[iDC] iCollege

[Klaus Knoll]

I came across this piece a while ago, maybe relevant still - it's in
part about the role accreditation plays in maintaining the system as
it exists today, Soenke

September / October 2009
College for $99 a Month
The next generation of online education could be great for
students—and catastrophic for universities.
by Kevin Carey

http://www.washingtonmonthly.com/college_guide/feature/college_for_99_a_month.php

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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