Once-unthinkable disintermeditiation: higher ed

Ever since MIT introduced OpenCourseware in 2001, higher ed faculty have been watching with curiosity to see how giving away free content would impact the school’s brand and corse business model. Last December, my alma mater announced MITx, where students could earn a “credential” from online courses, and then on May 16, it named the leader of MITx, Provost L. Rafael Reif as the 17th president of MIT.

MIT is far from the only university to embrace and promote this change. In 2007, Yale launched Open Yale Courses and Stanford helped launch iTunes U in 2005, and recently began offering courses with 10,000s of enrolled students. However, the biggest visibility for such efforts came on May 2, when Harvard joined MIT to announce edX, which will combined MITx and Harvardx to offer certificates but not course credit.

Many of us business profs have been watching with both curiosity and trepidation. On the one hand, there is no business model yet for the (well-endowed) colleges to give away content, even at low cost. On the other hand, we’ve seen this movie before — whether with CD Now and Wherehouse (or Sam Goody or Musicland), Amazon and Borders or Amazon and Circuit City.

In particular, the talk by these pioneers that these efforts are complementary to traditional education is just talk. As the outgoing MIT president said on May 2:

“Online education is not an enemy of residential education, but rather a profoundly liberating and inspiring ally,” MIT President Susan Hockfield said in announcing the project, according to a Harvard Gazette report. She explained that "you can choose to view this era as one of threatening change and unsettling volatility, or you can see it as a moment charged with the most exciting possibilities for education leaders in our lifetimes."

I recall how when I started my full-time computer career in 1980, the PC was a toy and any serious work was done on a mainframe. Now everyone carries more computing power in their pocket than the mainframes of 30 years ago, but most of our computing power and storage capacity is provided cheaply by a few on-demand clouds.

As we business profs are painfully aware, online higher education shows all the signs of becoming a classic Clayton Christensen “disruptive innovation.” It will start out lower quality, but eventually it will get good enough to replace the traditional product and destroy most of the market due to its larger scale and lower cost. (NB: When will this effect come to secondary education?)

An op-ed in this morning’s Wall Street Journal by John Chubb and Terry Moe — two Hoover Institution (i.e. Stanford) fellows and education reform authors — was a little more blunt:

Over the long term, online technology promises historic improvements in the quality of and access to higher education. The fact is, students do not need to be on campus at Harvard or MIT to experience some of the key benefits of an elite education. Moreover, colleges and universities, whatever their status, do not need to put a professor in every classroom. One Nobel laureate can literally teach a million students, and for a very reasonable tuition price. Online education will lead to the substitution of technology (which is cheap) for labor (which is expensive)--as has happened in every other industry--making schools much more productive.
…
For now, policy makers, educators and entrepreneurs alike need to recognize that this is a revolution, but also a complicated process that must unfold over time before its benefits are realized. The MITs and Harvards still don't really know what they are doing, but that is normal at this early stage of massive change. …

But like countless industries before it, higher education will be transformed by technology--and for the better. Elite players and upstarts, not-for-profits and for-profits, will compete for students, government funds and investment in pursuit of the future blend of service that works for their respective institutions and for the students each aims to serve.

Even this is a Panglossian (or, more likely, intentionally sugar-coated) view of the world. Retired USC professor Lloyd Armstrong wrote:

One could imagine that a few years from now, MITx would have the equivalent of entire degree programs on line. Students successfully completing the demanding sequence would not, of course, get an MIT degree, but rather a MITx "super-certificate" certifying their success in the entire degree program. They would not be equivalent to MIT grads, but because of the rigor of MITx courses, they would likely be better prepared than the grads of a large fraction of accredited schools. I believe that the MIT reputation is such that employers would see this MITx super-certificate as providing a meaningful description of the skill set of the recipient.

OK, maybe a BSEE from Berkeley (or even Cal Poly) is worth more than an online certificate from MITx, but how would the certificate compare to a BS from CSU Nowhere or ITT Tech?

At the Chronicle, the trade journal of higher ed, Kevin Carey is a little more blunt:

Harvardx won’t compete with Harvard University in the business of running admissions tournaments for aspiring members of the ruling class or assembling great minds in a single place to conduct world-class scholarship and reseach. Harvardx will be competing with everyone who isn’t Harvard University, or its general equivalent. Expensive, newly-arrived, brand-deficient for-profit online colleges probably have the most to fear, followed by over-priced private non-profits and then lower-quality non-selective public institutions.

This news comes at a time when California politicians continue to mismanage the state economy and state budget, spending billions on pet projects we can’t afford while defunding public higher education. The cuts are real, not hypothetical, and they are weakening all three levels of higher education — UC, CSU and JCs. Since college expenses are mostly people, as with the past decade of cuts, the latest cuts mean hiring freezes, layoffs and likely less students being served (or increased prices, or both). The generate incremental revenue, the UC graduate and professional programs — MBA, JDs, MDs, MS engineering — have already raised their prices to public school levels, and CSUs are heading in that direction.

It‘s clear where this trend is going. As with online retailing, scale economies reduce costs, increase scope and eliminate natural geographic boundaries of competition. All colleges will need to increase labor productivity (both efficiency and effectiveness) to survive.

Writing on TechCrunch, Gregory Ferenstein attacks the problem of effectiveness — the unspoken problem that rather than mastering material, students everywhere cram information into short-term memory just long enough to take a test:

[S]aying that EdX is "the biggest change in education since the invention of the printing press" ignores the fact that lectures are often the least educational aspect of college: after four years of instruction, research shows that many students haven't mastered basic reasoning or communication skills. Students forget most of what they hear in lecture and then only recall 40% of the tested material two years later. Lectures do little for students actually enrolled in the school, let alone the millions of online users who will study part-time, without a supportive community or frequent feedback from a professor.

The answer is to change the actual delivery approach in residential education, i.e. use online methods to eliminate the lecture and use classroom time for feedback and personalized instruction:

[l]ast week, two Stanford professors made a courageous proposal to ditch lectures in the medical school. "For most of the 20th century, lectures provided an efficient way to transfer knowledge, But in an era with a perfect video-delivery platform -- one that serves up billions of YouTube views and millions of TED Talks on such things as technology, entertainment, and design -- why would anyone waste precious class time on a lecture?," write Associate Medical School dean, Charles Prober and business professor, Chip Heath, in the New England Journal of Medicine. Instead, they call for an embrace of the "flipped" classroom, where students review Khan Academy's YouTube lectures at home and solve problems alongside professors in the classroom. …

Prober and Heath point to a recent one-week study that compared the outcomes of two classes, a control class that received a lecture from a Nobel Prize-winning physicist and an experimental section where students worked with graduate assistants to solve physics problems. Test scores for the experimental group (non-lecture) was nearly double that of the control section (41% to 74%).

"Students are being taught roughly the same way they were taught when the Wright brothers were tinkering at Kitty Hawk," they explain. After a revolution, an organization should bear little resemblance to its former self. Harvard and MIT have merely placed the 20th century education model online. Stanford, on the other hand, is completely doing away with the old model of the "sage on the stage" and embracing a learning environment that mirrors life forever connected to the world's information.

My new employer is pursuing exactly this approach of flipping the classroom to improve effectiveness. Being small, nimble and non-bureaucratic, I think we can get there quicker than most. But, like every other graduate professional program, we will have to demonstrate the value proposition and career benefits of our residential program.

Still, it’s clear to see where this is heading. Higher education has long resisted improvements in labor productivity, but online education efforts such as edX and OCW provide the path forward. Improved efficiency means less labor used for the same quantity of goods delivered. In a “flipped” classroom, much of the work today done by professors will be done by grad student TAs, people with master’s degrees, or otherwise less expensive or higher productivity workers.

The one missing piece was grading: the labor-intensive, non-automatable part of the education equation. Stanford’s CS faculty have been working to create an artificial intelligence approach to grade more arbitrary forms of homework (including someday essays). This would provide order of magnitude improvements scale, allowing one faculty member to teach not 500 but 50,000 or 100,000 students, without having (as in a traditional lecture-recitation approach) provide one section leader for every 30 students. (MIT says their electronics class of 120,000 students has “the number of TAs you would expect for a class with 100 or 200 people,” by relying on discussion boards as a substitute for class discussion.)

As a result, employment numbers for PhD-holding faculty will fall by at least a third (probably more like 50%) by the middle of this century: college professors will not quite go the way of cold type typesetters, keypunch operators or record store clerks, but our jobs are not as safe as manicurists or lifeguards. Like other elite research universities, MIT will continue as a contract research lab for industry, government and other sponsors, hiring PhDs and grad students to deliver that research (and less frequently, teach classes).

We're not sorry, Charlie

The head of America's largest higher education system, Charlie Reed, announced his retirement Thursday. Privately and publicly, employee groups are celebrating.

Nobody has heard of Reed, the head of the 23-campus California State University, with about 425,000 students and 40,000 faculty. (Enrollment peaked at 437,000 in 2008). Although by headcount the CSU is twice the size of the 10-campus University of California system, the UC has an international reputation based on the faculty and selective admissions policies of its leading campuses.

The CSU was created in the 1960s by consolidating the state’s teachers colleges of the 19th and early 20th century. Its most elite campus, Cal Poly San Luis Obispo, has tougher admissions standards than several of the UC campuses and attracts some very bright students, but the general CSU orientation is towards teaching rather than research. At SJSU (where I worked for 9 years) and other campuses, we often served students who were the first in their family to attend college.

The San Francisco Chronicle did the best job of presenting a balanced assessment of Reed, who earned $450k a year. Several papers glossed over his contentious relations with faculty, while Merc had a sketchy story that gave disgruntled faculty a disproportionate voice.

The California Faculty Association and some of my former SJSU coworkers are glad to see Charlie go, but — like many academics and other public employee union members — I think they’re in a serious state of denial. Yes, Reed was imperious and autocratic, with a degree of powerful central control not seen among UC presidents since Clark Kerr.

The union members (I was not one) were denying two fundamental realities facing Reed or any other CSU head.

First, any president is constrained by this simple inequality
state subsidy + (tuition * # of students) - scholarships + other income ≥
# employees * average salary + other expenses
Paying more to employees requires either increased revenues or a reduction in head count.

Instead, during the past decade, the California legislators (like their counterparts elsewhere) have been reducing the state subsidy, faster than the CSU can realistically increase prices (particularly since half of every price increase is rebated through scholarships to needy students).

In the fall of 2010, I met a longtime CSU faculty member who questioned why the CFA and other faculty unions were backing Jerry Brown for governor, because he'd been “terrible” for higher ed during his previous 8 years as governor. Meg Whitman promised to strengthen education — something her industry buddies care about — and I think she would have cut other aspects of the state budget to keep that promise.

Instead, it appears that Gov. Brown is protecting spending where there are votes and campaign contributions: the California Teachers Association (the state’s largest union), CalSEA and SEIU (who unsuccessfully tried to save Gray Davis from recall). Plus — like every other politician in the state — kowtowing to the state’s richest and most powerful union, the prison guards.

Brown cut $1.4 billion from higher-education for this academic year. best case budget for next year is flat, and if his $7-9 billion annual tax increase fails, more cuts will happen.

Starving the CSU will not be good for the state, as it supplies not only the K-12 teachers and other public employees, but employees for most of the private sector. I know that at SJSU, our College of Business provides the bulk of the college-educated managers for local businesses. It’s also a major supplier of engineering talent to Silicon Valley. Our average student would not have gotten into Stanford or Berkeley, but they form the backbone of the state economy.

Unfortunately, I don’t have an answer, precisely because the scale of the enterprise is enormous. You can’t raise $4.6 billion through bake sales, corporate grants or private donors. Stanford’s $16 billion endowment can make life easier for its 7,000 undergraduates, but the CSU neither has a trillion-dollar endowment nor any prospect of ever achieving that level of support.

Past time to liquidate Yahoo

After turning down Microsoft’s $31/share purchase offer four years ago, Yahoo shares quickly gave up 25% of their value. Since the post-crash recovery began three years ago, the NASDAQ index is up 80% while YHOO has gone exactly sideways at $15. (Another well-down Silicon Valley search company is up 55% during the same period, while a large Redmond-based software company is up 60%.)

Today Yahoo forced out their controversial CEO Scott Thompson, agreed to put 3 (of 4) of Daniel Loeb’s dissident director nominees
on the board, and appointed a new interim CEO, Ross Levinshohn.

The only thing that seems to be supporting the stock are its 33% stake in Yahoo Japan and 40% stake in Chinese search company Alibaba. Thompson was apparently working on selling these stakes to raise money.

So far in the past 5 years, the company has had a string of mediocre, inadequate or just plain terrible CEOs: Terry Semel, Jerry Yang (who turned down Microsoft), Carol Bartz, interim Tim Morse, Scott Thompson and now interim Ross Levinshohn.

Loeb has been proven correct in his criticisms of Yahoo. And due the mistake in hiring Thompson without checking his resume, Loeb he has succeeded in getting the board seats where Carl Icahn failed.

Yahoo is now worth 7% of Microsoft and 9% of Google, and the trend of the past five years has been layoffs rather than growth. Its days as a stand-alone company are long since over. The company should be wound down for the best possible price, but since Bartz sold the company’s birthright to Microsoft, it seems unlikely to be able to start a bidding war for all but its most marginal properties.

The Tarnished State

While driving last week I heard reporting of the latest annual survey of US CEOs by Chief Executive magazine, which ranked California #50 out of 50 for its unfavorable business climate.

As the San Jose Business Journal reported:

"CEOs tell us that California seems to be doing everything possible to drive business from the state. Texas, by contrast, has been welcoming companies and entrepreneurs, particularly in the high-tech arena," said J.P. Donlon, editor of the magazine, in a prepared statement.

The magazine said that CEOs surveyed said California's poor ranking is because of its hostility to business, high state taxes and overly stringent regulations, which it said is driving investment, companies and jobs to other states. According to Spectrum Locations Consultants, 254 California companies moved some or all of their work and jobs out of state in 2011, an increase of 26 percent over the previous year and five times as many as in 2009.

One company that's leaving is CafePress, the crowdsourcing innovator that was launched in San Mateo. Apple is not leaving, but is adding 3,600 new jobs in Austin Texas (the state that ranked #1 on the business climate survey).

In the CEO scorecard, California earned the worst possible rating for taxation and regulation. It also has a terrible economy, with negative 2.1% growth from 2007-2010 (1.7% worse than the national average), unemployment in Dec. 2011 at 11.1% (2.6% above the national average), and net out-migration from 2000-2009 of 1.49 million (#49 in the country). About 5% of the state’s population are state or local government employees (5% of the whole population, not 5% of the workforce.)

Chief Executive offered these choice quotes:

“California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are “necessary evils” that provide the funds to enable pursuit of their misguided agendas.”

“California government is difficult to work with and very bureaucratic. Taxes and regulation are high and unruly.”

When google’ing to find the story, I also found a series of pro-California claims being made by Gov. Brown and the Commerce Secretary Bryson during an April 24 meeting of the “CEO Business Climate Summit 2012”. Gov. Moonbeam (as he called himself) was bragging about being unconventional — and about all the innovative companies being formed in the Bay Area — but not about the performance of the economy under his tenure.

The website reporting on the April 24 event is also advertising a May 11 “California Economic Summit” which — as in Brown’s earlier tenure — will likely be long on symbolism and short on actual results. The summit is sponsored by the Think Long Committee for California, an effort sponsored by the center-left Nicolas Berggruen Institute.

Brown’s plan to help turn around the economy is now to join the American Federation of Teachers to promote a $7-9 billion annual tax increase, to protect government employee jobs at the expense of the private sector. (The tax increases are claimed to be “temporary,” but the “temporary” transit taxes in the state’s major cities seem to have lasted 20-40 years thus far.)

California right now is behaving like New York in the 1970s — assuming that it can jack up taxes and regulations because companies have to be here. Back then, the major NYC-based companies reacted to high costs by either moving the entire company out of state (the airlines) or the bulk of the back office jobs (the retail banks).

Of today’s companies in California, some of the highest value-added jobs — like Apple and Google — are likely to remain in Silicon Valley, just as the top Goldman Sachs and Morgan Stanley jobs stayed in Manhattan. However, no matter how successful they are, Apple and Google are not going to provide jobs for the state’s 37 million population.

The apparent indifference by California’s ruling caste to its destruction of the state’s economy — and its denial of its culpability in this outcome — pains me greatly. I was born here and will die here, as my ties to the Golden State run deep: my paternal grandfather came to California over 100 years ago, while my mother’s side was here 150 years ago. But I can’t recommend that my students start companies here; worse yet, I don’t expect that my daughter will settle here after college, unless she lands one of those elite Silicon Valley jobs.