Unbundling Higher Education

Gary A. Bolles

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Oct 24, 2014

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#2 in the series: How the Internet Evaporates the Middle

• Unbundling Media
• Unbundling Higher Education
• Unbundling Inequity: The Evaporation of the Middle Class
• The Future of Work and Learning

I’m frequently asked by friends who aren’t in hi-tech: What just happened? Traditional media companies are gone. Industry after industry is being changed dramatically by technology: Is no business safe? College is unbelievably expensive: Will it change as well? What are “incubators,” and why are there so many of them? Will Google and Facebook run the world? Why have so many older workers been unemployed for so long? What’s happening to the middle class in America?

And… are all these things somehow connected?

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Unbundling – the process by which the Internet and technology helps to split apart functional areas of traditional industries – is in the process of claiming its next target: The vertically-integrated business called Higher Education.

A growing number of well-known thought leaders agree. The Innovator’s Dilemma author Clayton Christenson believes that education is the next industry to be disrupted, and LinkedIn co-founder Reed Hoffman agrees. And under the heading of “Creative Destruction,” the Economist in May of 2014 offered a package of articles exploring how this might happen.

But the first thinking I ever heard on the specific mechanics of Higher Ed’s unbundling came in 2010 from Tara Lemmey, then of LENS Ventures, at DGREE: Envisioning the Future of Higher Education, a conference for which I was one of Tara’s co-producers. The videos on the DGREE.org Web site provide a valuable set of insights about the early thinking on the coming cracks in the Higher Education egg. What was clear then, and is even clearer now, is that the question isn’t whether colleges will be unbundled, nor when. It’s how.

To understand the mechanics of Higher Ed’s unbundling, let’s look at four fundamental questions:

• Why go to college?
• Why not go to college?
• How exactly will Higher Ed become unbundled?
• The Educator’s Quandary: What can — and should — colleges do?

PART A: WHY GO TO COLLEGE?

The U.S. education market is a monster: $1.3 trillion, nearly 9% of the country’s GDP, second only to healthcare. Higher Education alone was about $475 billion in 2012. A record 21.8 million students attended U.S. colleges and universities in 2013, about 6.5 million more than in 2000. Over 57% of those attending were women, another record. In all, two thirds of adults go to college, and a little over half of those actually finish.

So who is paying all that tuition? It can be a little complicated. In a simple product market, a product is produced, and the customer buys it. There may be middlepeople, financing sources, and related products involved, but at the end of the day, someone provides a product, somebody pays for the product, and then someone possesses that product. But the money to pay for a college education can come from numerous sources: Depending on a student’s situation, the payer for a four-year degree can include:

• The student
• The student’s family and friends
• Third-party payers such as non-profits, foundations, and philanthropic individuals
• The school, which may offer scholarships, “workfare,” or other money to defray costs
• The banks that issue the student loans
• All of us, who through our federal and state taxes are paying for school infrastructure, guaranteeing loans and funding a range of scholarships

No matter who ends up actually writing the check, though, the initial“client” is the student, the one who is the main recipient of the educational experience. It’s then up to the student to use that education in a way that’s beneficial to the student and to society. (At least, that’s the theory.)

Motivations of the Payer

Why are people paying for two and four year degrees in record numbers? There are three compelling reasons.

1. Develop as a person. This includes gaining social experience — learn independence, have fun, and hopefully, kickstart the process of becoming a grownup. It includes critical thinking, gaining important analytical and collaboration skills. And of course, it includes learning, finding out what interests you, and gaining more knowledge and experience about those topics.
2. Get connected with other people. Meeting others going through the same journey, meeting people, developing deep relationships — all of these fit within our typical mental pictures of the college experience. It also includes getting stamped with the brand of a specific school, which may look good on a resume. And it includes becoming part of the “tribe” of that school, developing a network of contacts that may be helpful in future pursuits.
3. Prepare for the work world. This includes getting exposed to various fields, one of which may become the student’s initial chosen field of work. It includes preparing to learn something you can actually use in the world of work, developing a set of knowledges and skills, which can be assumed to increase your future earning power. It includes being trained for specific tasks. And, of course, most people hope it eventually includes making more money than you might have without a degree.

(We could also include Pleasing Others — making parents, teachers, and other adults happy that the student is at least going through the motions of trying to grow up, even if the timing for college may not be right for the student. But let’s stick with the three above for simplicity.)

In an ideal world, a student receives all of these benefits from a four-year degree. And even if the only predictable outcomes are that the student will develop as a person, that’s a fine result for some. But increasingly, colleges will have to answer the most questions about #3: Preparing the student for the world of work — and especially for a degree’s impact on future earnings.

What’s a Degree Worth?

There’s no question that college graduates on average make more money than someone who only graduated from high school. A recent Pew study stated that on average it means about $17,500 more in annual salary for college graduates, or about $550,000 over a 40-year career, once you’ve removed the cost of college itself.

And that gap is rising. Also according to Pew, “…in 1979 when the first wave of Baby Boomers were the same age that Millennials are today, the typical high school graduate earned about three-quarters (77%) of what a college graduate made. Today, Millennials with only a high school diploma earn 62% of what the typical college graduate earns.”

Finally, a college degree is directly connected to people’s ability to pull themselves out of poverty. Of all those adults in the bottom 20% of the economy, those with degrees were found to be over five times more likely to move up out of that category those who weren’t college graduates.

In the past, those on the customer side of the equation — especially the student and her family — could better afford to support goals like learning critical thinking, or exposure to a broad range of ideas, which are common touchstones of a liberal arts degree. When a four-year degree was comparatively inexpensive, your parents would pay, or you could quickly repay your student loans from your earnings: It often didn’t matter if that degree didn’t specifically make you marketable to a subsequent employer.

Motivations of the Employer

When an employer hires, there are many questions to be answered. But there is just one fundamental question, and that is: Will this work out?

Employers want certainty. The cost of a poor hire — bringing someone on full time, then having to terminate the relationship, or finding the employee abruptly resigns — can run employers up to 100% of the employee’s annual salary or more.

Depending on the field, and the hiring organization, some companies will reliably recruit directly from specific colleges and universities, because they feel there is a greater certainty that these graduates will have a higher chance of being successful at their organizations, often going so far as to recruit graduates directly from campuses.

In a hot job market, when there are many openings but few acceptable candidates, the connection between a degree and specific job opportunities matters less: Employers are more willing to hire workers who don’t fit their ideal profile. But in a competitive job market, which is true today for most industries outside hi-tech and nursing, employers can be far more choosy. Historically, that’s meant a strong dependence on schools to provide them with well-trained workers — which meant that degrees had substantial value in the hiring process.

PART B: WHY NOT GO TO COLLEGE?

All of the intangible benefits of a college degree — and even the tangible benefits — are huge selling points when a degree is comparatively cheap. But it’s become an incredibly expensive product, and it’s getting more expensive every year. From 1978 to 2013, the U.S. consumer price index increased 275%, housing costs went up 375%, and healthcare rose 600%.

But college tuition increased a whopping 1120%. Between 2003 to 2008 alone, the average tuition and fees for a public four-year college or university rose 31%, and in the 2011–2 school year, the average private four-year college charged over $33,000 per year, for a total of $132,000 (if the student actually graduates in four years). That’s more than two years’ worth of the average household income in the U.S. But don’t look for the government to pick up increased costs: Between 2007 and 2012, the average government funding per student dropped 27%.

The Economist classifies this as something that sounds like a miser’s misery: Baumol’s cost disease, which maintains that costs go up in labor-dependent industries that can’t increase productivity. And if there’s any institution that still looks a lot like it did 100 years ago –with a consistent level of productivity — it’s a four-year college. As Microsoft’s Ray Fleming points out, the cost of access to knowledge is rapidly decreasing — as the cost of education rises.

These rising costs function as a substantial tax on students entering the workforce. About 60% of all students take on some kind of debt to fund their education. In less than a decade, student debt more than doubled, rising from 3% of all personal income in the U.S. in 2003 to 7.3% in 2012, to the point where the average student in 2013 graduated with over $27,000 in loans. As a result, a record percentage of young adults is carrying student debt — about four out of ten “young” households (with a head who’s under the age of 40). And those households have about one seventh the net worth of young households that have no student debt.

When these kinds of dynamics occurred in the U.S. housing market — rapidly-rising prices, ballooning consumer debt, banks making loans with minimal chances of full repayment — the result was a “market correction” that spawned The Great Recession, with many homeowners so far underwater that they simply walked away from their homes, which the banks then repossessed.

When it comes to student debt, though, there’s nothing to repossess. About 1 in 7 recent college graduates is currently considered in default on their federally-guaranteed loans, and 9.1% actually do so the moment they leave college. Yet because the banking industry was able to make it illegal to default on most student loans, that debt will follow most students around for the rest of their lives. (Students enrolled in a little-known income repayment program can have their debt erased after “only” 20 years.) In fact, the total student debt load in 2013 was over $1 trillion, up almost 14% from the previous year. (By comparison, U.S. consumers in 2013 owed only $854 billion in credit card debt.) As a result, student debt is essentially acting as a tax on the future earnings of a huge portion of our workforce — currently over 37 million people, and rapidly rising. In fact, both the number of borrowers, and amount borrowed, ballooned by 70 percent from 2004 to 2012.

To be fair, some believe these concerns are overblown. A Brookings Institute study states that student debt is in fact no larger a portion of the economy than it has historically been. But the same study agrees that those feeling the greatest impact are those who have attended college for some period of time, without getting a bachelor’s degree. For these people, their “incidence of debt” — how many households are carrying student loans — has risen from 11% to 41%, a dramatic increase. And some maintain that the net benefit of having a degree and debt, versus having no debt and no degree, is substantial. But the data is inconclusive: Do most debt-free graduates go to cheap schools and pay their own way, or do they simply come from more-affluent families — and therefore are more likely to be economically successful in their future work?

The Connection Between College and Future Work: Important or Irrelevant? Discuss.

The traditional argument is that since college often prepares us for the work world, the traditional increase in wages for a college graduate, compared to those with only a high school education, trumps the cost of college, and any debt that a student takes on. But do those traditional arguments hold up as costs skyrocket?

First, let’s start with the question of college as training for work. The debate about schooling as vocational preparation is as old as higher education itself. Should we learn for learning’s sake, or should we prepare for future work? Ideally it wouldn’t be a choice: Let’s have them both. Staunch defenders of a liberal arts education will maintain they’re not in the business of training students for vocations, and vocational trainers will maintain that college isn’t accountable if a student can’t find work in their chosen field soon after graduation.

Yet whether we want there to be a linear connection between schooling and employment or not, it’s increasingly likely that our four-year degrees and our ultimate field of work will be disconnected. In a study by Accenture, though 84% of college grads expected they’d find a job in their chosen field, about two thirds actually did, straight out of school. Two out of three may sound pretty good, but in many fields, as time goes on in a person’s career, the eventual connection between college training and future employment becomes increasingly tenuous. In a recent study from two Federal Reserve researchers who looked farther down the road in people’s work lives, only about a quarter of all college graduates were found to be working in jobs that were directly related to their degrees. If you believe we’re all continually changing and adapting to new work opportunities, that could be a good outcome. But if you think of college as an investment, that’s probably bad.

Of course, the argument can be made that, even if a graduate doesn’t work in her chosen field, she gained from all of the other benefits of going to college, so she’s much better prepared for the work world. But there is precious little research that compares graduates who don’t work in their chosen field, with a control group of kids who simply started working after high school: For those people, it would seem that work would be the best preparation for the world of work, so they would be better off having simply started looking for a job upon graduating high school.

Yet the process of finding a job has become a lot harder — not just in your chosen field, but in any field. In 2013, the average college grad took 27 weeks to find a job — more than double the time it took her counterpart in 1979. In that Federal Reserve study, a third of college graduates were found to be working in jobs that didn’t even require a college degree in the first place.

That means that many of our youthful workers don’t just have to contend with the challenges of unemployment: If they find work, it means many will have to deal with dramatic underemployment, as their higher-level skills go to waste in less-demanding — and lower-paying — jobs. In fact, the Bureau of Labor statistics says that, of the ten jobs projected to generate the most employment through 2022, only one requires a bachelor’s degree.

That disconnect between education and occupation may be okay with many graduates when a college degree is comparatively inexpensive, a student carries little debt, and there’s reasonable expectation of a job opportunity in their chosen field. But the math being done by many customers of a four-year education will inevitably change when a college degree is increasingly expensive, student debt continues to spiral upward — and the market for jobs requiring college degrees becomes increasingly tougher.

A third of college graduates were found to be working in jobs that didn’t even require a college degree in the first place.

But what about that $550,000 lifetime bonus for college graduates over high school graduates? Doesn’t that guarantee the value of a college degree?

Only if you graduate. The National Student Clearinghouse, a nonprofit verification and research organization, tracked 2.4 million first-time college students who enrolled in fall 2007 with the intent of pursuing a degree or certificate. The completion rate was highest (72.9%) among students who started at four-year, private, nonprofit schools, and lowest (39.9%) among those who started at two-year public institutions. The average was a little better than half — 56% — of students earned a four-year degree within six years, or a two-year degree within four years.

If we look at college as a pure market function — colleges provide a product, and people buy it — on average, college has a 44% failure rate. We can point to many factors that can get in the way of degree completion, such as immature decision-making and tough financial circumstances. But as the average price of a college education rises, colleges will become increasingly expected to ensure a large percentage of their students graduate. Otherwise, kids who leave college early with student debt are doubly underwater: They don’t have a degree, which could potentially increase their future earnings, and they have crushing loans to repay.

And it’s those with lower incomes who take most of the hit. In fact, if you’re in the top quarter, income-wise, in the U.S., there’s an 80% chance you’ll get a college education. But if you’re in the bottom quarter, your chances are dismal — about 9%. Picture 11 high school graduates living in poverty, yet trying to go to college: Only one of them will succeed.

Doing the Math

But suppose you don’t go to college. Suppose, as entrepreneur Michael Robertson suggests, you took that investment in your college education, and made it into an actual investment, with, say, a 7.5% return. Whether you calculate the cost of student loans or not, over your lifetime you’re likely to make more money just graduating from high school and putting your college money into a retirement fund, than you would from the increased earnings of a college degree.

Even if you aren’t in a position to directly invest your college fund, some Silicon Valley entrepreneurs, such as PayPal co-founder Peter Thiel, assert that the value of a college degree in fields such as computer programming, or in starting your own business, is rapidly diminishing. So Thiel is actually paying some students to avoid college altogether.

Another challenge: That $550,000 in average increased earnings is heavily back-weighted — that is, you’ll make more of that money later in your work life. That means you’ll be paying off your student loans at a time when your wages are at their lowest, and your wages will only rise over time.

And in an era of job mobility, and where the trend towards lifelong learning means you’ll work in a variety of fields throughout your lifetime, does it make sense to spend $120,000 to $250,000 on a four-year degree when you’ll likely be switching fields within a few years?

Finally, what about the cost of the college’s business model? How many businesses do you know of that see someone as a customer for only four years – and for the rest of their lives views them as a cash register? Once you have a degree, you’re automatically enrolled in a lifelong program that makes you a target for unrelenting alumni marketing. You’ll receive an endless stream of messages offering you creative ways to provide funding for an institution that will provide zero value to you. You paid all of that money: Shouldn’t you get something more down the road than a bumper sticker?

Adding the pluses and minuses, there are three groups for whom college is a slam dunk, with manageable risk:

• If you come from a family that’s willing and able to pay entirely for your schooling, so you’ll emerge with little or no debt, it makes sense to go to college: The cost to you is minimal, and you’ll be far likelier to make more money in the future.
• If you come from a family that can help to defray at least part of your college costs, or if your life situation allows you to work while you’re learning, and the training you receive is for a comparatively-lucrative field with reasonably reliable chances of good employment in the future, you should go to college: It will all work out.
• If you come from a lower-income family that can’t pay for your schooling, but you have either the support or the drive to get good grades in high school, and therefore qualify for substantial scholarships, you should go to college: You’ll come out with minimal debt, and you’ll be far likelier to make more money in the future, despite the low chances that you’ll complete your degree.

For others who don’t fit into these categories, such as middle-class students whose families can no longer mortgage the house to pay for college, or those from lower-income families who make less than a single year’s tuition, or anyone with kids living in an expensive city, the math becomes much harder — and it will become increasingly more so, as tuition continues to rise. The result is that college-age men and women will increasingly look for alternatives.

For those students for whom the current higher education model may be challenging — but who still want a great education — their most reliable opportunities may come as college becomes unbundled. And that’s what’s happening before our eyes.

PART C: UNBUNDLING HIGHER EDUCATION

The unbundling of Higher Ed has been a regular topic in media and events. LENS Ventures’ Tara Lemmey discussed it at the DGREE conference in the San Francisco Bay Area in early 2011. In early 2012, Alan Jacobs of the Atlantic Monthly predicted The Great Unbundling of the University. Later that year, Justin Reich asked in Education Week, Will Technology Lead to the Unbundling of Schools? And soon after, the University of Texas’ Benjamin Lima wrote about Massive Online Learning and the Unbundling of Undergraduate Education.

There are varying perspectives on the specific elements of the education bundle. For example, The Atlantic’s Jacob distilled the main elements down to just knowledge and credentialing. But if we look at Higher Education as a business, the characteristics of the Higher Ed bundle are uncannily similar to those in the media arena — which helps to illustrate why Higher Ed is so ripe for unbundling.

Let’s say that four-year institutions have five layers:

• The Physical Plant (known as a Campus)
• Course Development
• Course Delivery
• Brand and Network – the reputation of the school, and the connections you gain through its alumni.
• Accreditation

In a vertically-integrated world, with the physical plant at the bottom, and brand at the top, it looks like this:

From bottom to top:

• Physical plant or campus. One of the strongest attributes of any college is the environment that it creates. Stepping onto a college campus offers the opportunity to feel as if you’ve entered into a separate place, one dedicated to greater learnings and higher ideals than you might encounter out in “the real world.” When many people think of the college experience, it’s the campus environment that is the most memorable.
• Curriculum development. The ability to develop great “content” – in the form of a compelling curriculum that will attract and engage students – is often thought of as a core competency for many colleges, and a school’s curriculum is one of its key differentiators.
• Course delivery. The model of course delivery in many colleges is basically a mass-production process. A tenured professor — or, more likely, a graduate student teaching assistant — addresses a huge sea of undergraduates in a lecture hall. Everyone is expected to move along at the same pace, with the “slower” students struggling to catch up, and the “faster” students perpetually bored. Most students have little direct relationship with the instructor, and the school is able to continue to churn out graduates at the most efficient cost.

This approach is a holdover from our industrial-era model of mass-produced education. Rather than each student learning at her own pace, the pedagogical model requires a mass learning experience. Students are rewarded for obedience, conformity, and tolerance for repetition and memorization. Why would students stand for this kind of approach? In a bundled Higher Ed world, the school itself often provides the over-arching brand, making even the best teachers secondary to the “platform” of the school itself. A teacher at, say, Harvard or Stanford has a higher perceived market value than, say, a teacher from your local community college — even if the community college instructor is a far better educator. Rather than seeking out the best teachers, the student simply wants the brand of the school — the diploma — often at any cost. So the student has little incentive to challenge the existing educational offering.

• Brand… A college’s brand has market value at two points: On the student’s way in to the school, and on the way out. On the way in, it’s all about recruiting a pool of student candidates who meet a school’s qualification targets. In today’s world, colleges are heavily dependent on student-magnet rankings such as those doled out by the U.S. News & World Report, or by Forbes. In an era of $50,000+ annual fees, private colleges especially can spend vast amounts of energy and money to increase their ratings by a few points – and therefore maintain a “quality” pool of students who meet their entrance standards, and who can pay, or at least commit to paying, those high fee. (However, as costs increase, there is also substantial pressure to take high-paying out-of-state or overseas students who don’t meet standards.) On the way out — as the graduate enters the job market — a school’s brand potentially matters to the employer, as a perceived indicator of future success. Anything the employer believes will reduce that risk — such the name of a well-known college — increases the likelihood the employer will choose the “better-branded” candidate.
• ..and Network. In the same way the Brand of the school is perceived to be a contributor to future success, the web of contacts that comes from fellow students and alumni is also perceived to be a future asset. The quality and value of the network obviously varies widely by school, but it’s a substantial asset in fields where a broad set of contacts — all of whom who feel some quasi-tribal bond to each other due to their shared college connection — can have a positive impact on job possibilities.
• Accreditation. Accreditation is the coin of the (Higher Ed) realm. What guarantees that a school will teach students what it says it will teach? Accreditation, the “virtual currency” that defines the value of a degree. Many people don’t realize that four-year colleges and universities are regularly reviewed by standards bodies that determine if each institution provides enough of a “quality” education to merit the stamp of accreditation. That stamp means those the courses a student takes can be aggregated into a degree in a recognized field or fields. It also means the courses that a student takes are transferable to other institutions, if the student decides to continue studies elsewhere.

That makes accreditation essentially a currency. The currency of any country is valuable basically because its government says it is. That backing guarantees consistency of transfer: You can take 100 individual dollar bills from one bank, and exchange them for a single 100-dollar bill at another bank in the same country. You can also take dollars from New York to Paris and convert them to Euros, at a widely-accepted exchange rate.

Accreditation is the difference between a learning activity that’s simply valuable to the student, and one that creates a coin. Each class a student takes at an accredited school is essentially like putting a coin in the student’s pocket. Add up enough of those coins, and the student will have a two- or a four-year degree — which can be used as a calling card to employers. Employers in turn believe themselves to have a greater certainty of the quality of a prospective employee’s training than if the student had received training from an unaccredited school — or if they’d never gone to college in the first place.

If the value chain of the current “bundle” of higher educational services continued — the cost of a college education in large part is paid back by future earnings — the underlying business model of Higher Ed would be sustainable. But with all of the tectonic influences we’ve reviewed, such as skyrocketing costs and dramatic underemployment, it’s tempting to use the “perfect storm” analogy to describe what’s happening to Higher Ed as we speak. But whatever analogy captures your imagination, it’s clear that, just like the media business, Higher Ed is becoming unbundled. And that creates a significant quandary for educators.

PART D: THE EDUCATOR’S QUANDARY

Author Clay Christenson predicted in 2013 that “…Fifteen years from now, more than half of the universities will be in bankruptcy” in America. And the Economist predicted that if Higher Ed was affected like the newspaper industry has been, colleges’ revenue would be cut over half, there would be 30% fewer people employed, and over 700 colleges would close. “The rest,” the Economist says, “would need to reinvent themselves to survive.”

Yet just as in media, unbundling doesn’t mean that traditional higher educational institutions have to completely disappear. Far from it: Many will thrive. As the Internet has embedded itself into virtually every aspect of modern life, radio, broadcast and cable television, magazines, and newspapers have all continued to exist. But they’ve fundamentally changed as businesses — and there are far fewer successful businesses around. That’s the educator’s quandary: Innovation in higher ed isn’t just important today: It’s critical for survival.

Here are some ways in which Higher Ed is likely to become unbundled:

• Physical plant or campus. In an unbundled world, as college costs continue to skyrocket, it’s legitimate to ask if the average middle-class student in the future will be able to afford paying for the on-campus environment – or if it will become a luxury only accessible to the affluent, or to the high achiever, requiring those with lesser means to focus on online alternatives, at least as part of their educational mix. There already are services in major cities that are partial replacements for the college environment: They’re called co-working facilities. Every major metropolitan area in the U.S. — and many smaller towns as well — now has at least one or more former office buildings that house entrepreneurs and independent contractors who pay a monthly fee to have a place to go work. These facilities usually have numerous opportunities for mentorship and collaboration, providing hotbeds of entrepreneurial activity. If you skipped college, but you wanted a place where you could be around young, energetic people like you, you’re a likely candidate for a co-working facility.

People roaming the unbundled campus of the future probably are using mobile applications to reserve and find rooms to work, teach and learn. Those rooms probably have 24-hour webcams, so people from other areas can watch, learn and collaborate. Unbundled campuses have the opportunity to become hotbeds of activity — not just for young full-time students, but for anyone looking for ongoing learning and working activities. True, an online education can’t provide that sense of place, nor can it create the kinds of connections between students that come from the structured and random interactions that occur on a regular basis. So a result, unbundling in the near term could mean a significant loss of the campus experience.

• Curriculum development. In an unbundled world, how much value exists in the differences between a course on Shakespeare at college A versus college B? In many fields, the basic information and activities that are needed are fairly straightforward – and, in many cases, what’s being taught today may not be completely current with the most effective practices, especially if a course creator hasn’t been keeping up to date. As a result, startups like Udacity are providing software platforms that can provide best-of-breed courses from superstar designers. Unbundling curriculum development – and making it visible to other course creators, who can rapidly improve upon any given course – therefore creates the opportunity to increase the quality of what’s being taught.

But there’s a significant potential downside to unbundled course offerings: Unbundling runs the risk of encouraging services that provide homogenizing learning, placing course developers from any given field into a large echo chamber where the same ideas could be endlessly recycled. Quality control therefore becomes key. Look for the Higher Ed equivalent of services like Yelp that will help learners find the right learning opportunity for them. Another concern in an unbundled world: As Higher Ed begins to move online, it’s critical that there remains a broad diversity of thought in many subjects, providing a healthy ecosystem of information and perspective — avoiding the “Amazonification” of Higher Education, which would consolidate learning into the hands of a few dominant players, as has already happened for various layer of the unbundled media industry.

Look for the Higher Ed equivalent of services like Yelp that will help learners find the right learning opportunity for them.

• Course delivery. Even in an unbundled world, it would be comforting to say that the traditional classroom experience will remain the most common course delivery environment in the future. But it’s not likely. The fundamental questions about the value of a college education are the same kinds of questions that consumers asked about media by their own reading, viewing, and buying behavior. If the only option you have is to buy a magazine, or purchase an entire record album, or go to a movie theater, then that’s what you’ll do. But once you were able to get your content in a dozen different forms online, you’ll choose the format and price that works best for your situation, and for your perception of value. And that’s what’s likely to happen to Higher Ed as well.

In an unbundled world, many individual courses will become as free-floating as individual articles are. How will you find these courses? In 2011, the father of the Maker movement, Dale Dougherty, talked about an idea for an OpenTable-like offering (“OpenCourse”) to help increase the discover-ability of online courses — and in fact startups like OEDB have begun to appear. Learners will be able to find exactly the learning situation that suits their specific needs. And just like FlipBoard and Pinterest, services will appear to re-bundle course offerings from multiple sources – and weave them together into an offering that is compelling both for the student, and for the employers who will ultimately hire them.

What happens to teachers in an unbundled world? With Massive Online Open Courses (MOOCs), whose classes are open to students from around the world, teachers have the capacity to gain unprecedented power. Just like independent bloggers who can garner massive online followings almost overnight, great teachers will have substantial groups of students from around the world. Through platforms pioneered by the likes of Udacity, Coursera and EdX, course delivery has the potential to become an “increasing-returns” business (remember the long tail?), with a small number of “big-brand” teachers, and a huge cadre of individual teachers with smaller followings. Though his is a non-profit organization, Sal Khan’s Khan Academy is a perfect example of the rise of the superstar instructor, and there will be many more in the future, initially starting as MOOC instructors.

And some instructors may find they can help students more by going online. When Udacity founder Sebastian Thrun started recording his lectures at Stanford, he says that he thought that attendance at his live talks would be continue to be robust. But he started to notice a significant dropoff in live viewers. He decided to look at the specific viewing behavior of students watching the videos — and found that some students were repeating sections of his talk dozens of times. No student could ask for a concept to be repeated over and over again in a classroom — but in the privacy of a controlled environment, a student can replay repeatedly, without penalty.

That doesn’t mean that online courses from existing colleges will be guaranteed successes. While many existing colleges are experimenting with MOOCs, providing world-class instruction to virtually anyone in the world who wants to sign up, for the most part they’ve represented safe experiments. A single course can generate thousands of registrants from around the globe, so it’s essentially cheap marketing. Yet until now, MOOCs have been largely unaccredited, making it impossible for students to gain course credits that can be transferred elsewhere, or aggregated into a degree.

In fact, the initial results for many MOOCs are considered by some to be rather disappointing, with large numbers of students signing up, but few successful completions. But this is simply because we’re in the very early days of innovation in unbundled Higher Ed. Perhaps it’s easier to think of today’s MOOC as a transient part of the hi-tech fossil record, like the Apple Newton or Microsoft’s Clippy: Today’s smartphone can be seen as the highly-evolved version of the former, and Apple’s Siri the advanced descendant of the latter. Online course purveyors will inevitably continue to update their offerings to the point where they will provide high-quality educational experiences that can rival in-person lecture halls. And they will be able to continually update their offerings far faster than today’s tenured professor usually updates his courses.

• Brand… In an unbundled world, The Law of the Lost Middle says that those at the high end — well-known brands such as the Ivy League schools — will be able to maintain a “quality” student body in perpetuity, because they can charge a premium price for a scarce commodity. But ultimately the value of the Brand is in the eye of the employer — and if hiring managers begin seeing the value of training from digital and hybrid education alternatives, the future value of any individual school may erode. What will a degree be labeled that includes classes from a half dozen, or even a dozen, schools? And how will an employer view such degrees?
• …and Network. Online alternatives will increasingly offer ways to connect their graduates, exhibited by the campaign of University of Phoenix, which has marketed itself on the strength of its network ties. Though it will always matter, Networks are inexorably shifting online, in the form of LinkedIn connections. But of all the bundled attributes of the existing Higher Ed market, Brand and Network offer the strongest reinforcements for the traditional model of Higher Ed — which will only reinforce the power of today’s top schools, for those who can afford them.
• Accreditation. In an unbundled world, Accreditation as a currency for the education business will experience some of the greatest challenges. In a rapidly-changing world, how will existing accrediting institutions keep up? The short answer is, they’re not likely to.

Today, accrediting bodies typically require accredited colleges to solidify their basic curricula and degree requirements for a year or more, which gives the accrediting institution time to assess any changes, and to continue to guarantee that a degree will meet the accreditor’s requirements. But the world is changing rapidly, and a year in some fields is far too long to pour concrete over a set of course requirements.

Here’s a great example where the existing system is not up to the task of supporting the dynamic learning environment of the future, even in the brick-and-mortar world: Singularity University, on the campus of the NASA Ames facility in Mountain View, Calif., offers executive and graduate student programs introducing a broad range of disruptive technologies that are impacting various fields. SU’s faculty comprise a who’s who of top Silicon Valley entrepreneurs and executives. Given the dynamic environment its courses chronicle, SU changes its curriculum multiple times each year – making it ineligible for accreditation, and therefore unable to operate as a traditional university.

Now imagine many such institutions, constantly updating their curricula to reflect changing times. Their students would get world-class knowledge that is relentlessly up to date – but would never be able to aggregate their learnings into a degree, nor to gain credit at other colleges. That’s like giving students Monopoly money instead of real currency: Eventually, the market will revolt. Yet today, few existing accrediting bodies are equipped to keep up with such a rapidly-changing landscape.

If history is any judge, there will first be an avalanche of new credentialing approaches, each vying for legitimacy with employers. There are already 1 million credentials awarded each year, outside of the college accreditation process. About 10% of American workers reports that a certificate is their highest level of education, and healthcare, office management, and cosmetology are currently the largest segments. Research so far suggests that men with certificates on average make somewhat more income than those with just a high school education, but it doesn’t yet clearly suggest a net benefit to women.

In mid-2014, Sebastian Thrun of Udacity announced a credentialing program — “the NanoDegree” — designed in conjunction with AT&T. With only 6 months’ training, a high school graduate would qualify for an entry-level data analyst or application designer job at AT&T. If employers begin to hire large numbers of workers with NanoDegrees or similar credentials, it’s essentially like having a new currency on the market. Add up a student’s learning experiences — coins — and you’ll eventually have the equivalent of a NanoDegree, a two-year degree, or a four-year degree , which will in turn have a future value in the marketplace.

The future of accreditation will probably look like a true marketplace, where certain employers will reward certain accrediting bodies, by the employees they hire. Workers will more easily be able to gain credit for their work experience and learning outside of a traditional classroom — and employers will change the dynamics of the Higher Ed market by changing how they exercise their purchasing (hiring) power.

So What’s a College Administrator to Do?

Of course, administrators from brick-and-mortar colleges aren’t blind to the dynamics of their industry slowly becoming unbundled. Imagine you’re a college administrator who sees all of these dynamics. What are the biggest challenges you’re dealing with?

• The Incumbent’s Dilemma. Though author Christensen — ironically, an educator himself – defined the Innovator’s Dilemma, it’s a little bit of a stretch to call colleges and universities “innovators” as a group, at least as far as a college’s business model goes. Many have been around for decades, and some for centuries, with few changes to their fundamental way of doing business. But we can call them “incumbents,” and their challenge is an incumbent’s dilemma: What do you do when your industry is being unbundled? It’s extremely difficult to make fundamental changes in an historically-successful business model, and Higher Ed institutions are no different from organizations in other industries who were at risk of being unbundled (such as media businesses) — and didn’t adapt quickly enough to maintain their market positions. Change is hard, under any circumstances – and it’s especially in something as hermetically-sealed as an institution of education.
• The Tenure Tax. Colleges are like any bundled businesses that become dependent upon a way of doing things. But costs are history: Everything from the cost of real estate to the rising challenges of marketing a college add layers to the costs of running Higher Ed efficiently. But many point to the greatest costs coming from rising teacher salaries. Just like incumbent media companies, who hired (comparatively) highly-paid journalists, colleges have a fundamental challenge in their cost structures that makes it challenging for them to adapt to a new model. In business, we’d call these employment contracts: In Higher Ed, it’s called tenure.

Tenure first appeared in colleges in Great Britain in the 19th century as a way to protect the freedom of speech of teachers. Educators wanted the ability to espouse opinions or pursue lines of inquiry that might be considered challenges to cherished positions by college administrators. This eventually led to institutionalized policies requiring strict due process to fire college professors, with the result that only the most egregious offenses would result in termination. Academic tenure continues to provide benefits to colleges by allowing them to provide guaranteed employment, which can serve as a counter to often-higher wages available in the corporate world.

Yet in any business, the management of the organization gains its greatest edge by continually ensuring that the best possible talent is available to provide the best-possible products and services. That includes the ability to require the highest possible performance by employees, and — if needed — to determine if there’s no longer a perceived fit between the organization and any given employee. But a four-year college has substantial difficulties disciplining its tenured faculty, and in fact the dirty little secret of tenure is that it can reinforce the exact same dogma it was originally designed to overcome. As a result, colleges are uniquely limited in their ability to ensure they will field the talent they need to adapt to changing market conditions — a critical capability in the coming era of unbundling.

To be fair, some maintain that tenure isn’t the problem. But tenure is actually a market mechanism: Colleges wouldn’t continue to use it, and instructors wouldn’t continue to seek it, if there wasn’t general agreement that it made business sense. But that sense mattered in a world that moved much less quickly than today’s world, and one that demanded less accountability than today’s employment marketplace. Just as colleges will increasingly be held accountable for their ability to prepare their students for employment, they will also be increasingly held accountable for the effectiveness of their instructors.

• High Costs of Marketing… Rankings like those of the U.S. News & World Report have created incentives for colleges to focus on practices that encourage high numbers of applications — and low numbers of acceptances. That “exclusive” label delivers a growing benefit to the school, increasing its reputation as an elite institution — and diminishing the chances of a less-accomplished student to gain admittance. Ultimately, college is a product market, and as costs rise, the inevitable questions about the value of that product will rise as well. In fact, the challenges with the perceived value of a higher education are coming to such a critical juncture that the Obama administration announced an initiative for the Federal Government to establish its own rating system for colleges.

But marketing is expensive – not just because of the raw costs of staff and advertising, but because colleges with perceived exclusivity standards have to continually turn down “lower-quality” students – those who could pay, but whose test scores or Grade Point Averages don’t meet the school’s standards. It’s expensive to turn down customers with the ability to pay, and to spend what it takes to continue to develop a large enough pool of applicants that allows a college to maintain the appearance of exclusivity.

• …To a Shrinking Market. Here’s the way I ask the question: How many middle-class families are there in the U.S. that are able to spend $250,000 after-tax dollars on a four-year degree in, say, archaeology? And to do that for multiple kids? The “middle class” is important, because we’re not worried about an affluent family’s ability to pay — and a middle-class family isn’t likely to qualify for much in the way of financial aid. And the “U.S.” is important, because we’re not worried about the pool of families overseas that are willing to pay: That’s like to be an expanding pool. So the number of middle-class families with a spare quarter-million dollars is guaranteed to be a shrinking number — which means that colleges’ domestic “addressable market” is guaranteed to contract.

Where’s “The Middle” of Higher Ed?

Through unbundling, the Internet has historically evaporated the middle of many markets. So what’s the equivalent of “The Middle” in Higher Ed? It’s not as straightforward analysis as, say, the Media business. Simply going online isn’t a near-term solution for most schools, as many former print magazines have done. And colleges don’t normally acquire each other (unless they’re online-only schools), so the kind of consolidation that happens in more-traditional business arenas isn’t likely.

But that doesn’t mean that many aren’t at risk.

A 2012 study by Bain found that fully one third of the 1,700 colleges surveyed were on an “unsustainable financial path” — they were spending more than they were taking in — and found another 28% ““at risk of slipping into an unsustainable condition.” Bain and Sterling Partners have posted a web site with an interactive tool providing information about the schools at risk. Critics say the numbers come from the depths of the Great Recession, when fund-raising dipped substantially, and that the situation is more complicated than the Bain report describes. But it might be challenging to find a college administrator today who isn’t concerned about the rapidly-changing nature of the college market.

Because it’s a complex dynamic, it may be that all of paying side of the market – students, families, and government – will continue to throw money at the problem, paying for an education whose value they may not be able to accurately quantify. But most markets inevitably succumb to market forces, so let’s apply the Law of the Lost Middle and see what some results might be.

• In an unbundled world, the high end would be occupied by Ivy League schools – in fact, any institution in the billion-dollar club of endowments, which could let all students attend for free if they wanted. These would be likely to continue to thrive, because they’ll benefit from the twin towers of more-affluent families paying tuition, and more-affluent graduates as lifelong donors.
• The base of the market pyramid would be occupied by local community colleges, and some existing online institutions. In a unbundled world, these would also be likely to survive, and perhaps even thrive, because they have deep connections to local communities and specific populations.
• Unbundling would seem to put at risk the segment of the market comprised of low-endowment, lesser-known four-year liberal arts colleges far from major cities. These schools would be the most likely to have substantial challenges revamping themselves for the unbundled future — and unlike their counterparts in major cities, these colleges won’t easily be able to re-use their campuses for other activities, such as large-scale education experiences for corporations, due to their remote locations.
• State colleges that aren’t well funded will also have their own challenges. While their costs are rising more slowly than private four-year institutions, they’re still increasingly expensive. And it’s becoming harder to graduate their students in time: Forbes reports that 80% of students who graduate from private colleges are done in four years, but nearly half those graduating from public colleges require five or more years. For example, Arizona State University had more than half of its students graduate in 6 years — which may partially explain why ASU has moved so aggressively into online education.
• To avoid losing their core market, private colleges are likely to increase their overseasa recruiting efforts, reaching into a large pool of affluent families willing to pay the higher costs of out-of-state and out-of-country students. America is seen as providing some of the best educational opportunities to encourage critical thinking and artistic skills, and those capabilities are heavily sought after in many other countries. That dynamic is likely to dramatically change the makeup of the student bodies of such schools in the future, as administrators try to avoid having their schools occupy an evaporating Middle.

Opportunities for Higher Education in an Unbundled World

Though it remains a work in progress, we already have some strong indications of what an unbundled media industry looks like — and what surviving companies have done to stay alive. What are some similar opportunities for colleges? Though a comprehensive list of options could take up another article, here are some examples of ideas that have parallels in other industries.

• Helping People Make Early Adulthood Decisions. With a range of options available to them – from gap-year programs to online courseware to work-and-learn options, graduating high school students will have a much more complicated decision-making process before them. As a result, colleges could begin taking more responsibility for helping students make decisions about going to college – and schools will come up with creative ways to package those options in a variety of offerings.
• Hybrid Learning in the Real World. The lines between formalized classroom education and real-world learning is already blurring, as online and brick-and-mortar colleges begin giving credit for life experiences and on-the-job learning. Why shouldn’t colleges more proactively create these kinds of work-based learning opportunities, blurring the lines between internships, apprenticeships, on-the-job training, and traditional courses? Rather than maintaining a mythical Chinese Wall between these arenas, colleges could embrace programs that deliberately blur the lines — and anoint work-environment learning as college-sanctioned learning before those work experiences even begin.
• Lifelong Learning. Colleges could become purveyors of services throughout a person’s life. Whenever you go through a career transition, or want to learn something new, the college you attended could offer to be your resource platform, providing you with online career development courses, onsite refresher seminars, and even full-blown continuing-education degrees.
• Hybrid In-person/Online Offerings. Just as media businesses now make little differentiation between a print and an online article – writers must produce content for both at the same time – colleges could require courses to be designed simultaneously for in-person and online. Of the 16,000 courses that Arizona State University offers, 10,000 are “tech-mediated,” with some component supported by technology. And just as some articles are actually better online than in print – look at the New York Times’ Snow Fall for an example – college instructors could create online courses that could offer a vast improvement over some in-person lectures. Colleges would therefore have to reward teachers who go digital, compensating them for adapting to a hybrid world.
• “DGREEs.” As Tara Lemmey of LENS Ventures so cogently maintained at the DGREE Conference in 2011, online and in-person courses — and their hybrids — could be equally accredited. Georgia Tech was one of the first brick-and-mortar college in the U.S. to announce a complete online Master’s degree in computer science, fully accredited, at a fraction of the cost of an onsite degree: Watch for an explosion of these offerings from existing and new colleges. And just as individual articles have become the basic atomic element of media content, individual courses could become available through learning aggregation services. Well-known colleges could put their brands to work as umbrellas for bundles of courses that could come from multiple schools, and new brands may appear that could gain credibility with students and employers because they would provide exactly the package of learning experiences needed for particular kinds of work.
• Deep Connections with Employers. Colleges could begin building deep connections with employers to ensure their offerings are relevant. Those offerings could be continually updated to ensure they remain relevant, often through input by graduates who have been hired at those companies. In fact, today’s job-listing sites could morph into online market services, essentially allowing employers to bid for future trained workers who commit to certain learning experiences to upgrade their skills – and for schools to bid for providing that learning. On the flipside, employers will seek to provide learning opportunities for their workers, such as Starbucks’ collaboration with Arizona State University to offer degreed programs.
• New credentialing services. Watch for an explosion of new credentialing services that are tied to specific employers’ hiring needs. As Udacity’s Thrun describes in a McKinsey report, flexible credentialing will be critical if the global workforce is to shift to the kinds of work that organizations will need in the coming decade. Which credentialing services will survive? The ones that prove to businesses that the educational experiences they verify are valuable for future work — reducing risk for the employer.
• Lower costs. Many colleges are probably going to have to move (painfully) to significantly lower cost structures that will allow them to adapt more nimbly to a constantly-changing business landscape. Why is this critical? ASU charges for an online four-year degree half what it does for one that’s onsite. And Georgia Tech dropped the cost from $45,000 for an on-campus degree to $6,600 per year for an online “dgree.” How many businesses can drop their price by 85%? And what happens if high-quality online universities start appearing that charge $4,000 for a bachelor’s degree — or nothing at all? One likely result: Colleges will need to phase out tenure. The alternative will be to reward teachers based on performance – much of which will be measured online, with Yelp-like ratings, such as Koofers RateMyProfessors.
• Sharing. Colleges need to begin publishing their own successes (and, hopefully, failures) as they shift to an unbundled world. They need to collaborate much more frequently, in a variety of online and in-person contexts, through events and databases — and they’ll need to share their learnings more rapidly than media companies did when their businesses began to erode.

Of course, many of these steps might be seen as band-aids on bleeding wounds: There is an increasing perception that education itself is broken, because it’s built on a paradigm created in the industrial era. The fourth paper in this series, “The Future of Work and Learning,” discusses what a new model for education and occupations might look like.

A Word on Platform Thinking

If you really want to see a glimmer of what success might look like in the future for Higher Ed organizations, watch this video on platform thinking by J.P. Rangaswami, and this one on open systems by Tim O’Reilly, from Tara Lemmey’s DGREE.org conference.

J.P. was the Chief Scientist for British Telecom when he gave this talk, and is now the Chief Scientist for Salesforce.com. In his talk, he deconstructs the thinking behind creating a platform, rather than simply creating a set of products. People buy products — but products can be overtaken in markets by competitors’ products, so a product line by itself doesn’t necessarily mean a sustainable business. But a platform — a set of services on which others can create products and services — is potentially far more sustainable, because it involves a broad range of stakeholders, each of whom has an incentive to keep the platform alive. eBay is a platform. Google’s AdWords & AdSense together make a platform. Salesforce.com’s Apex programming language is a platform. People build products using these companies’ applications and services, sell things through them, and therefore become “locked in” to those platforms.

Of course, not all platforms are destined to create sustainable market advantage: Sun Microsystem’s (now Oracle’s) Java programming language is hugely successful, but it wasn’t designed in a way to lock customers into Sun’s hardware platform. Yet the thinking behind successful platforms is exremely germane to Higher Ed. Is a college simply a set of courses? Or is it a platform for learning services, on which entrepreneurial service providers (a.k.a. teachers) can build dynamic, leading-edge products (a.k.a. courses and other learning experiences)?

Tim O’Reilly is the founder of the industry-defining O’Reilly Media, a small but incredibly influential publishing firm that has delivered leading-edge technology-focused books and conferences since 1978. In Tim’s talk, he shows how an open approach to something as complex as government can have a seismic impact on education. Higher Ed has operated in many ways like an amalgamation of “walled gardens,” with little sharing of resources and best practices across institutions, at least when compared to hi-tech. An open approach to Higher Ed would ensure a much higher level of “interoperability” between schools, allowing students to move between them as easily as information moves between different software applications — and allowing the most innovative schools to flourish.

Taken together — platform thinking and open systems could have a transformative effect on individual colleges, and on Higher Ed as a whole.

Looking Forward: Unbundling an Economy

All of these coming changes in Higher Ed are symptomatic of a variety of seismic shifts in whole industries. High technology and the Internet have sped the pace of change in our economy dramatically, and have fueled growing rifts in the way that whole sectors of our economy function. The Middle is evaporating in many (though not all) arenas. But one seemingly inevitable result of these seismic changes is the rapid dissipation of what we’ve come to call the Middle Class. The next paper in this series, “Unbundling Inequity,” covers a range of information sources pointing to a substantial shift toward a world with a substantially-reduced “middle” in our economy.

Next: Part 3, Unbundling Inequity: The Evaporation of the Middle Class

-gB

Gary A. Bolles, eParachute, Inc., gbolles@gmail.com

eParachute is a San Francisco-based startup providing online career decision-making and job-hunting tools inspired by the work of What Color Is Your Parachute?, the most popular career book in the world, with 10 million copies in print. Learn more at eparachute.com.