What happens when you tell an investor you can sell $2 bills to unsuspecting buyers for ten $1 bills and further that you can convince the buyers to sign a 10-year deal agreeing to these terms? That investor would be suitably impressed, of course, and would happily invest in your company at a high valuation. But then what would happen if you later went back to that investor and explained how these buyers you’d been selling to are gaining experience, talking to each other, and now are demanding to pay two dollars for that snazzy $2 bill?
Well, we just found out after 2U’s Q2 conference call and earnings report when the stock price lost 65% of its value in one day (and nearly 90% over the past year).
I have been saying for a while that the traditional way universities have outsourced online programs (bundle of services in exchange for a revenue sharing agreement over something like 10 years) is a bad deal for universities and ultimately for students. Further, I have been saying that as more and more universities go online there are more options for students which makes differentiation more important. Apparently, the 2U second quarter 2019 earnings report and conference call convinced investors that the traditional online program management (OPM) business isn’t a magic money tree.
Now this is no doubt bad news for 2U investors, management, and employees and will surely have a ripple effect on all of the private OPM vendors. There are a ton of vendors in this category that has a total revenue figure somewhere in the $2 billion to $4 billion annually (I’ve heard all kinds of numbers from analysts and industry insiders, but data are actually hard to come by). There are hundreds of millions of equity invested in this market not to mention an equally large amount of debt. Almost certainly, all of these investors are underwater now and that means a lot of pain is coming over the next year or two.
But I also think this is good news for higher education, that it is good news for students and ultimately for the online enablement industry. Prices and costs will begin to converge ($2 bills will start to cost two dollars) and there will be more options for universities. There will definitely be more competition as students can choose from many online options, but that competition will drive innovation, cost reduction and ultimately make for a healthier market. We are going to see way more customization as schools compete based on their unique assets and tailor online programs specifically to take advantage of them.
We will see an acceleration of unbundling of the traditional OPM services. And, yes, we’ll see more fee-for-service.
For Extension Engine, this comes as a bit of vindication. We’ve been saying for a while that fee-for-service is the best option. We’ve also been saying that an unbundled offering is the best way to build skills and capacity with our university clients. And most importantly, we’ve stayed focused on delivering quality without the distraction of outside investors or bank debt, of which we have none. There is tremendous opportunity in front of us all. Many years in the future, the summer of 2019 will be seen as a big moment of change that enabled that growth.
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