Back in the 1990s I used to write thematic investing reports on winners and losers from the advent of the Internet. One day I had a minor epiphany. Why, I wondered, would anyone pay to place in the local newspaper a three line “classified ad” for a “Blue 1995 Chevrolet in good condition with 55,000 miles New transmission” when they could run an Internet ad with several color pictures and full details on condition, options, location, etc.? Newspapers, I decided, were toast. Lots of fixed costs, declining revenue. It may seem obvious, but not to everyone; since 2000 “value investors” have gradually ridden NYT down from 40 to 10 and GCI from 70 to 25.
Here is the analogous question for higher education: Every September, college students across the U.S. file into lecture halls to listen to the 1st of 24 lectures on Econ 101. From Maine to Alaska they hear the same stuff—supply and demand, indifference curves, comparative advantage, components of GDP, etc. Obvious question: Why not have one really great professor deliver the lectures over the Web while on-campus professors teach small classes to help students master the material? Like the online auto ad, it would be cheaper and better.
It will happen, but the transition will be messy. In the case of newspapers, ads are a pure commodity, so outside “disrupters” such as Craigslist could quickly grab market share. By contrast, the better universities have strong “brands;” they confer valuable credentials; and they are largely run by professors who have a vested interest in the status quo. The faculties of San Jose State College, Duke, and Amherst have all resisted the introduction of online courses. Professors not only want to keep their jobs; they also have what psychologists call a “high need for autonomy.” They didn’t spend years getting a PhD to help teach someone else’s course.
But universities have a big problem newspapers did not: Customers can no longer afford their product. The $1 trillion in educational debt is hard to service, let alone pay off, when unemployment is elevated and Obamacare will force young people to overpay for mandatory health insurance. A year at Princeton costs $56,000; my crude calculation, which excludes both investment returns and tuition inflation, is that if Bill and Sarah have a 34% combined Federal and state tax rate, they need to generate over $1 million pre-tax to send three kids to Princeton. That’s $50,000 per year if they save for 20 years. Not many people can afford to do that when they also need to save for retirement.
Universities, unlike newspapers, also face a big and immediate demographic reality, which they could view as an opportunity but probably won’t. Young people already live online and won’t mind getting their lectures over the Web. Entering freshmen have few preconceptions about what a “standard” university curriculum consists of. If they file into their first Econ 101 lecture and see a dynamic Nobel Prize winner from MIT hold forth on Supply and Demand, they are not going to complain.
Bottom line: Significant digitization of higher education is both feasible and inevitable. Established universities should use online lectures for basic courses while professors devote their energy to small classes and one-on-one mentoring. There are also huge savings to be had by slashing the number of administrators. But, like other organizations, universities won’t change until they must. In my experience, industry insiders, whether in the auto industry or on Wall Street, are always “the last to know” that their industry needs radical restructuring. The catalyst for change in academia will probably be the appearance of much cheaper start-ups that utilize the Web and the failure of a few small and respected liberal arts colleges.
Copyright 2013 Thomas Doerflinger. All Rights Reserved.
