American Colleges' Tenuous Business Model

A blog about business and economics.
Aug. 28 2012 9:22 AM

American Colleges' Tenuous Business Model

Kevin Carey's Washington Monthly feature on online higher education startups is a great read, but, fortunately for those of us looking to add value with a blog post, I think he buries the lead. The key thing you have to understand about the threat that Massive Open Online Courses pose to the business model of traditional colleges is that traditional colleges have a business model. It's a bit of a strange business model because the colleges aren't organized as businesses, but it's a business model all the same.

The way it works is that you charge the same price for all the courses. When I took Patrice Higonnet's five-person seminar on Vichy France, I didn't need to pay a premium tuition over what I paid to take his 150-person lecture survey course on the French Revolution. Part of the way the college works is that the large courses generate profits that subsidize other activities, including the small seminars. The seminars themselves happen in part because some of the faculty wants to do them, and in part as an investment in the value of the brand. But while it would be very difficult to replicate the value of the small Vichy seminar, it's pretty easy to imagine a French Revolution MOOC that's both higher quality than your average French Revolution lecture-format survey course and radically cheaper:

That’s when American colleges and universities will eally start to feel the pain. Political pressure will continue to grow for credits earned in low-cost MOOCs to be transferable to traditional colleges, cutting into the profit margins that colleges have traditionally enjoyed in providing large, lecture-based college courses.
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The problem then isn't how do traditional colleges offer a higher quality product than what you could get in a MOOC. There are still all those smaller, more intimate classes out there. The problem becomes how do you pay for that stuff when the high-margin low-quality stuff gets competed away? Right now, the high-quality teaching being done at colleges is benefitting from a large implicit subsidy from the low-quality teaching being done at colleges and it's not clear that bundle can survive.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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