Higher ed disruption: zig when others zag

It seems like every spring I write a posting about disruption facing higher education. It is a topic of interest to my coworkers and the many academics among my blog readers — and also an interesting strategy problem where I have a front row seat.

In the past year, one of the big surprises has been the large amount of private investment in tech startups targeting this market. They seem particularly concentrated in developing platforms to enable MOOCs, i.e. massively open online courses.

Stanford is front and center in the revolution. A friend (Chuck Eesley) has been leading the Venture Lab experiment at Stanford. Meanwhile, my previous employer (San Jose State) has been at the center of national controversy as faculty are attempting to fight an experiment with Udacity (another Stanford startup) because faculty (not unreasonably) feel it will someday put them out of a job. Meanwhile, Coursera (a 3rd Stanford spinoff) and edX (started by my alma mater) are also promoting MOOC efforts.

The MOOCs seem to tilt the scale on the longstanding efficiency vs. effectiveness argument. The US higher education is pretty effective for people who get in, who apply themselves and can afford to pay for it. However, it’s very expensive (and labor intensive): its efficiency (i.e. labor productivity) has shown few gains in 50 years.

Meanwhile politicians (esp. state legislators) see higher ed as a ripe opportunity to cut costs. There is a supreme irony that the pressures are coming from the leftwing legislators in California and rightwing legislators in Texas — who rarely agree on anything — who now agree they want to spend less on higher ed so they can spend the savings on something else (that presumably buys more votes).

However, my suspicion (without any hard data) is that the marginal college students (without a lot of motivation or support network) will tend to fail in such an impersonal high-volume, low-touch setting. These are exactly the students that the California State University (the parent of SJSU) targets: every CSU faculty member can tell heartwarming stories about students who succeeded despite being the first in their family to attend college.

A few months ago, I met the executives of a Bay Area startup taking a different approach. Instead of a large-scale impersonal MOOCs, the approach of the Minerva Project is to cut costs by 2x (rather than 10x or 100x) but offer a high-touch online alternative to higher education. In other words, if everyone else is zigging — pursuing low-touch massively online solutions — they want to zag with high-touch smaller scale online courses.

The company landed $25m in Series A funding and numerous headlines about its plans to “be an online Ivy League university.” To be more Ivy League, it hired a 64-year-old former Harvard and Stanford administrator to be its founding dean.

The reason I met these execs was announced this morning:

Minerva Project and KGI Partner to Launch the Minerva Schools at KGI
San Francisco, Calif. – July 24, 2013 – Minerva Project, reinventing the university experience to develop global leaders and innovators across disciplines, and Keck Graduate Institute (KGI), a member of The Claremont University Consortium, today announced an innovative new partnership in higher education. KGI, an institution accredited by the Western Association of Schools and Colleges (WASC), is partnering with Minerva Project to launch the Minerva Schools at KGI, with the first class matriculating in the fall of 2015. The Minerva Schools’ unique undergraduate program will complement KGI’s current graduate-level offerings, expanding its portfolio and providing opportunities for student, faculty and administrative collaboration. The KGI-Minerva relationship and new programs are pending WASC approval.
…
The Minerva Schools, like KGI’s graduate programs, will help high-performing students become mature, confident individuals and put them on a path to meaningful careers and fulfilling lives. The highly selective undergraduate program will offer students from around the world the opportunity to learn from accomplished faculty versed in the latest teaching methodologies to ensure positive student learning outcomes.

“Minerva Project is pleased to have found in KGI a forward-thinking university partner whose philosophy and values align closely with our own,” said Ben Nelson, founder and CEO of Minerva Project. “As the most recent member of the pioneering Claremont University Consortium, KGI proved to be a major innovator in higher education when it created the first-of-its-kind professional science master’s degree in 1997. Today, more than 130 institutions have established nearly 300 such programs. By partnering with KGI, Minerva is following one of the established paths to accreditation as set forth by the Western Association of Schools and Colleges and strives to have a similar impact on higher education as a whole.”

It’s an interesting experiment — both because it tries to preserve some of the best things about higher education, and also because it’s so contrary to the conventional wisdom about online education.

It also seems consistent with the most insightful comment I’ve ever read about the future of online education, written last year by my friend (and co-author) Michael Mace in response to my blog posting:

universities bundle several services in that thing called a degree:
--Teaching the students
--Credentialing (ensuring that the students have learned the material)
--Giving the students social connections (Yale, Stanford)
--Helping young people turn into adults in a semi-safe setting

The MOOCs largely emphasize the first two points, and seem to be completely ignoring the value of the rest of the bundle. Meanwhile, Minerva promises to complete the bundle through a global cohort experience while saving money on buildings the way Amazon saves money on mall space.

As a college professor (and eventually a college parent), I believe the partial bundle is going to be less effective at preparing young adults for life — unless the missing pieces are provided another way — and also going to be less desirable for anyone who has a choice. Still, ala Clay Christensen, a disruptive innovation is one that appears inferior (but cheaper) at first and eventually displaces the higher quality solution.

I don’t have a financial stake in the success of Minerva, nor do any of my co-workers. Thus we can afford to be a bit more dispassionate than Nelson (and all the other entrepreneurs) attempting to remake the world of higher education. As with any disruptive innovation effort, it’s a high-risk, high-reward endeavor.

If I were 25, I would be terrified that my industry is heading the way of the landline, record store and the newspaper, but I’m expecting that the disruption will come slowly enough — and I’ll stay valuable long enough — to allow me to retire at the customary age.

Update 12:30 p.m: KGI has posted a press release from its perspective, and both EdSurge and GigaOM have articles on the news. Below is the publicity photo from the PR Newswire press release.

KGI president Sheldon Schuster and Minerva CEO Ben Nelson

Microsoft reorg: tragedy or farce?

There are many ways to interpret the massive “One Microsoft” reorg announced Thursday by Microsoft CEO Steve Ballmer.

One is as a corporate political drama. Mary Jo Foley (of ZDNet) and Sean Ludwig (of Venture Beat) report that winners include Terry Myerson (from head of Windows Phone engineering to all OS engineering), Qi Lu (head of online services engineering who adds Office) and Julie Larson-Green (head of Windows and Surface engineering, who adds Xbox and games). Losers are the presidents and CFOs of the five previous business units: Windows, Server and Tools, Microsoft Business Division, Entertainment and Devices and Online Services.

A second is as a plausible and sincere effort to revive Microsoft’s growth after more than a decade going sideways and now facing the collapse of the PC category that accounts for most of its OS an application profits. As the WSJ reported

Microsoft's restructuring follows a strategic plan, which began taking shape about a year ago, to shift its identity away from being a producer of operating systems and application software. Instead, the company wants to be known for devices—designed by Microsoft itself or by partners—and services that are closely tailored to work with that hardware.

The strategy shift, though it still relies heavily on software development, emulates the way rivals like Apple Inc. and Google Inc. have approached development of products such as smartphones and tablets.

The third way to view this is as reshuffling the deck chairs on the S.S. Titanic. JP Mangalindan of Fortune quotes an outside leadership consultant

"It's a great first step but won't get them to 'One Microsoft,'" says Randy Ottinger, EVP of the executive leadership strategy firm Kotter International. "The real question is what are they going to do post-reorganization to actually change the culture. The re-org will not change the way they behave and act because it's been years and years of doing business in a different way."

Similarly, Barb Darrow of Giga OM writes:

But it is crucial that the changes take direct aim at a long-running Microsoft problem: Fierce political infighting (see org chart diagram below.) When I covered the company day to day, the best way to get dirt on Office was to ask the Windows guys and vice versa. Clearly, after decades of that, and faced with huge and capable (and well funded) competition — Google, Apple, Amazon et al., Microsoft can’t afford to let that behavior stand.

and refers to a June 2011 cartoon contrasting Microsoft to Oracle, Facebook, Google and Apple (the latter updated after Steve Jobs’ death).

A fourth perspective is as an attempt to obfuscate a failed strategy by a failed CEO. As a Microsoft shareholder (NB: Dogs of the Dow), the only writer who seems to feel my pain is the anonymous Lex, writing 7,000 miles away at the Financial Times:

Everyone knows Microsoft’s challenge: its operating system and business software divisions account for 80 per cent of operating profits. These divisions’ core products were developed for personal computers. The PC is in decline, so those profits need protection or replacement. Investors deserve a clearer view of the strategy for doing that, and a reporting structure that allows them to see if it is working. While Microsoft’s overarching strategy has never been clear, its reporting structure has at least made it clear that, profit-wise, one product effort (server software) has been a smashing success while three others (online services, Xbox, phones) have been failures.

Any new structure must deliver at least that much clarity. And if Microsoft is committed to devices, investors should get systematic unit volume reporting. If software sales are becoming services sales, they should be told how the licence sales/subscription sales mix is shifting one quarter to the next. Failing this, they should assume the patient is unlikely to recover.

Most of all, I’m reminded of the Marxist saying that “History repeats itself, first as tragedy, second as farce.” Longtime Microsoft watchers are having a hard time in hiding the sarcasm in their skepticism. As the lead of the Business Week column observes

Microsoft Unveils Its Latest Reorg SpectacularBy Ashlee Vance July 11, 2013

Say this for Microsoft (MSFT) Chief Executive Officer Steve Ballmer: The man knows how to do a reorg, reorg, reorg.

Or even more to the point, Nitrozac and Snaggy capture this at the “Joy of Tech” cartoon. For maximum effect, read the whole cartoon, but here’s the punchline:

And then 2,700 words later:

So if I had to bet on tragedy or farce, “One Microsoft” looks more like farce.

Note to regular readers: Sorry for the delay in posting this, but I’m teaching this week in the KGI business bootcamp for life science postdocs.

Cartoon credits: Org chart by Manu Cornet, Bonkersworld.net; Steve Ballmer as rendered by Nitrozac and Snaggy of GeekCulture.com

More on Samsung's un-FRANDly patent terms

With the release of the (redacted) ITC decision June 4 granting Samsung exclusion of older iPhone models, Munich patent attorney Florian Mueller published two follow-up analyses Saturday of that decision. Both excoriating the five member majority and concluded that only commissioner Dean Pinkert understood the full implications of the case.

In his first posting, Mueller wrote

I'm outraged. The underlying rationale of the ITC ruling is a serious threat to innovation and competition. Among other things, it represents a radical departure from well-established antitrust principles concerning the illegal practice of tying (in this case, a Samsung proposal that required Apple to license its non-standard-essential patents to Samsung in order to get an SEP license). This totally runs counter to the ITC's mission to protect the domestic industry. In fact, no U.S. government agency has ever taken positions on standard-essential patents that could cause a similar extent of harm to innovative U.S. companies of all sizes in other jurisdictions. Basically, the ITC has adopted a blueprint that would enable other countries to engage in protectionism of the most extreme kind, allowing their domestic players to extort more innovative competitors from the U.S. and deprive them of intellectual property protection, while being able to point to a U.S. trade agency's opinion.

The posting summarizes Pinkert’s dissent. Here are a few key excerpts. From Pinkert’s footnote to the majority decision:

Commissioner Pinkert … notes that Samsung does not dispute that it has made FRAND licensing commitments in regard to the '348 patent, and, as explained in his dissenting views, he has considered the evidence before the Commission in the current phase of the investigation and has found the weight of the evidence to indicate that Samsung has not made FRAND licensing terms covering the '348 patent available to Apple.

From his decision:

I note in this regard that Samsung has made no effort to demonstrate that the license terms it has offered Apple specifically with respect to the '348 patent, or specifically with respect to a portfolio of declared-essential patents that includes it, satisfy an objective standard of reasonableness, has not identified a methodology for determining whether they satisfy such a standard, and nowhere suggests an intention to make them more attractive to Apple.
…
As the U.S. Federal Trade Commission has observed regarding commitments to license on a reasonable and non-discriminatory (RAND) basis:

RAND commitments mitigate the risk of patent hold-up, and encourage investment in the standard. [Citation omitted.] After a RAND commitment is made, the patentee and the implementer will typically negotiate a royalty or, in the event they are unable to agree, may seek a judicial determination of a reasonable rate. However, a royalty negotiation that occurs under the threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in tension with the RAND commitment. High switching costs combined with the threat of an exclusion order could allow a patentee to obtain unreasonable licensing terms despite its RAND commitment, not because its invention is valuable, but because implementers are locked in to practicing the standard. The resulting imbalance between the value of patented technology and the rewards for innovation may be especially acute where the exclusion order is based on a patent covering a small component of a complex multicomponent product. In these ways, the threat of an exclusion order may allow the holder of a RAND-encumbered SEP [standards-essential patent] to realize royalty rates that reflect patent hold-up, rather than the value of the patent relative to alternatives, which could raise prices to consumers while undermining the standard setting process.

The second article focuses on the antitrust implications of tying. His language is even more harsh:

In its ruling on Samsung's complaint against Apple, this ITC majority has taken the notion of intellectual property as an exclusionary right to such an extreme that the net effect is... the expropriation of innovators by extortionists. Anyone wielding standard-essential patents (SEPs) could abuse his gatekeeper role by requiring everyone else, at the threat of total exclusion from the market, to grant a license covering his non-SEPs as a condition for being allowed to operate at all. So a right to exclude could be abused in order to force others to give up their legitimate right to exclude.

Later on, he notes a relevant passage (cited by Pinkert) from a recent article by two of the world’s leading experts on patent licensing, lawyer Mark Lemley (of Stanford) and economist Carl Shapiro (of Berkeley):

While the issue is not free from doubt, we think that an offer made conditional on the would-be licensee licensing any patents other than standard-essential patents reading on the standard at issue is not a FRAND offer.

As Mueller concludes:

I don’t know any example of a case in which an antitrust authority or court of law considered anything other than a cash-only demand to be a FRAND demand. Again, a FRAND demand made at the threat of exclusion is something different than a voluntary FRAND agreement.