My normal focus here is on innovation, but as I’ve a daughter looking at college and as I just had a good reason to take a look at the state of education and at massive online open classes (MOOCs) in particular, I’d like to share some thoughts here. Also, one could in principle consider MOOCs a potentially disruptive innovation for the current model for higher education.

One of my goals with this post is to generate some comments, so I hope you’ll let me know what you think.

The Landscape. Higher education in the US is clearly heading for a brick wall. From 2003-2013, US college tuition increased three times as fast as the CPI; at the same time, an advanced education is increasingly important for career prospects. Together, these factors are what drove overall student debt in the United States above $1 trillion. If these trends continue unchanged, a college education will eventually move out of reach for all but the extremely wealthy.

At the same time, increasingly sophisticated online tools and ever faster internet access has been stirring the pot. As early as 2002 universities like MIT began to experiment with putting course materials online. They correctly recognized that (a) without the guidance and incentive of a formal, tuition based course, few would complete the courses and (b) that without a degree or other formal certification, the courses alone had little other than personal enrichment value. Later, organizations like the Khan Academy began offering online courses with more guidance, targeting more generally relevant skills. Now, there are several brick and mortar schools—like the for-profit (and, potentially problematic) University of Phoenix and the non-profitSouthern New Hampshire University—that offer complete degree programs online.

An important milestone in this exploration of online education occurred in 2011, when a series of courses offered at no charge online in parallel to physical classes at Stanford each attracted more than 100,000 online students. These were examples of MOOCs. Shortly thereafter three distinct startup efforts emerged devoted MOOC concept: Udacity, Coursera, and edX.

In this post, I want to explore whether and how these MOOC ventures might impact higher education in general. For now, I will set aside Khan Academy (though it is a very important initiative), and the online extensions of conventional universities. The former seems to be more of a public service effort to supplement standard education, while the latter are really just migrating standard fare online. The MOOC ventures are working to build distinct new platforms for education, and to expand the scale of education by orders of magnitude. Though Udacity, Coursera and edX differ in important ways, for now I will focus on Coursera. In particular, I would like to speculate on whether and how it might disrupt conventional education, and try to peer into a crystal ball and foresee how it might change education.

Coursera is a private, VC funded ($85 million as of December, 2013; according tothis report, combined with this one) for-profit education company founded in April of 2012 by Stanford Computer Science Professors Andrew Ng and Daphne Koller. As of November 2014, Coursera had partnered with 115 colleges, universities or other course content providers, and offered 860 courses with 10 million online ‘students’.

It has focused on providing a proprietary platform for large-scale online courses (MOOCs). The platform is owned by Coursera, while course content is owned by partners, typically universities and their faculty, who develop the courses. A portion of revenue, if/as generated, is returned to the content providers.

Coursera is currently experimenting with business models, with the most prominent being courses taken for verified certificates at modest (e.g. $30-$100) cost per course. Five courses have been recognized by the American Council on Education as suitable for college credit, subject to proctored exams with a $60-$90 testing fee. By September, 2013, Coursera reported its first $1 million in revenue from this approach. As of October 2014, Coursera was reportedly seeing $1 million/month in revenue from the program. Apparently, this revenue may be somewhat concentrated around the most popular/relevant courses, with one Coursera professor reporting 10,000 certificate participants in a single course (Introduction to Marketing, David Bell, U. Penn).

Coursera’s overall approach seems to be positioning it as a ‘disruptor’ to conventional higher education. According to Michael Raynor (The Innovator’s Manifesto):

Specifically, Disruptive innovations are defined as products or services that appeal to markets or market segments that are economically unattractive to incumbents, typically because the solution is “worse” from the perspective of mainstream, profitable markets or market segments.”

The figures below illustrate how Coursera’s approach conforms to this definition.

Mainstream, incumbent, universities appear to have a productivity frontier like this:

By leveraging scale, creating virtual classrooms, and by targeting people more interested in skills development than in formal degrees, Coursera has managed to position itself well outside of what is possible for conventional universities:

Thus, Coursera has created (if not actually, then potentially) a much lower cost structure that enables them to target a less-picky segment of students that are presently, because of cost and poor access, non-consumers of college programs. If Coursera’s underlying technology and approach allows them to move upward in value, while preserving their low cost structure and massive scale, then they would disrupt higher education, putting mid-tier 4 year and public 2 year colleges out of business, and possibly even disrupting elite universities.

Is Coursera likely to be able to do this—fully disrupt the current higher education system?

Conclusion. I think that Coursera may well fully disrupt 2 year public colleges, and will seriously erode the bottom of the market for ordinary 4 year colleges that are below average, non-elite schools. But, I strongly suspect that they will not be able to displace the elite and above average non-elite schools. It can be hoped, however, that they will help reverse the trend for tuition. Here’s why.

Coursera may have core technology that is sufficiently extendable to allow them to eventually displace 2 year public colleges and low-to-mid tier 4 year colleges. Though their current focus is on continuing education, they do have 5 courses that are now accredited for university credit (though it remains to be seen whether brick-and-mortar universities will honor them). In principle, there is nothing to stop Coursera from expanding this program to a full, accredited, university level program. A key event in this trajectory, aside from beginning to offer the degrees, will be the emergence of one or more prominent graduates with substantial, visible accomplishments. With full degree programs in place, and prominent success stories, the population of students looking simply for a credible education might ‘tip’ toward MOOCs.

However, I would argue that Coursera is unlikely to be able to fully displace top-tier universities. Why? Simply because Coursera relies upon them for content, and because Coursera shares revenue from courses with the content creators. Ultimately, in my view, this partnership with Coursera could allow large universities to reduce tuition for mainstream graduates because of (a) the efficiencies of using MOOCs for some of their curriculum and (b) their revenue share in the displacement of mid-tier and 2 year colleges, along with revenue from continuing education via the MOOC ventures. This revenue would, basically, subsidize brick and mortar students. They would allocate MOOC revenue to this subsidy for two reasons: (1) Should the traditional elite system collapse, then the infrastructure for both brick and mortar and MOOC curriculums would vanish. There would be no superstar professors to create the content needed for the MOOCs, nor to attract the elite students still willing to pay for degrees from elite schools. (2) Tuition costs have to be reined in somehow.

Coursera also seems likely to carve out a ‘blue ocean’ niche for continuing and adult education – overseas students that could not otherwise obtain a degree, professionals wishing to demonstrate competencies without committing to (for instance) a complete part time or executive MBA, etc. It is the scale from this that may, even at low per-student prices, create enough revenue to sustain the overall educational system.

In closing, let me point out that edX is doing something very similar to Coursera, with an open source platform, and is both nonprofit and controlled by a consortium of universities. If Coursera does not do what I suggest here, then edX might.

What do you think? This is a highly speculative piece. Do you agree or disagree?

Acknowledgements – Some elements of this post arose during conversations with fellow students at the Fox School of Business. My thanks to Gary. Pinkesh and Gianfranco for their insights!

Postscript: Another insight from my colleagues at Fox is that the cost structures of mid-tier and elite universities are quite different. Elite schools that maintain a large R&D program receive relatively little of their total operating income from tuition (10 % or less is typical); in comparison, large public colleges might receive as much as 50 % of their operating income from tuition.

In a scenario where there is pressure on tuition costs, forcing tuition fees down, then the elite schools will be better positioned to survive that change than the mid-tier schools. -G.