Online Education as an Agent of Transformation

WHEN the first commercially successful steamship traveled the Hudson River in 1807, it didn’t appear to be much of a competitive threat to transoceanic sailing ships.

It was more expensive, less reliable and couldn’t travel very far. Sailors dismissed the idea that steam technology could ever measure up — the vast reach of the Atlantic Ocean surely demanded sails. And so steam power gained its foothold as a “disruptive innovation” in inland waterways, where the ability to move against the wind, or when there was no wind at all, was important.

In 1819, the technology vastly improved, the S.S. Savannah made the first Atlantic crossing powered by steam and sail (in truth, only 80 of the 633-hour voyage was by steam). Sailing ship companies didn’t completely ignore the advancement. They built hybrid ships, adding steam engines to their sailing vessels, but never entered the pure steamship market. Ultimately, they paid the price for this decision. By the early 1900s, with steam able to power a ship across the ocean on its own, and do so faster than the wind, customers migrated to steamships. Every single transoceanic sailing-ship company went out of business.

Traditional colleges are currently on their hybrid voyage across the ocean.

Like steam, online education is a disruptive innovation — one that introduces more convenient and affordable products or services that over time transform sectors. Yet many bricks-and-mortar colleges are making the same mistake as the once-dominant tall ships: they offer online courses but are not changing the existing model. They are not saving students time and money, the essential steps to disruption. And though their approach makes sense in the short term, it leaves them vulnerable as students gravitate toward less expensive colleges.

For-profit universities latched on early to online learning, rough as it was in the 1990s. The target, as with all disruptive innovations, was customers who wouldn’t otherwise consume their product — in this case, working adults for whom traditional higher education was inconvenient. In theory, for-profit companies should have shaken up the higher education landscape. But federal financial aid seems to have gummed up the disruption: the easy revenue has encouraged some schools to indiscriminately enroll, often at the expense of quality, and has discouraged cost reduction.

Still, the theory predicts that, be it steam or online education, existing consumers will ultimately adopt the disruption, and a host of struggling colleges and universities — the bottom 25 percent of every tier, we predict — will disappear or merge in the next 10 to 15 years. Already traditional universities are showing the strains of a broken business model, reflecting demand and pricing pressures previously unheard-of in higher education. One example: Needing a cash infusion, Thunderbird School of Global Management in July announced a merger with Laureate Education Inc., an online pioneer.

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