How can a nonprofit organization that gives away courses bring in enough revenue to at least cover its costs?
That's the dilemma facing edX, a project led by Harvard University and the Massachusetts Institute of Technology that is bringing in a growing number of high-profile university partners to offer massive open online courses, or MOOCs.
Two other major providers of MOOCs, Coursera and Udacity, are for-profit companies. While edX has cast itself as the more contemplative, academically oriented player in the field, it remains under pressure to generate revenue.
"Even though we are a nonprofit, we have to become self-sustaining," said Anant Agarwal, president of edX. And developing MOOCs, especially ones that aspire to emulate the quality and rigor of traditional courses at top universities, is expensive. Harvard and MIT made an initial investment of $30-million each last year to start the edX effort.
Legal documents, obtained by The Chronicle from edX, shed some light on how edX plans to make money and compensate its university partners.
According to Mr. Agarwal, edX offers its university affiliates a choice of two partnership models. Both models give universities the opportunity to make money from their edX MOOCs—but only after edX gets paid.
The first, called the "university self-service model," essentially allows a participating university to use edX's platform as a free learning-management system for a course on the condition that part of any revenue generated by the course flow to edX.
The courses developed under that model will be created by "individual faculty members without course-production assistance from edX," and will be branded separately in the edX catalog as "edge" courses until they pass a quality-review process, according to a standard agreement provided to The Chronicle by edX.
Once a self-service course goes live on the edX Web site, edX will collect the first $50,000 generated by the course, or $10,000 for each recurring course. The organization and the university partner will each get 50 percent of all revenue beyond that threshold.
The second model, called the "edX-supported model," casts the organization in the role of consultant and design partner, offering "production assistance" to universities for their MOOCs. The organization charges a base rate of $250,000 for each new course, plus $50,000 for each time a course is offered for an additional term, according to the standard agreement.
Although the edX-supported model requires cash upfront, the potential returns for the university are high if a course ends up making money. The university gets 70 percent of any revenue generated by the course. However, if the university also has self-service courses with edX, the university will not get any revenue from the edX-supported courses until edX has made the equivalent of $50,000 for every new self-service course and $10,000 for every recurring one.
The university partners can choose which model they want to use on a course-by-course basis, and every 12 months they have the opportunity to switch from one to the other. "If it's more in the university's interest to switch models, then edX will recommend that they do that," said Mr. Agarwal.
Both edX models offer higher shares to universities than agreements with Coursera do, but only once edX has collected its minimum payment. Coursera offers universities 6 percent to 15 percent of the gross revenue generated by each of their MOOCs on its platform, as well as 20 percent of the profits generated by the "aggregate set of courses provided by the university."
There is no minimum payment to Coursera—meaning universities are guaranteed a cut of any revenue for their MOOCs on Coursera, even if the company offers a smaller piece of the pie than edX does.
Revenue Still a Puzzle
The details of edX's financial arrangements do not answer the crucial question of how the MOOCs will make money in the first place—and, in edX's case, whether courses that do make money will make enough that universities will see a cut.
The organization is still "in start-up mode," said Mr. Agarwal. "We don't quite know what the key source of revenue will be."
Potential moneymaking strategies include deals with outside companies—such as publishers that are looking to sell their products to the many students who register for MOOCs, or employers looking to recruit the most impressive students.
"EdX will be entitled to all net profits from agreements with third parties not directly related to College/UniversityX courses," the standard agreement stipulates, "including, for example, book sales on the site, proctoring services, and any sitewide employee-recruiting services."
That is another key difference separating edX from Coursera, which counts those third-party deals as part of the revenue generated by the courses. Daphne Koller, one of Coursera's founders, said that all profits associated with a course on that platform "are shared back with the university that provided the course."
EdX has a deal with Pearson VUE, a company that runs a worldwide network of testing centers, to hold proctored examinations for its MOOCs. Although edX does not charge for the certificates that successful students receive for passing those proctored exams, Mr. Agarwal said it may do so in the future. The edX president said the organization is also considering referring students to related books in exchange for a cut from publishers, as well as operating as a headhunter for employers—avenues that Coursera is also exploring.
But in terms of generating the kind of revenue that edX would share with its university partners, Mr. Agarwal said the most likely strategy could involve licensing their MOOCs to other universities.
To test the licensing model, San Jose State University last fall used an edX MOOC, "Circuits & Electronics," as the basis for a "blended" online course offered to 85 tuition-paying students on its campus.
The early results were encouraging. The semester before the edX pilot, 60 percent of students passed the San Jose State course; 91 percent passed the edX-infused version.
EdX did not charge San Jose State for the pilot, and Mr. Agarwal said there is no pricing model yet for licensing the courses. But if the San Jose State experiment becomes the basis for a key revenue stream for the organization, the edX courses that generate revenue will do so in closed classrooms with limited enrollments and tuition-paying students.
Correction (2/25/2013, 11:45 a.m.): The original version of this article included incorrect details about edX's revenue sharing with its college partners. The minimum payments to edX for “edX supported” courses apply only to partners that also have "self-service" courses. The text has been corrected.