Is online education disruptive or not?

Burck Smith, the founder of StraighterLine, has written a very nice piece about Clayton Christensen, et al.'s Disrupting College (see Christensen on disruptive innovation in higher education) for the John William Pope Center for Higher Education Policy. In this article, Smith argues that, in fact, online education is acting as a sustaining, rather than disruptive, innovation at this time:

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.

It is worth noting that Christensen, et al (abbreviated below as Christensen) also have some concerns that not all indicators point to robust growth of disruptive innovation; in footnote 43 they write:

Recall that when a company has a product offering that gets an important job done, its customers will “pull” that product into their lives with minimal marketing by the company, whenever the job arises. When a company’s product offerings are not structured around a job that customers are trying to do,the company typically must spend marketing dollars mightily in order to persuade customers to buy its products. A good metric of whether acompany’s products are doing an important job for customers is whether its customer acquisition costs are falling or rising over time. Many of the for-profit low-cost universities spend lots of money on marketing and customer acquisition—and in many cases these costs have risen over time.

Smith argues that the reason one is not seeing disruption is that the higher ed market is highly regulated, thus preventing many of the effects that would naturally occur in a free market. Regulation comes primarily from the way in which federal financial aid is allocated, and the related area of accreditation, which is run by the traditional higher education institutions.  He points out that an iTunes-like disruptive innovation is unlikely because accreditation is of an entire institution, not the individual courses.  As a consequence, a new innovator is forced to build a costly infrastructure that reflects in many ways that of existing institutions in order to get accredited. 

Christensen points out that a potentially powerful innovation must be tied to a new business model in order for a disruptive process to occur. The core of the disagreements between Christensen and Smith relates to the issue of whether such a new business model currently exists.  Christensen argues that for profit higher education had created such a model, and that it very successfully disaggregates some of the major functions of traditional education. In addition to arguing that this disaggregation is not radical enough to provide real disruption, e.g. does not disaggregate at the level of courses, Smith takes aim at a more basic issue:

“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.

Smith's argument moves accreditation to the center of the argument - the question for him becomes "is the accreditation system being disrupted?"  In other words, he believes that accreditation and the present model of higher education are so intertwined and symbiotic that disruption of one requires and implies the disruption of the other. Christensen, on the other hand, emphasizes that the theory of disruptive innovation does work well in highly regulated industries, but that The successful disruptions have started by going around and outside of the reach of the regulations and avoiding head-on attacks.  Thus, disruption can coexist with regulations that are designed to protect the status quo - if it can find the right space. Nevertheless, Christensen certainly would agree with Smith that accreditation is a problem, and he focuses at the end of his paper on changes that are needed in accreditation in order that existing disruptive influences can grow. 

At the end of the day, however, Smith's point that the educational functions of all sectors of higher education are highly dependent on government funding, have very similar models of cash flow and similar price points is certainly correct. Does this similarity demonstrate, as Smith claims, that the new for-profits are not operating under a different business model and thus don't fulfill the need for a new business model that enables the disruptive process? Or does it demonstrate that there is something else of interest happening that makes disruption in the higher education "industry" look a little different from what one sees elsewhere?

It seems to me that there are two elements that might argue for the latter interpretation.  Both Smith and Christensen bring up one of these elements, the role of government support. A primary source of government support is Pell grants, and these are of variable size depending on student need. This gives all institutions, both for-and non-profit, the incentive to increase tuition in order to increase student need, thus maximizing institutional income coming from the Pell grants. Subsidized loans also contribute to this "price support" mechanism. Thus, it should be no surprise that new and lower cost business models are not leading to lower prices, as typically occurs when a disruptive innovation is occurring - there are "free" federal dollars on the table that drive prices in the other direction.  Christensen attempts to address this issue by suggesting a new mechanism for allocating Pell grants.

The other characteristic that might be influencing the evolution of price in a disruptive event in higher education is the lack of outcome measures that define the value of the product.  This leads to higher education generally being viewed as a "credence good", that is, one whose real value cannot be measured directly, with the result that value is imputed by looking at surrogates. A typical surrogate for quality in credence goods is cost - the more it costs, the better it must be. (I discuss other surrogates used in higher education in Competitive Higher Education.)Thus, there is good reason for a disruptive innovator not to compete on price grounds for customers - to do so could be interpreted as an admission of lower quality.  But even this argument has an interesting twist. As Christensen states: Yet the job that students typically hire low-cost universities to do is laser focused: Help me get better employment. That is, for the students of the low cost universities higher education may not viewed as a credence good, but rather as an experience good whose value is immediately measurable by use of job placement and salary data. For these students, higher cost will not increase the quality perception of the product. Rather, they will balance the cost of a program and the expected outcomes in making a choice. Consequently, removing or modifying the price support mechanisms discussed above could lead to real price competition for this segment, resulting in lower prices. All of this speaks, of course, to the importance of the low-cost universities having more robust outcomes data with respect to the job they are being hired to do so that the consumers can make informed choices.   

This view that the universe of higher education contains both a credence good component and an experience good component may be useful to educational institutions as they consider new educational ventures, and the organizational structure needed to support those ventures.

 

Comments

[Online Education]

Christensen is right about new business model i think they should understand this too.

[Charles C.]

Great article.

[Mike]

Good article and comments. Though the process may take time. It is still very vauable to move forward as time changes.

[Janet]

It's interesting to note the "rehab" aspect of the for-profit institutions. However, I don't know that they've "bought" accreditation. The processes and means to attain accreditation is a complex process that involves regulating education bodies. How does one "buy" accreditation in this context?

Lloyd responds: a for-profit buys an institution that is accredited, and then tries to convince the accreditor that the change in ownership will not lead to substantive change in program quality, mission, etc. If the arguments are successful, then the now for-profit institution continues using the old accreditation. Had the for-profit tried to set up a brand new institution, it would have taken several years to obtain accreditation.

[Ken]

Powerful article, plus nice comments from Wally Boston.

It appears that the advancements in technology that were supposed to cut costs and improve efficiency have not been realized in higher education because schools did not need to make such advancements to stay afloat. They just relied on guaranteed funding resources by admitting X number of students to meet budgetary needs. It is unfortunate that this is the case.

Author makes a great point that online for-profit schools used a less direct method to challenge current brick and mortar institutions. What they did is bought into accreditation by buying distressed schools and revamping them, as in the Frontline special "College Inc" explains.

After buying accreditation they were free to award federal student aid to their admitted students, and calculated their tuition pricing around students Federal Stafford loan eligibility and potential Pell eligibility.

So in effect, the potential savings to the consumer were lost, but the head on disruptive collision of online vs brick and mortar schools was averted.

I make mention of the rising costs of college in an article produced last year identifying federal funding as a major cost driver, although the definition of experience good is explained differently by Robert Martin, a distinguished economics scholar.

http://www.custudentloans.org/2010/11/16/taking-control-of-spiraling-college-costs/

[Wally Boston]

Nice article and thanks for pointing out Burck's piece as well. Whenever regulations impact an industry, the economic effects are more similar to the reaction of fluids in a closed end hydraulic system than an open end hydraulic system. Participation in the federal financial aid system requires accreditation. Accreditation requires an initial and periodic peer review process. There are many accreditors, national, regional, and specialty that are approved by the Department of Education. With more than 4,000 accredited institutions of higher learning, there are substantial differences among them even if the majority of the players seem to behave the same from a pricing perspective.

Burck is correct that accreditors do not accredit courses. But, inexpensive courses have been offered by community colleges for years. The "good" that the consumer/student wants is a college degree. Regardless of whether your goal in adulthood is a profession or a job, you want to have the credential that positions you to be hired by your prospective employer. If the employers change their requirements, the market will adjust. Accreditors have policies, rules, and regulations that prescribe how much of an education must be delivered by the accredited institution in order for them to grant a degree. Nonetheless, flexibility exists for institutions to accept credits from multiple sources including non-accredited courses, training programs, experiential learning, or competency tests. The elite institutions accept very little transfer credit because they don't have to (if you have the highest valued luxury good, why cut your price?). Below the elite level, transfer credit policies vary substantially and most are based on economic decisions as well as decisions based on the perceived quality of the learning being evaluated for credit transfer.

Your points about credence and experience goods are on track. Christensen points out that the "umbrella of pricing" held by the traditional institutions allows online institutions (for-profits and Western Governors) to offer programs at a total cost per student 40 percent less than the traditional costs (cost per student includes state and federal subsidies) but gives them no incentive to decrease costs even more. A question with no answer at this point is "Is there a minimum price point for a college degree, below which, students with no economic 'skin in the game' more easily drop out?" If an answer could be calculated, I believe the online market would eventually move there and don't believe that there would be any reason for the accrediting bodies to object. Our most selective institutions are generally our highest priced and have the highest graduation rates. The inverse is generally true as well. If decreasing your cost of attendance creates a larger market but one in which completion rates decrease, institutions capable of disrupting will be less inclined to do so.