The fortunes of Online Program Management companies, or OPMs, are falling fast these days. These companies, which help colleges set up online programs and often help finance them as well in exchange for a cut of revenues, have recently seen a barrage of bad news.
Wiley posted an 8 percent drop in university partner enrollment for its OPM segment, Pearson lost its biggest OPM customer (Arizona State University) and reported falling enrollments (1 percent) and revenue (2 percent), Coursera saw a 4 percent drop in revenue and lowered full-year guidance, 2U dropped its full-year revenue guidance by 10 percent and began an across-the-board 20 percent set of layoffs, and FutureLearn reported that it may not survive another year without new investment.
What happened to this market that many analysts consistently describe as profitable and growing, and that many critics fear would take over and privatize much of higher education?
Rather than simply pointing to a pre-pandemic aphorism that college-going always declines when unemployment is low, or cheering the collapse of what many academics see as an unwanted trend, it would be useful to take a deeper look at what is happening to one of these companies, 2U, to get a better understanding of not just OPMs but the broader trends in the market for online education.
2U has been the poster child for revenue-sharing models, and the company tends to make the most strategic changes based on broader market conditions. And as such, it provides more useful market insights than its lower-profile competitors. The associated news provided by 2U late last week alongside its earnings was no exception.
What 2U announced was both a pivot and an acceleration. In 2U’s early years, the company focused on working with one online graduate program per discipline (so that none of its partners were in competition with each other) and working only with highly-selective programs with low enrollments per course. In essence, 2U worked on high-tuition programs that relied on elite reputations.
2U and the OPM market have come under fire in recent years for, in effect, encouraging unsustainably high graduate program tuition, thus increasing student debt, culminating in the Wall Street Journal article about the University of Southern California’s Online Masters of Social Work that charged upwards of $115,000 for a two-year program. While the article conflated USC and 2U issues, it is worth noting that 2U’s response to the tuition issue was hands-off—stressing that the partner institutions set tuition, not the company.
One key part of the big pivot last week is that 2U is now taking an active role to encourage programs to lower tuition, first by “exchanging revenue share points for tuition reduction.” The argument is that it is easier for 2U to market lower-tuition programs, and that it is the right thing to do.
The second part of the pivot is that 2U will no longer offer a one-size-fits-all high-touch approach typically charging 60 percent of tuition, instead offering a stackable set of service packages that start at 35 percent “for a core set” of tech-enabled services” with options to go up to the legacy amount 2U still offers the full bundle for schools that want all services. In essence, this allows schools a better option to choose only the services needed, which helps with lower tuition and acknowledges that colleges and universities have been developing their own online-education capabilities. So overall, the move is from a deliberately high cost, full package of services to a stackable set of services and incentives for lower tuition.
The acceleration is that 2U is going all in on the education platform strategy that started with the company’s acquisition of edX last year. The idea at the time was to rely on a flywheel effect, where edX can upsell to its tens of millions of registered learners taking free or low-cost online courses known as MOOCs, thus driving down the marketing costs required for the OPM business, while offering a spectrum of options—from free MOOCs to stackable certificates, to bootcamps and short courses, all the way to full degrees. The flywheel aspect is that the more the strategy succeeds, the more revenue is made by institutional partners and by the company, leading to more free courses and registered learners. It’s a self-reinforcing strategy that is the same one followed by Coursera.
2U announced last week their plan to fully embrace this strategy. The company will reorganize as one entity under the edX brand, and it will increase its focus on sustainability (and profitability) and decrease the focus on growth. This acceleration unfortunately means that 2U will lay off approximately 20 percent of its staff across all functions in the second half of 2022. The claim made to financial analysts is that revenue estimates for full-year 2022 would be down 10 percent, but EBITDA (a popular measure of profit) would be up 30 percent.
2U is a company that is willing to make big changes and not just ride out the storm. They did it in 2019 when they realized the increased level of competition between online programs was leading to lower enrollment expectations, and they are doing it now.
Market and Company Implications
In pursuing this strategy, 2U is betting that the broader market for online college programs is changing and may continue to see decreasing enrollments and decreasing average course activity in the short to medium term. 2U is betting that these changes are structural, and not an end-of-pandemic situation that will reverse back to normal.
2U is also betting, or acknowledging, that the days of high-tuition online graduate programs are going away. 2U wants to get out of the crosshairs of activists looking to rein in the revenue-sharing OPM market. Having lower-priced options and a direct incentive for colleges to set lower tuition may help take off this pressure, and it could help colleges make better decisions.
The jury is obviously still out on whether these strategic changes will work for the company. edX was never the premier MOOC brand—that title belongs to Coursera. And 2U is potentially losing some of the hard-won brand value of “2U” in terms of providing high-quality offerings for elite schools that do not want to put their own brands at risk.
It’s important to remember that before 2U, few highly-selective colleges were willing to offer fully-online degree programs. Brands have value and inertia.
Furthermore, for this strategy to work, colleges need to be aligned in the desire for lower-tuition programs, which is not a given. And there are additional questions to consider. What will be the impacts of the layoffs, and will company morale impact their services for partners? And core to the entire strategy, will the flywheel effect work by reducing the amount of marketing and recruitment spend needed to fill online programs beyond what has already been achieved in early 2022?
While I’m not ready to say that the changes will work, I do think the changes were needed and are going in the right direction regarding lowering tuition and offering more flexible, lower-cost choices.
Resting on its laurels and riding out the storm would have been a mistake, and it will be interesting to track 2U / edX’s performance over the next 2 to 3 years to learn not just whether the strategy works, but also to better understand the changing nature of post-pandemic higher education in the US