also has many others that are little more than holding pens for high school graduates convinced (rightly) that some sort of college degree will be required for their future career. These students, at second- and third-rank schools, are the ones who stand to benefit most from access to higher quality content in classroom instruction - if only because the systematic engagement with such content will better prepare them for a lifetime of ongoing learning and skill acquisition. It used to be said that one's "education" was what remained after one had forgotten all that was learned in college. The serious part of that joke is what is most applicable here: The core value of higher education is acquiring a better capacity to absorb and analyze new information for use in one's career.

Content questions are most difficult at the K-12 level, where the "quality crisis" is most pronounced. The persistent influence of local boards of education is a continuing drag on the ability of the nation to adopt a unified, rigorous curriculum and a recognized set of performance standards. Too many students are passed through school without ever learning how to express themselves coherently or engage in even modest mathematical or analytical exercises. Quite apart from what this means for students or society at large, it forces the business community to run an ongoing program of remedial education for new workers.

Privatizing educational services in an unstable marketplace raises a number of troubling issues. It does not require a leap into science fiction to foresee the development of a government-financed education industry complex that is ultimately as unaccountable as the military-industrial complex. To whom, other than their investors and shareholders, might the bearers of these new technologies be accountable? Is it really enough to say that citizens are "free to choose" among companies and technologies in the education market - when we know from the history of the defense and health-care industries that rational choice often plays little part in important decisions?

It will be an enormous challenge for the new companies in the education industry to penetrate the marketplace. But ultimately, they are sure to find a way, and the benefits that will accrue to children may be immense.

H.G. Wells once wrote of education that it put "each generation in a race with disaster." One could almost say the same thing about the newest generation of companies in America's education industry. They must find a way to revolutionize education that permits them to maintain consistent profitability. Health care in America has been massively restructured over the past 15 years, but health-care companies themselves have often performed poorly. The education industry must find a way to profit from their example.

FOCUS: CONCORD LAW SCHOOL

Courting Tomorrow's Lawyers

In a September 1999 speech at Rutgers University, Supreme Court Justice Ruth Bader Ginsburg described Concord University School of Law, which operates solely on the Internet, as a place "where a student can get a J.D.... without ever laying eyes on a professor." Justice Ginsburg said she was "uneasy about classes in which students learn entirely from home, in front of a computer screen, with no face-to-face interaction with other students or instructors." She also argued: "So much of legal education - and legal practice - is a shared enterprise, a genuinely interactive endeavor."

Reaction to Justice Ginsburg's remarks was immediate - and not just because Concord is operated by Kaplan Educational Centers, a test-preparation firm owned by The Washington Post Company. Concord argued that the Justice didn't grasp the sophistication of its curriculum.

Using a template similar to those of UNext and Pensare, Concord employs experts from law schools across the country to videotape lectures, which are then delivered through the students' computers. Other professors conduct online "chats" with students that approximate the Q&A sessions associated with a conventional law school. Another group of instructors grade the students' essays and exams. Before a Concord student is able to receive the next lecture in a course, he or she must pass a quiz on the previous lecture. The student then receives an instantaneous performance analysis and a custom-designed study guide for the future. The Concord curriculum follows a standard law school curriculum using cases and textbooks.

Many of the school's 150 students also leapt to Concord's defense after Justice Ginsburg's remarks, arguing that they were getting a legal education that was every bit as thorough as that available at traditional schools - for $30,000 less. They noted that Concord made legal education available to students whose personal finances or circumstances made it impossible for them to attend a traditional school.

The faculty and students at the University of London's law school, which offers its own online degree, also criticized the Justice's remarks. The university makes no distinction between law degrees taken internally and those taken externally: The university devises and marks the exams, which are administered in proctored settings at a worldwide network of cooperating institutions. "We do not want to return to the days when Mr. Justice Darling could comment, 'The Law is open to all... just like the doors of The Ritz Hotel,'" wrote Michael Semple Piggott, C.E.O. of the legal education firm that administers the program.

In the late 1980's, the Georgetown University Law Center (where Justice Ginsburg's husband is a professor of tax law) toyed with requiring students to attend a minimum number of classes, only to abandon it. If classroom attendence were inherently valuable to a legal education, one would expect that fact to be reflected in exam scores and grades. But there is little evidence that classroom attendance is correlated with class rank. And with classroom performance fading as an element of student grading, it is hard to see just what Justice Ginsburg and other critics of the virtual law school have in mind.

Reprint No. 00110


Authors
Michael Barker,

Michael Barker is vice president and research director of the Center for Economic Organizing in Washington, D.C. Prior to joining C.E.O., Mr. Barker was editor of the Washington Post Briefing Books, chief economic advisor of the Democratic Leadership Council, editorial director of Tax Notes, executive director of The Gallatin Institute, editor of the monthly newsletter Politics & Markets, research director of the National Governors' Association's Council of State Planning Agencies and an aide to Massachusetts Governor Michael Dukakis. He is also editor of the four-volume "Studies in Development Policy" (Duke University Press).

 
 
 
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