Has Online Education Jumped The Shark?

A rather startling development occurred this month in the market for online learning. The stock of 2U, the leading public company in online education, tanked by 64% in a single day after the company’s CEO told investors that online degrees have become mainstream.

At first glance, you’d think that is positive news. After all, it signals that online learning has become so fully accepted by prospective students and employers that the market will enter yet another growth spurt. Instead, investors took “mainstream” to mean “mature” and 2U lost more than a billion dollars in market value in a single day.

“When we started 2U, the market was in its infancy,” explained 2U CEO Christopher Paucet who co-founded the company in 2008. “The core thesis of the company was that online programs could drive a similar quality to campus programs and that the company’s scale and unique platform characteristics would build a competitive moat around the business over time. Today, the online education market is evolving. Secular forces are pushing more schools online. Indeed, it’s becoming obvious that all schools are going online. We’re calling it the mainstreaming of online education.”

The upshot: Competition for students has become immense. The acquisition costs of recruiting those students is continuing to skyrocket. Many rival programs at other universities are much less expensive than the 2U options, in part because 2U takes 60% of the tuition revenue. And 2U is admitting that its degree programs with such premier schools as the University of North Carolina at Chapel Hill and the University of Southern California, will enroll fewer students as a result of these trends.

No wonder, the stock crashed. 2U shares, which traded at a high as $90 a share less than a year ago, collapsed by two-thirds to $12.80 on July 31 from $36.50 a day earlier. Today (August 14), the obligatory securities class action suits were filed against 2U by two different law firms, alleging that the company’s leaders had made “materially false and misleading” statements about its prospects that caused investors to be more optimistic about the company.

Look no further than the market for online M.B.A. programs. Already, nearly 32,000 students are now studying for an online M.B.A. degree at just the 25 largest programs in the U.S. The latest U.S. News ranking lists puts numerical ranks on a record 285 programs, up from 267 last year. What’s more, the magazine profiles 302 different online M.B.A.s. 2U itself has ten online M.B.A. programs in its portfolio, including those at UNC, Rice, and Syracuse. This year the University of Michigan, Southern Methodist University, and UC-Davis’ Graduate School of Management all entered the increasingly crowded and commoditized market.

And while 2U convinced many business school deans to price their online M.B.A.s similar to their on-campus programs, the pressure on prices has been significant. The University of Illinois’ Gies College of Business offers a $22,000 online iMBA program, and Boston University’s Questrom School of Business recently announced a $24,000 online option that will start next fall. Those are two prominent higher education brands that directly compete with 2U premier online M.B.A. at UNC which now costs more than $100K more with a price tag of $125,589.

2U programs are quality options, with live online classes, residencies, and more bells and whistles than the no-frills programs priced below $50,000. But the price differential is so great that it is becoming increasingly difficult for 2U’s university partners to match the earlier growth rates achieved by many of its digital degree programs. What’s more, the online market is innovating at a pace that makes it harder for 2U to keep up. One notable example is the newly revised online M.B.A. curriculum at Indiana University’s Kelley School of Business which doubled the number of elective courses a student can take and added majors in specific disicplines. Many online programs are far more rigid, with few or no elective options.

The rapid growth of some of 2U’s online options has also led to charges that admission standards have fallen. As a recent article on 2U’s partnership with USC’s School of Social Work in the Los Angeles Times noted that in recent years about 40% of the students in that program were deemed “conditional admits” because they lacked the mesquite minimum GPA or failed to meet other admission standards.

To get online students, 2U, which is responsible for the marketing of its online program partners and the recruitment of students, has resorted to lead generation campaigns on highly dubious websites with fake clickbait rankings. These shadowy players on the Internet have figured out how to gain high listings in Google search by convincing schools to link their valuable .edu addresses to the site’s favorable rankings on their programs (see The Biggest Rankings Scam On The Planet and Confessions Of An Architect From The Ranking Netherworld).

2U says that it places advertising on sites that meet the expectations of their business school partners and aligns with their brands. “We deploy targeted online advertising campaigns across a range of web properties that generate high-quality potential students for our university partners,” says Jemila Campbell, a spokesperson for 2U, in a statement provided to Poets&Quants. “We strive to advertise our partners’ programs on web properties that meet their expectations and align with their brands. 2U doesn’t control or endorse the editorial content, including the ranking methodologies, on these websites.”

Yet, the firm’s practices were a harbinger of its recent stock tumble, something that has been evolving for the past year. 2U, which has yet to earn a single penny, is now forecasting net losses of between $157.5 million and $151.5 million this year on a revenue estimates of between $576.9 million to $586.9 million. In other words, for every dollar of revenue that 2U books this year, it is losing about 38 cents.

That kind of math may have been accepted in the frothy dot-com era of the late 1990s but today’s investors have much less patience for such tired excuses as first-mover advantage or building marketshare while breaking even is continually elusive.

“The mainstreaming of online education means increasingly regional competition,” said Paucet in his call with investors. “While brands still win, they win in smaller circles of dominance. Regional bias impacts enrollment decisions. For example, a student in Philadelphia has online options locally that they didn’t have back in 2014. Program quality and brand strength both matter in the long run, but you need it be for students, and more options simply means it’s somewhat harder.”

Frankly, few think the market for online education has actually matured. The growth expectations for digital education still remain strong. Instead, more people are thinking that the business model of a university paying 60% of all its revenue to to an outside vendor to offer an online program may be questionable.

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I’m the editor-in-chief of Poets and Quants, the most read and most popular provider of information on business programs in the world. Our main website, PoetsandQuants.c...