University Week: Virgin Air, UF Online, and the Price of Privatization (Updated)

It's been a big week--and month--for the afterlife of online higher ed.  After sponsoring or forcing the adoption of online programs over the course of 2012 and 2013, college presidents now admit that at least the MOOC version won't fix budgetary or educational issues. At the Berkeley Online Summit I attended earlier this month, the chancellor of UC Berkeley and the president of Stanford described online as a supplement to hands-on instructor involvement and as good for specific student populations. Elsewhere, UC President Janet Napolitano chimed in with the same message--if online is done well, "it doesn't save all that much money."  Quelle surprise!  There are no savings! The LAT's Michael Hiltzik asked, "Are you listening, Gov. Brown?"

This year the conventional wisdom is that online is here to stay as a non revolutionary complement to teaching rather than as a disruptive replacement--much like course management software, additional videos, study groups, and required texts.  As John Scott reported here last Sunday, the most interesting online practitioners now see its value as controlled by the social practices in which it is embedded. Leading online designers like Anne Balsamo and her FemTechNet alliance, or Robert Lue of HarvardX, reject the MOOC broadcast model of passive education that seemed to solve the public university's "cost disease" only one year ago.

Online continues to function well as a means for private firms to access public funding. This was the mechanism behind the Udacity-San José State-style partnerships we've covered here, and that produced major pushback from the UC Academic Senate and the SJSU Philosophy department, among others. At the online summit, I asked Ellen Junn, then SJSU's provost, whether they had identified the budgetary savings expected from online conversions like the Udacity-SJSU partnership of the kind she continues to advocate. In that case, she replied, we didn't know.  All of the costs were paid by Udacity.  

Nobody batted an eye at this stunning admission.  To me it meant that for at least some of these major deals university officials didn't actually run the numbers on the cost savings to verify net savings of the kind assumed by policy heavyweights like Gov. Jerry Brown--the online providers ran the pilot service like a K-Mart blue light special, selling it for nearly free. The apparent absence of financial due diligence on the part of administrative or Regental / Trustee advocates is not only irresponsible--I would certainly not give my own money to these folks to invest--but is an epistemological crisis with which we still haven't come to terms.

Last June I analyzed the Udacity-Georgia Tech contracts that Inside Higher Ed reporter Ry Rivard got through a public records act request.  I found no MOOC cost savings.  I assumed that more financial data would appear and more reports would analyze them. Perhaps they would be written by certified accountants or by the business consultants that have their noses in every other aspect of university affairs.  No such luck: I haven't been able to find another such analysis, or to get better data myself.

The news this week reminded me why. In Florida, Jeff Schweers at the Gainsville Sun tried to find out how much University of Florida Online paid to a division of Pearson LLC, the giant publishing and education corporation headquartered in the UK. He was rebuffed.  

Something seemed fishy at U Florida by mid-March, when the press got wind of the sudden departure of UF Online's director, former ASU provost Elizabeth Capaldi Phillips, after only two months on the job. UF Online was much like what Gov. Brown wanted to set up in California. It got a $15 million start-up fund from the legislature, the promise of $20 million more over four years, and a requirement that it be a fully online program that could "offer the same academic level of coursework as the bricks-and-mortar institution at 75 percent of the cost to in-state students." Nearly half the students were to be non-residents, and were to pay four times the in-state rate for a fully online degree. Pearson was hired to, among other things, use its marketing prowess to recruit students who would be willing to pay high tuition to get a UF degree at home. How much was UF going to pay Pearson to turn a program with many obvious problems into a major success?  On March 21, Mr. Schweers reported, 

In response to a public records request from The Sun, the university this week released heavily redacted documents that blot out the amount of money UF will pay Pearson over the life of the 10-year contract — saying that information is a trade secret exempt from the public records law.

UF did admit that it had to pay Pearson cash up front: it just wouldn't say how much.  A week later, Mr. Schweers reported that through various documents he'd been able to show that UF would pay Pearson Embanet $186 million over the 11 year life of the contract.  The business plan sounds much like the Udacity-Georgia Tech deal. It involved very large growth projections to 13,000 students paying full in-state or non-resident tuition for an all-online program by 2018, with Pearson getting, in addition to its fee, $19 million of $43 million in projected revenues.  13,000 is the size of UF's first year class.

The revenue estimates are worth pondering. Even if Pearson fails, it will effectively pocket all of the state funding that was given to UF for online, and some internal UF money besides. Pearson is owed $186 million over time for getting involved, and the state provided $35 million.  Pearson will contractually absorb all of the state money and then be entitled to another $151 million of UF's internal funds.  (UF Associate Provost Andy McDonough says that Pearson will get $9.5 million in the first five years, but it is not clear whether or how this reflects the still partially redacted contract.)

If somehow the Pearson dragnet finds thousands of students to pay full tuition for an all-online program with the University of Florida name, UF is slated to gross $24 million in 2019, which is projected to rise to $48 million five years later.  In this best possible scenario, UF will get back its initial $151 million around ten years from now.  The University will thus be ready to earn its first net dollar in 2025.

This is a bad business deal, but that's not its point.  The point is for the University of Florida to function not as a university with a need for new revenues but as a pipeline for sending existing revenues somewhere else.  Taxpayer funds--the $35 million-- are funneled to the private corporation Pearson Embanet. Additional operating funds (tuition and state monies)--the $151 million--are also supposed to go to Pearson.  Pearson assumed that UF will conceal these terms from the public, since it had requested and been granted trade secret projection.  In exchange, Pearson seems to provide marketing, "proprietary digital content" and a range of other services that simply duplicate what any university already does ("admission and enrollment support," "providing on-demand student suppert," and so on).  Pearson's global brand is supposed to muscle this albatross into the air, but its exchange of non-essential services for guaranteed income qualifies as extraction rather than exchange.

Pearson has extensive operations in the UK, and has been involved in the UK's experiment in wholesale higher ed privatization.  This past week its failure was in the news again.  The universities minister David Willetts, architect of the tripled fee cap that was to replace the elimination of most public  teaching funding, admitted that the government is likely to be spending more on grants and loans to cover tripled tuition than it had been spending on direct outlays. The government will continue to need to make additional cuts in its higher ed budget--to maintenance grants for example-- in order to make up the shortfalls in the loan program.  Needless to say, students, academic staff, and a growing number of administrators are furious, and feeling tricked, and as usual uncertain of what to do.

The Guardian also reported that a former Willetts aide who is the new head of the Higher Education Policy Institute now agrees that the "government got its maths wrong." His solution is that student debtors start paying back sooner and from a lower income threshold.   Andrew McGettigan's analysis in The Great University Gamble has been tragically vindicated (Stefan Collini's review is here, and mine is here).   His government testimony is also borne out. Writing in The Guardian and on his blog, Critical Education, Dr. McGettigan has explained yet again that the higher ed budget is being hollowed out not just by the overall loan scheme but by the share going to new for-profit providers, whose claim on public money has risen 2100% since the government encouraged private companies to provide university services.

How do governments "get their maths wrong"? How do universities cut deals that due diligence would tell them will cost them money rather than net them new returns?  The most helpful explanation I found this week came from David Runciman's analysis of the habitual deal strategies of Richard Branson, Virgin CEO. Prof. Runciman notes,

Branson’s modus operandi is to identify and target industries that he claims are being run as monopolies. He presents himself as the man who introduces competition by shaking the industry up with his innovations. 

Reality, however, is rather different. For Mr. Branson doesn't want to end monopolies, but to exploit them.

He has made his fortune out of the regulated parts of the economy, which he has milked to extract government subsidies, tax breaks, licensing agreements and protected income streams. Transport works for Branson – trains as well as planes – because it rewards the person who gets the routes. How do you get the routes? By persuading government officials and industry regulators to give them to you. 

Pearson, Udacity, Coursera, and other private providers came to public universities touting a similar paradigm: universities are little more than holders of a government-sanction monopoly power--to grant degrees.  Say you want to innovate to improve and/or end the monopoly, and then keep the monopoly in place to capture as much of its revenues as you can.  The analogy to Virgin's bad train service (and many other failed enterprises) is strapped university instruction, which at public universities badly needs the scalable upgrade they have no money to build.

In all this, university managers get to play the role of earnest regulators who are in over their heads. They don't want to hurt their industry, but they lack historical leverage; just as important, they lack confidence in their own institutions and its social mission.  Prof. Runciman again:

In the absence of robust trade-union representation, Branson is much freer to strike deals at the top table of government and finance. He is able to spin his magic without having to worry too much what the people at the bottom think. One of the consequences of the demise of labour power has been that personal contact among the rich and powerful carries more clout. This is connected to the second trend that has worked in Branson’s favour: the progressive deregulation of finance and business since the late 1970s. There are still plenty of regulators, of course, often with increasingly complex and demanding responsibilities. But without the heavy artillery of robust social democratic states behind them, they have been put on the back foot. The new generation of regulators has turned out to be surprisingly easy to flatter and perhaps not so surprisingly easy to bully. Branson is skilled at both.

Sebastian Thrun at Udacity and Daphne Koller at Coursera functioned, in their own ways, as charismatic Branson monopoly-busting monopolists, criticizing the massification of higher learning so they could massify it even more.  They played university managers like Mr. Branson plays transportation regulators.   In this context, it's hardly surprising that private partnerships haven't fixed public university financial problems, since that is exactly what these partnerships are not meant to do.  Instead, private partnerships are meant to make the private provider money.  In general, university executives are eager to help. 

Universities may have a cost disease, but they now have a privatization disease that is even worse.  It confronts us with one or more of the following scenarios:

1. University, corporate, and political officials will reinvest in public universities--capping tuition and paying down student debt--once the economy really gets going again.
2. Corporate and political officials will block public reinvestment--as too expensive for them.  Their university counterparts will keep muddling through. They'll call for more public money (maybe 5-6% a year), "moderate" tuition increases (3-6% a year), while touting fundraising and efficiencies as they have for decades.
3. Corporate and political officials will block public reinvestment, and their university counterparts will try to "scale up" the New Sources of Revenue. These will provide net returns to universities and also net educational benefits.
4. Corporate and political officials will block public reinvestment, and their university counterparts will try to "scale up" the New Sources of Revenue.  Most or all of their value will go to the private providers, and university officials, desperate for deals and distant from education, will rely on wishful thinking rather than due diligence. 

I'm hoping for (1), most hearing (2), and expecting (4)--while finding counter-forces on a recent speaking trip that I'll talk about next time.

UPDATE 3/31. Over at e-Literate, Phil Hill has been writing about the UF Online contracts. In his post today, he rejects my reading of the Sun reports of the UF Online-Pearson contract when I say that "Pearson will contractually absorb all of the state money and then be entitled to another $151 million of UF's internal funds." Mr. Hill states that in fact "Pearson will only make 27%" of the state of Florida's $35 million in support for setting up UF Online, and that the rest of Pearson's $186 million will come from its share of online student tuition and fees.  He has also found the UF Online business plan, which he kindly sent to me, and he has updated his post with images of some of the spreadsheets and further discussion.

Here's what my first rapid pass through the business plan makes me think:

A. Phil Hill is right and I am wrong about the extent of Pearson's direct access to state funds. 27% of that $35 million, or $9.5 million, goes to Pearson up front, but the "Additional Fixed Fee" going to the coded entity "P3" ends in 2018 (p 84).  So strike from the record the calculations of the three paragraphs I identify above.

B. Do not strike from the record the framing commentary and conclusions. I was being too literal-minded about the transfer of publicly-funded value to the private sector.  A better way of thinking about it is that this value comes in at least two forms: direct transfers from public to private via a university intermediary, as with the $9.5 million; and foregone value of a public investment in a public entity, as with the remaining $176.5 million.  Were UF to build the same mandated online program in-house and achieve the same success, it would have that $176.5 million instead of Pearson, and it would be available to support UF's academic programs.  In the business plan, that revenue goes to Pearson for services that are not well articulated in the text. For UF, the "cumulative fund balance" over 11 years comes to $43.6 million (p 82), which I interpret to mean that UF's returns are about a quarter the size of those projected for Pearson.  UF is making less than $4 million a year on average for this large effort, even if it works: what would be its returns if it did "fully online" services itself? How does this compare to returns for something it already knows how to do--face-to-face teaching of the same number of additional students? Although I still need to go through these spreadsheets line by line, it still looks like UF got Bransonized.

C. "Where are the Savings?"   UF's costs increase by a factor of 10 over the contract period, while "total revenue" increases by a factor of 5. As I argued in the Georgia Tech-Udacity case, the private provider is supposed to offer economies of scale through technical expertise. Where are the economies for UF in exchange for foregone $176.5 million?  I don't see it in the spreadsheets, and missing economies helps explain why UF can gross less than Pearson even with a higher cut of tuition revenues.

There are other familiar issues--implausible enrollment growth, excessively cheap course production costs--and so on. I will have to defer these to next week when I return from a trip.