A capital innovation for making a profit

December 17, 1999

Michael Goldstein looks at the economic challenges created by technology Technology has changed the economics of higher education profoundly, resulting in a dramatic lowering of the wall between not-for-profit and government chartered institutions and the for-profit business community.

While technology-mediated learning is changing the way institutions interact with their students, the breaking down of the for-profit/non-profit barrier may have equally profound implications.

This transformation is driven by an economic imperative: the need for capital. Historically, the establishment of a university required substantial capital outlay, while the cost of providing instruction was tied to revenues: faculty offered courses, the cost of which was covered by tuition and whatever additional subvention was deemed acceptable.

Likewise, the cost of creating new courses was modest, requiring nothing more than giving a faculty committee a mandate. Faculty maintained the currency of their offerings by regularly updating their lectures. Any measurable costs were operating expenses, readily absorbed within the usual budget.

The economics of technology-mediated learning are very different: the faculty that provides the intellectual content is much more akin to a playwright - the script gains life through the work of a team that resembles the producers, directors, scene designers and, indeed, actors. Once produced it must be distributed, over the internet or some other means, and it must be marketed.

The cost of producing and delivering high-quality courseware is not only substantially greater than that of face-to-face instruction, it is also constantly recurring. Like the production of a West End play, it requires capital.

Most universities are not organised as businesses, so they cannot, as a matter of law, do what the rest of the commercial world does when it needs capital: they cannot sell an ownership interest. Administrators are now rethinking that premise.

Institutions used to be satisfied to accept a share of the value of faculty discoveries and inventions in the form of royalties. But companies were also benefiting by the increase in their value from the economic value of the discovery.

On realising this, institutions started creating their own for-profit technology-transfer entities and forming partnerships with companies so that the university would have a shared ownership interest that could be turned into cash.

The economics of technology-mediated learning are similar. Capital is needed to develop, distribute, market and maintain courseware. Institutions could contract with companies to support these activities. Indeed, there is a booming market among companies such as Blackboard and eCollege that do exactly that.

But there is an alternative. Universities are forming their own for-profit enterprises to create, market and distribute technology-mediated courseware. Like Columbia University's Morningside Ventures (see box), these university-owned companies are designed to attract private capital.

They are capitalised in two ways: the institution puts into the company its intellectual property while the commercial partners provide the capital. Typically, the institution retains a majority interest in the company, with its academic integrity protected through both shareholder agreements and a separate services agreement that defines the nature of the relationship between the institution itself, the new entity and its commercial partners.

The market has responded favourably to these efforts. When an American institution, National Technological University, sought funds to create new satellite-delivered graduate courseware and to market more effectively and distribute its courses on a global basis, it found substantial commercial interest.

NTU split off its non-academic components to form the for-profit National Technological University Corporation, and private investors paid $15 million for a third of the new company. When the company is able to sell its stock, the value of the university's share will provide the institution with a substantial economic base.

There is another important attribute to this approach. In most institutions, the faculty member "owns" the courses he or she is teaching. But technology-mediated courseware is different: the faculty member is not the sole author; he or she is part of a team that has used institutional resources to create the courseware. Such a situation demands a different ownership model, as the American Association of University Professors has acknowledged.

But achieving that result within the structure of a university can be daunting: for most faculty the thought of creating technology-mediated courseware is foreign.

The establishment of a subsidiary enterprise affords the opportunity for a fresh start, to design a structure for ownership that is compatible with the economics of telecommunicated learning.

The technology-transfer model is again informative. As faculty became more successful in creating valuable discoveries, the best and brightest were defecting to commercial enterprises. The technology-transfer companies provided a new mechanism for sharing value while keeping the faculty member within the institution.

The same opportunity exists in telecommunicated learning. Through the use of a commercialisation entity owned (at least in part) by the institution, a portion of the value created by courseware can be shared with faculty. And that sharing can be done entirely independently of the institution's intellectual property protocols.

Replacing the cost of building a campus with the very different cost of creating courseware makes this area very attractive to the commercial sector. To some, this strikes fear of fatal competition. But it is also an opportunity to go into partnership with the world of capital to better serve the needs of a world of learners. Michael B. Goldstein is a member of the Washington DC law firm of Dow, Lohnes and Albertson, plc, where he heads the firm's educational institutions practice. MLA, page viii

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