Cash-Cow Universities
http://www.businessweek.com/magazine/content/03_46/b3858102_mz021.htm
NOVEMBER 17, 2003
Cash-Cow Universities
For-profits are growing fast and making money. Do students get what they pay for?
As another workday draws to a close in Phoenix, some 20 adults hurry from their offices to a marketing course at a nearby university. But rather than meet on a leafy campus, they head to class in a spartan, leased office building out by the airport. Their school: the University of Phoenix, the nation's largest private university, with 96,000 students scattered among 134 satellite locations across 28 states. Instead of tenured faculty, over 95% of the university's lecturers are working professionals who teach only part-time. George Francisco, for example, a 23-year veteran of Kraft Foods Inc. (KFT ) who now runs his own food-brokerage firm, is the marketing instructor. Nor are the students primarily 18- to 24-year-olds. Like tonight's class, they tend to be working adults in their 20s and 30s who are looking to get ahead by finishing a B.A. or earning an advanced degree.
NEGLECTED MARKET
Something else sets the University of Phoenix apart from most other colleges: It's in business to make money, and it's doing so in spades. In the year ended Aug. 31, earnings of parent Apollo Group Inc. (APOL ), surged 53%, to $247 million, as revenues jumped by a third, to $1.3 billion. Such stellar performance has given Apollo a market value of $11.4 billion -- equal to the endowment of Yale University, the nation's second-wealthiest college.
Phoenix is the most prominent of a controversial new generation of for-profit colleges that are emerging as a dynamic new force in higher education. As traditional universities struggle with soaring costs and plunging taxpayer subsidies, the 10 largest publicly listed for-profits have already grabbed more than a half-million students. Add the hundreds of smaller players, and overall for-profit enrollment will jump by 6.2% this year, or five times the pace at conventional colleges, according to Boston market researcher Eduventures Inc. That will push the industry's revenues to $13 billion this year, up 65% since 1999.
How are they doing it? Largely by catering to the voracious appetite for college-level skills among groups neglected by conventional higher-ed institutions. While most colleges fight furiously over the top 25% of high school graduates, for-profits aim for the middle half of the class. They also target working adults hungry for technical and professional skills, including many lower-income ones. Even without affirmative action, almost half of for-profit students are minorities.
To capture these booming markets, schools such as Phoenix are changing the definition of what it means to be a college. Rather than recreate the Ivory Tower, they treat students like customers whose goal is to get a job or a promotion. So students are willing to shell out the $11,000 or so a year the typical for-profit charges -- less than the $20,000 tuition at private colleges but more than twice that of the average public university.
Programs are designed with the job market -- and customer needs -- in mind. Most are highly focused on a particular skill or subject area. They also meet at times and locations that are convenient for students, who can keep working while they study. Many companies value a for-profit education, too: 60% of Phoenix students get tuition reimbursement from their employers. By bringing basic business precepts such as customer service and cost controls to the college classroom, for-profits are spearheading educational innovations that are likely to be increasingly copied by their nonprofit counterparts.
Critics charge that for-profits succeed by commercializing higher ed. Certainly, Phoenix and its brethren make no pretense of providing a classic liberal arts education. Most are stripped-down, sterile places, a far cry from ivy-covered campuses and football teams. They also have done away with many hallmarks vital to great universities, from pricey research labs to purely academic subjects such as philosophy and linguistics.
Still, by delivering marketable skills and helping students to complete a degree, the best for-profits provide a service that's largely unavailable elsewhere. "They're not about to supplant the finest educational institutions in the country, but they add to the array of choices students have," says Yale University President Richard Levin.
NICHE STRENGTH
Long term, for-profits may even challenge traditional universities' dominance in some areas. So far, most gains have come from students who probably wouldn't have gone to a conventional college. But more and more, they're stealing those who might have. Already, 10% of MBA candidates attend a for-profit, up from 2% a decade ago. Ross University's 2,000-student medical school -- located on the island of Dominica because the U.S. medical Establishment won't accredit for-profit med schools -- graduates more M.D.s than any school in the U.S. (Virtually all are Americans who return home to practice.)
For-profits also have grabbed 41% of the $3.5 billion online-degree market, which has tripled since 2000, according to Eduventures. They're aggressively expanding in foreign countries, too, targeting eager students from Chile to China. John G. Sperling, Phoenix founder and chairman of Apollo Group, predicts that as it rolls out online courses in developing nations, Phoenix could become the largest university in the world. Meanwhile, Career Education Corp. (CECO ) plans to raise its enrollment in the U.S. and abroad, to 250,000 over the next few years. "Smaller schools and those that don't serve student needs are going to get buried," says Career Education CEO John M. Larson.
WHAT DEFICITS?
If nothing else, the for-profits have shown that there's money to be made in higher ed. For-profit entrepreneurs have struggled in the kindergarten-to-high school arena, as exemplified by the ongoing fiscal woes of Edison Schools Inc. (EDSN ) But Phoenix and others are running financial circles around conventional colleges even though they survive on tuition alone, with no endowments or taxpayer subsidies. In fact, they were one of the stock market's best-performing sectors during the bear market. Five of them -- Apollo, Corinthian Colleges (COCO ), Career Education, Strayer Education (STRA ), and ITT Educational Services (ESI ) -- ranked among the top 25 of BusinessWeek's Hot Growth Companies this year.
For-profit colleges have been a part of U.S. higher education almost as long as Harvard College, the nation's oldest. But as recently as 1990, virtually all of what are still called "career colleges" were little more than trade schools for auto mechanics and secretaries. Since then, a government crackdown on shoddy operators, combined with the economy's insatiable demand for college grads, has sparked a change in the industry. Of today's 4,500-odd remaining for-profits, about 800 now grant degrees (almost all are accredited), up from just 316 in 1990, says John Lee, a Bethesda (Md.) educational consultant.
Essentially, the new for-profits have taken the ethos of the traditional trade school -- delivering specific, marketable skills -- and applied it to higher education. For example, Katharine Gibbs, the century-old secretarial school, has exploded from 2,000 students to 15,000 since it was bought by Career Education in 1997. Gibbs now offers degrees in business and technology to a student population that's 40% male, vs. 2% before.
Gibbs and others have succeeded by focusing on programs aimed at furthering students' careers. Indianapolis-based ITT Educational Services Inc., which teaches technology subjects such as electronics to 37,000 students at 76 sites, created its curriculum after surveying employers to find out what they need, says CEO Rene Champagne. The payoff: ITT placed 73% of its graduates last year amid a jobs drought that savaged the prospects of many grads of conventional colleges. "We benchmark ourselves against the best customer-service organizations in the world," says Brian Mueller, CEO at the University of Phoenix Online, a separate entity from the main university whose 79,000 students take all of their courses on the Internet.
CUSTOMER SERVICE
Addressing student needs is such a core value that it frames virtually everything for-profits do. Because they have stripped out so many other costs, they can afford to lavish funds on direct educational expenses, such as small classes. While even Harvard University packs hundreds of students into lecture halls for some introductory courses, University of Phoenix Online classes average just 11 students per instructor. At Gibbs College in Boston, classes average 18 to 20 students, leaving plenty of time for math instructor Sheldon McDonald to give extra tutoring every week to a student who was struggling last semester. "When we started, he could barely multiply, but he did well on the final," says McDonald.
Another challenge: ensuring quality across far-flung networks of campuses. For-profits have radically redefined the role of professors, for starters. Instead of the centuries-old model of teachers designing their own courses, companies such as Phoenix and ITT use academic professionals to develop much of the curriculum at headquarters. The savings are significant, says Career Education Chief Financial Officer Patrick K. Pesch, as are the cost advantages of using part-time faculty to teach almost all courses.
To critics -- and there are many, particularly in academia -- the real question is whether the for-profit approach can deliver a quality education. In the five years since Kaplan Inc., now owned by Washington Post Co. (WPO ), launched the all-online Concord Law School, enrollment has ballooned to 1,500 students, making Concord the nation's second-largest part-time law school. But it has yet to win the blessing of the American Bar Assn., which thinks Concord doesn't offer "a sound program of legal education," says Barry Currier, the ABA's deputy consultant on legal education.
Similarly, the Association to Advance Collegiate Schools of Business, an oversight body, has refused to accredit the business schools of the University of Phoenix and other for-profits. These schools rely on "moonlighting amateurs" to teach courses, charges AACSB CEO John Fernandes. "It's like running a hospital with orderlies." Phoenix is accredited by the North Central Assn., a major accreditation group.
Many students write off the criticism as snobbery. Some say they even prefer classes taught by seasoned professionals such as Phoenix's Francisco, who can share the marketing lessons he learned at Kraft. For-profits "offer a solid education that gives regional state universities a real run for their money," says David Kirp, a public policy professor at the University of California at Berkeley.
This isn't the first time a new breed of institution has challenged higher education. In the mid-19th century, Congress created low-tuition land-grant universities, schools such as Iowa State University and Ohio State University, to expand access to college while teaching practical subjects such as agriculture and engineering. In the 1950s and '60s, community colleges boomed in response to rising demand. Now, for-profits are opening doors to higher education even further. As they continue to grow, they may well force some of the weaker traditional colleges to improve or implode. Either way, higher education should benefit.
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