Enticing the public with a private plan

July 13, 2001

Following the spectacular growth of the University of Phoenix, Jon Marcus reports on an increasing enthusiasm in the United States for for-profit higher education.

Although for-profit companies have begun to make their mark on American higher education, there is yet to be an explosion of private commercial universities. But the dramatic success of one institution has caused many others to review their status.

The extraordinary growth of the University of Phoenix, a publicly traded national chain that offers continuing and professional education to more than 116,000 students, has persuaded officials at traditional American institutions of the one-time heresy that higher education is a market - a commodity that responds to differences among schools in such variables as cost and convenience.

And while few have followed exactly the Phoenix's approach, many have reacted by seeking partnerships with private firms to improve campus services - and compete for students.

The growth in revenues of private companies involved in such behind-the-scenes services in American post-secondary education has been staggering. Private investment in the American education business has risen from $24 million (£17 million) in 1991 to almost $3 billion a year today, of which $880 million is at the postsecondary level. That amount is projected to rise to $11 billion by 2004, making for-profit higher education the fastest-growing sector of the $200 billion US higher education industry.

"What we're seeing is schools looking to develop revenue streams to differentiate themselves," says Peter Stokes, executive vice-president of EduVentures, a research firm that also serves as a consultant to universities. "Education feels it has to compete for what has traditionally been a pretty stable customer base. And a lot of schools are looking to stay competitive by offering improved services on campus."

To do that, universities are signing up with for-profit companies to provide management assistance ranging from finance and accounting to systems that allow students to use their identification badges as debit cards.

"One of the things driving this change is demand," Stokes says. "The students want to be thought of as customers. And people are now looking for value for their dollar."

That is a relatively new concept for many universities, which long took for granted that students would show up and pay whatever it cost for a degree. "The concepts of higher education as an 'industry' and students as 'customers' are relatively recent developments," says Robert Newton, associate academic vice-president at Boston College.

Hundreds of new education companies have been founded, a trend encouraged by the internet boom in general and President George W. Bush's education reform plan in particular. Not all have succeeded, and the number of victims increased during the dotcom crash. "Last year almost $1 billion of venture capital was poured into the post-secondary category," Stokes says. "Not all of that money is going to bear fruit. There is going to be a shakeout. There will be fewer companies, but those companies are going to survive and grow."

One company, ZapMe, for example, promised free computer labs to schools in exchange for the right to display advertising to students - it collapsed with huge losses. But the misfortune of some has been a blessing to others, which have swooped down and bought their assets at a bargain price.

London-based publisher Pearson spent some $3 billion last year acquiring American education companies. But while revenues are increasing, most major players have yet to make a profit.

Phoenix is not the only for-profit higher education institution. In all, there are 564 for-profit "universities". Most are small, they vary widely in quality and their number is still only a fraction of the 3,500 higher education institutions in the United States.

Based on enrolment, Phoenix, a division of the Apollo Group, is now the largest US private institution of higher education, after only 25 years in business. Its online division boasts ,000 students. Other students attend classes at 58 "campuses" - normally borrowed public-school classrooms, which it uses in the evenings - in 36 of the 50 states. The university is also considering expanding into the Netherlands and Germany and plans to enter markets elsewhere in Europe and in Asia. Rival, Sylvan Learning Systems, which runs everything from universities to tutoring centres to driving tests, also plans to expand internationally, using a $500 million pool of capital.

As families become increasingly sensitive to price, some non-profit US universities are following the examples of Sylvan and Phoenix, launching for-profit subsidiaries to raise revenue.

The University of Maryland has created the for-profit University College; New York University launched NYU Online; and Columbia University is behind the Fathom Knowledge Network, a for-profit division in collaboration with the London School of Economics, Cambridge University Press, the British Library and nine other institutions.

Not everyone is delighted with this trend. For-profit and online universities are finding it difficult to receive the certification and accreditation required in most states to confer degrees legally. Capella University, which bills itself as the fastest-growing fully online university, is accredited but still struggling to win approval for its masters and doctoral degree programmes in education to count towards eligibility to teach in given states. So far it has succeeded only in Arizona, the original home of the University of Phoenix.

Federal regulators are also sceptical of some elements of these commercial efforts. The US Department of Education has banned a growing practice by which recruiters for private, for-profit institutions received commission for enrolling students.

But perhaps the biggest obstacle to increased privatisation is resistance from the academic faculty. At traditional non-profit universities, Stokes says: "There is still relatively low penetration and one of the problems is that faculty are not being properly incentivised to use these tools. In some cases, it means teaching faculty how to teach again."

But, he adds, this resistance is easing. Before he left his job on a traditional non-profit university faculty in 1997, he says, "you would every once in a while hear some rogue faculty member refer to a student as a customer. Two years later I noticed that everyone was doing it."

Note of correction

In the newspaper and in our first version of this story on the web, we suggested that Capella University is not accredited and that it had done a deal with General Motors when, in fact, it is accredited and the deal with GM is with another online university, UNext.

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