Bryan Caplan  

"Wholesale Bankruptcies" in Higher Education: I'll Bet Against It

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While I was vacationing in Orlando, the Economist ran an exuberant article on online education.  Most of the piece is too vague to be wrong, but this passage calls for a bet:
Clayton Christensen, a Harvard Business School professor and author of "The Innovative University", predicts "wholesale bankruptcies" over the next decade among standard universities.
Here's my proposed $100 even-odds bet for Christensen: Out of U.S. News and World Report's top 200 "National Universities" of 2012 at least 190 will remain in business on January 1, 2023.  I'm happy to negotiate these terms.  My reasoning, to repeat, is that higher education is largely a form of signaling, not skill acquisition - and one of the traits that students signal is sheer conformity.  And in our society, conformists go to brick-and-mortar universities.  The first students to do otherwise mark themselves as non-conformists - and employers will accordingly frown upon them.

By the way, if this were any other industry, would the Economist consider the following figures a promising sign?
In October Udacity raised $15m from investors. It has 475,000 users.

In April two of Mr Thrun's ex-colleagues, Andrew Ng and Daphne Koller, launched a rival, Coursera, with $16m in venture capital. At first it offered online courses from four universities. By August it had signed up 1m students, rising to over 2m now.
The number of students is indeed impressive.  But the dollars of venture capital raised are laughable.  Pitiful.  The obvious explanation is that venture capitalists see online education as a rival for blogs, Wikipedia, and other online infotainment, not actually-existing higher education.  The only lunch online education might eat is the one that existing websites already provide for free to all mankind.

Update: Yglesias and Tyler respond.


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COMMENTS (27 to date)
David R. Henderson writes:

@Bryan,
First, welcome back from vacation. I've missed you.
Second, although I basically agree with your point, I'll take the bet at those odds if you make it that 192 or more will be around on January 1, 2023 and if you make it $400 to make it more interesting. But if we do, we'll have to store the current list somewhere. Are you willing to do the storage and take the bet?

Glen Raphael writes:

The reason conformists go to brick-and-mortar universities - the reason it serves so well as a signal - is that "conventional wisdom" currently says these are the best way to acquire skills. If the new institutions do a better job at providing the core stated purpose of universities - skill acquisition - some number of "early adopters" will switch, which will be rewarded by some number of "early adopter" employers. Once there's enough momentum going, the mid-to-late adopters will follow and soon enough the online universities will be the default thing to do and will send the same "conformity" signal that attending traditional college does now.

Given these sort of enrollment numbers, Christiansen seems obviously right in the long run, though it's hard to predict the exact timing. Universities have some clout; they well might be able to get the state to prop them up for a good long while with subsidies.

Another complexity is that when the universities do start going bankrupt, the school name will still be worth something to somebody and will be sold, so you should clarify that by "remain in business" you mean continuity is retained. Not sure how to word that exactly.

Brian writes:

I would think that Bryan's bet is pretty safe, even at 192. It's a sucker's bet. I'd be willing to bet on 198 or more remaining "in business" over the next decade. In fact, if mergers are counted as remaining "in business," I doubt that even a single one would be lost. Research universities don't close. Has even a single one been lost over the last 50 years?

The reason has little to do with signaling, which I reject anyway, and everything to do with the role of the research university in modern American life. With the demise of the corporate research lab, intellectual innovators have nowhere to go but the research university, and there's little likelihood that government will abandon its favorite form of welfare for the intellectual elites. And even if that were not the case, universities would not be likely to close just because a new mode of inexpensive knowledge acquisition is available. If this were sufficient, the universities would have failed shortly after Gutenberg introduced his printing press.

Now change the list to the BOTTOM 200 liberal arts or regional colleges and the best becomes mildly interesting.

Noah Yetter writes:

Actually the obvious explanation is that you have no clue how VC funding works. Those dollar figures, by themselves, mean absolutely nothing. At minimum, you need the total valuation numbers to get an idea of what the investors think these ventures are worth at this time and how much of that the investors have captured. Even then, it's only an expression of a point-in-time value, and doesn't tell us much about the future potential.

genauer writes:

Well,

the online universities should first clear the brush below the top 200, and 10 years will sure not be enough to really kill the entrenched establishments.
It takes many more years of shrinking market share, right sizing , ....

But I can not propose a verifiable bet to adress the otherwise great potential (in my view).

Brian writes:

Make that "the bet becomes mildly interesting."

bryan willman writes:

Uh, how many of the "top 200" are state institutions that cannot actually go bankrupt, or heavily endowed institutions that cannot practically go bankrupt without a repeat of the great depression?

How many of the "top 200" have medical schools or other divisions that require various kinds of in-person practice?

cm writes:

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Phil writes:

I've done a few online courses through a local college. For the most part, they're laughable in their quality. My son took one class through the Idaho Digital Learning Academy (IDLA) when he was in high school here in Boise. The kids said it stood for "I didn't learn anything." I'm sure online classes will continue to get better, but I would still rather be in a class room.

F. Lynx Pardinus writes:

One thing to remember is that both sites are less than a year old and are still in enormous amounts of transition. (Udacity largely switched away from deadline-based courses; Coursera courses can feel like beta versions with instructors switching formats midstream as they experiment with what works and doesn't work in the new medium.)

I'm reserving judgement until they get a few years of courses under their belts and have worked out a lot of the details. The finished product may be quite impressive.

Isma writes:

Brick and mortar Universities will exist forever because of the name. Employers want to see the name before they give you an opportunity to work.

Charles Giacometti writes:

The colleges at risk are not the top 200--nor is it the vast majority of public universities and community colleges. The risk is to colleges at the third-tier and below, especially those with small or negligible endowments. I expect some of them to start drying up as soon as 2015.

Glen S. McGhee writes:

"The number of students is indeed impressive. But the dollars of venture capital raised are laughable. Pitiful. The obvious explanation is that venture capitalists see online education as a rival for blogs, Wikipedia, and other online infotainment, not actually-existing higher education. The only lunch online education might eat is the one that existing websites already provide for free to all mankind."

I'll go along with this -- but we need to be careful to remember that this is only true because of the structural inertia of the credential markets -- were these to change (to "innovate"), all bet are off.

Historically, credential markets decline or collapse in sync with political-economic systems that depend on their cultural products. These cycles are epochal, throughout history and around the world.

The only reason the bet will pay off is that top ranking schools are not "standard universities." This sleight of hand is why the bet is a good one.

But Christensen is also right -- edifice envy and tuition hikes are starting to collide with state policy (i.e., $10k degrees), and structural inertia will push many of these lower status schools right off the fiscal cliff.

We need to remember that reliability (the capacity for consistent replication of product, both for the reproduction of organizational structures and in terms of output) and accountability (the signal) can become a death sentence IF the institutional environment changes overnight. These same characteristics that promote success over the long term make adjustment and change impossible -- see Hannan and Freeman, 1984 on structural inertia and organizational change, starting on page 152.

Wasay writes:

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genauer writes:

I think there are 2 more important aspects to online universities and grade taking:

a) (individual) speed
b) (anonymous / impartial) grade taking

a) if you look e.g. at physics nobel prize winners, a lot of them did their great work, when they were 25, 27, 30

The typical sequence of a german physics PhD of my age is:
with 6 to school, 13 years school, 1 year military, 6 years to diplom, 4 years PhD, and you start serious work age 30.
With online university, 6 (start) + 11 (skip one of 12 years) + 3 (online BS + MS) + 3 PhD = 23 years old, and of to genius work, for geniuses;
And the normal ones work 4 more years to pay my pension : - )

b) in the last 30 years in most places severe grade inflation happened. Anonymous, online, standardized tests, like a GMAT are more cost effective, impartial and will be required. Since that is by implementation logic a natural part first of online programs, this provides an inherent strong push.

Avron Barr writes:

There are apparently about 4400 degree-granting institutions of higher education in the US. How many of them will survive the decade? 100 bankruptcies? 1000?

Tom West writes:

Given

(1) Mastering the knowledge provided in a given course is perhaps 10%-20% of the value of a course to both the student and the prospective employer, and

(2) Such mastery is the only part of the university experience that on-line courses can really provide,

then I don't see on-line courses replacing the university experience any time soon.

As for people talking about replacing the bottom tier universities, I'd have to say that the students at those institutions are perhaps the *least* likely to possess the self-discipline necessary to complete an on-line course successfully. If it were, libraries would have at least damaged such institutions years ago.

Glen Raphael writes:
But the dollars of venture capital raised are laughable. Pitiful.

Another way to read that is: online universities are very cheap to run so they don't need very much money - they scale better - by orders of magnitude - than do traditional universities. That is their biggest strength. Well, that and consistency - a fully-online university could provide courses that monotonically increase in quality over time, whereas a standard university is doing well to merely maintain their existing quality level.

Since the new universities don't need very much money to serve a vast customer base, it would be crazy to ask for lots of venture capital investment up front, giving up equity and giving up control to the investors.

The fact that the new institutions can serve so many customers (and fine-tune their product line and start to gradually adjust supply to meet demand) with merely "laughable" levels of early investment is exactly why traditional universities should be very afraid.

Also: what Noah said. Typically, early rounds of VC financing are designed to provide a short leash - *just enough* funding to "take it to the next level" - they don't indicate what valuation is being put on the final company. The fact that a VC provided 15 million doesn't tell you whether the overall company is thought to be worth millions, billions, or trillions - it only tells you that they've convinced investors they can spend ~15 million very productively right now so it would be worth giving them at least that much.

David R. Henderson writes:

@Bryan,
In light of Brian's comment and Glen Raphael's comment above, I would like to alter the bet and make it about what % of all schools and universities close or merge. I'm not sure of the number I'm willing to bet on, but I'm thinking something like 6 or 7% as a minimum.
I realize that I've already made an offer above. I guess one could argue that since you didn't accept it, I'm under no obligation. I won't make that argument though because I did make the offer.
So, if you're willing to bet on something like the terms directly above, I'm interested. If you insist on the terms I originally offered, then I feel morally obligated to make that bet.

john hare writes:

I would think that 10% or more of all schools will not exist in current form in ten years. My son did his first two years brick and mortar while working. Then got his next two degrees online from the local university while working and raising kids. Two months after getting his bachelors, he got a job in that field. The online masters got him a raise.

I would think that some competitive employers will accept the online or no degree more and more over the next decade. Non-competitive ones will change or go under to the degree that the signaling is playing them false. That changing end result will hurt some of the brick and mortar schools.

Kendall Ponder writes:

If you have 475,000 students how do you provide individual feedback to questions? If you don't provide feedback, what does the online course offer that a book or DVD doesn't?

john hare writes:

If you have 475,000 students how do you provide individual feedback to questions? If you don't provide feedback, what does the online course offer that a book or DVD doesn't?

The class credit offers some signaling to a potential employer that would have no official record that the book had been read or understood.

Kendall Ponder writes:
The class credit offers some signaling to a potential employer that would have no official record that the book had been read or understood.

Couldn't you accomplish the same thing by just offering a test in conjunction with the DVD or book? Also, how do these courses prevent cheating?

Hugh writes:

There seem to be two problems conflated here:

1) The traditional university offering has become more and more expensive over the last few decades, whilst the earnings prospects of graduates have become dimmer: is there anything that can be done to reverse tuition inflation?

2) On-line learning seems to be becoming a reality: to what extent does this threaten the traditional offering?

These two problems can themselves be broken down into many smaller questions, e.g. should the 4 year residential BA be the norm for traditional universities?

I suggest trying to attack one small piece of the puzzle at a time, so as to keep things manageable.

Max writes:

@kendall: they do not. But the same is true for some top notch universities. Wasn't there a scandal a few months back?

Bryan, why would you think that skills are not the main reason. They are perhaps not 100 percent in line with you future job, but they might also include skills that the company didn't think of that come in handy. Of course I can only talk about mint studies and also about German universities.

genauer writes:

there is a long distance learning university in Germany "Fern Universit├Ąt Hagen" since many years, and they are obviously able to at least somewhat organize feedback,
and taking exams for remote learning. This can be done, not perfect, but somewhat acceptable.

I have NO doubt, that this can be organized, I have seen the GMAT system, that is definitely scalable and be broadened in most areas to MSc level. PhD, I have my doubts, but that would be decided earliest 20 years down the road.

Kendall Ponder writes:
there is a long distance learning university in Germany "Fern Universit├Ąt Hagen" since many years, and they are obviously able to at least somewhat organize feedback, and taking exams for remote learning. This can be done, not perfect, but somewhat acceptable.

I know you can do feedback online with a low enought student-teacher ratio. I took one last summer and was able to get answers to my questions. I don't see how you can do it with 475,000 students.

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