Colloquy Live: 2/14/2001: Distance Ed. Transcript

Is Anyone Making Money on Distance Education?

Wednesday, February 14 at 2 p.m. U.S. Eastern time

Are any colleges making money on distance education? How can colleges determine the costs of their distance-education programs?

As colleges and businesses have moved rapidly into distance education in recent years, they have struggled with a series of economic questions. Many college officials saw distance education as a way for them to make money -- by reaching many more students and/or by cutting their costs. But as distance education has grown, colleges have found that it involves significant costs, and that there is little agreement on how to measure those costs. In an effort to help colleges better figure out the economics of distance education, the Alfred P. Sloan Foundation is sponsoring a series of studies in which colleges are exploring both the costs and the potential profitability of distance education.

» Is Anyone Making Money on Distance Education? (2/16/2001)

A. Frank Mayadas is the director of the Sloan Foundation's Asynchronous Learning Network. Before joining the foundation, he held a variety of positions at the IBM Corporation, including vice president of the research division for technical plans and controls, and vice president for the technology and solutions department. Mr. Mayadas, who earned a Ph.D. in applied physics from Cornell University, has written numerous journal articles on systems, devices, and solid-state physics.

This is a transcript of a live discussion on Wednesday, February 14, 2001.

Sarah Carr (Moderator):
Thank you for joining us for today's live chat looking at the financial costs and potential profitability of distance learning. I am Sarah Carr, a reporter here writing about distance education.

Our guest today is Frank Mayadas, the director of the program at the Sloan Foundation that provides grants to colleges for distance learning initiatives. Mr. Mayadas has encouraged college administrators to investigate further the finances of online-learning programs, and recently commissioned a set of studies that explored financial and economic issues associated with online learning at five institutions.

Thanks for taking the time to be with us today, Mr. Mayadas.

A. Frank Mayadas:
I think cost is one of the important things that we have to address quickly when talking about online education. There are other things as well, though. One has to be convinced that quality learning takes place. One also has to be convinced that faculty can be found who want to teach this way. We have to be sure that students are satisfied with the experience.

Each of these things is important, and we have to think about all of them. One of the very important issues is cost, and we have to make sure online education is affordable, but also within the parameters of a quality education.

We are not used to always considering issues of cost. We tend to think of quality first, but we need to analyze it to some degree, and that's why we commissioned a number of institutions to think about the cost issue.

Question from Gary Miller, Penn State:
Distance education has been a part of higher education for more than a century, starting with correspondence study in the 1890s. While it has tended to be operated on a cost-recovery basis, it has generally been considered to be an extension of the university's educational outreach mission, and not something that is done primarily to generate profit. Why, now that distance education is moving to the Web, is there an expectation that it should be a profit center?

A. Frank Mayadas:
My impression is that while some university continuing education and extension schools operate on a cost-recovery basis, as Gary notes, many have for years derived a "profit." I think the various institutions will carry whatever model they currently have to the Web as well.

Then there are the for-profit subsidiaries in traditional universities (only a few at this point). The idea here is to generate cash from the capital markets to feed back into the university so that more courses can be created and marketed (not many have actually gone to the capital markets to this point). Finally, there are the for-profits recently formed (with the exception of Phoenix which has been in existence for 15 years or so). They are in the business because they and their investors believe that the Web affords a profit-making opportunity. Most are not making a profit at the point so we'll have to wait and see.

Sarah Carr (Moderator):
Here is a comment from Stanley Chodorow, UC San Diego:

The question reveals the way administrators, legislators, and trustees have approached distance education--i.e. as a possible profit center. It seems to me that in the traditional academic community distance education should be viewed as a new means of providing education to qualified students. As such, it would be a cost center, not a profit center. The question, then, is: Does DL cost less to deliver than classroom education? Does it cost the institutions less? Does it or should it cost the student less?

Question from Robert Burnside Corporate University Xchange:
I am a recent graduate of Duke University's Global Executive MBA program. I found it very useful - but very expensive. Do you expect distance learning programs to be more expensive than traditional classroom when the whole facts are in?

A. Frank Mayadas:
My impression is the Duke program requires a certain number of face-to-face sessions at various international locations. If so, that will add cost. Also I don't know a lot about the details of their online model so can't comment further. I will say, that for what we call ALN (instructor-led classes using similar learning materials as the campus counterpart so that new expensive learning materials do not have to be created) we expect online education to definitely become less expensive than campus education, though not by a very large amount (maybe 20 percent less).

Question from Will Clifton, Univ. Wisconsin-Madison:
When it comes to factoring in "Student Services" for distance education courses, do you adapt and expand what you do on campus, or do you create an entirely different infrastructure for the on-line student needs? And, what are the financial ramifications of expanding and/or creating new services?

A. Frank Mayadas:
Good question on student services. Only those services should be provided that the learner population needs and those should be provided well. Since the off-campus and on-campus learner populations are different, different service functions will have to be provided, or some of the same ones in a different way. The infrastructure for services to learners, or even for distributed faculty, will have to be re-thought. And yes, there will have to be some up-front investment here, but in the end, delivery cost is likely to be less than for the campus version. I also recommend spending the up-front money incrementally, on a pay as you go basis, not in one shot (because you will probably get it wrong the first time anyway.)

Question from Claudine SchWeber, U of Md Un College:
What benefits have non-online students received from the services and applications originally intended for the online students?

A. Frank Mayadas:
Ah, good question. I don't think we know. We have to speculate that as online education grows, the traditional students will also benefit. Both benefit because their courses and services have an online character. Undoubtedly, their services will improve.

Question from Ed Carson, Community College Trustee:
As distance education matures, will the economics substantially shrink the number of providers?

A. Frank Mayadas:
It may. This is a new area, and it's very difficult to speculate. I think those of us who have been in this are convinced that the number of learners will increase. Some institutions may find it hard in the end to stay in the game, but I don't think it will be a wholesale effect immediately. None of us can tell what will really happen beyond the ten-year horizon.

Question from Owen Holmes, Cal State Fullerton:
What are the cost differentials for delivery of distance education via satellite versus the web?

A. Frank Mayadas:
I think he's asking about the difference between televised instruction and online instruction. It's very hard to make a comparison between the two. Televised instruction only applies to a specific place and time, so it's very hard to make the comparison to online. But in my discussions with people who've installed interactive televised instruction, they've found it more expensive.

A. Frank Mayadas:
The following should be added to the answer about satellite vs. web education: Remember, there is a cost to the student as well. If a student has to take time off to go to a particular place for a class, that's a cost to the student. So again, I think that web education has an edge.

Question from Sarah Carr:
Do you know of any non-profit colleges or universities that have undertaken a study of the costs of online learning and then decided not to pursue it? Have there been any that have scaled back programs because it did not turn out to be as financially feasible as they thought? Or are we still in a period of continual growth?

A. Frank Mayadas:
It's a very good question. I must say, I don't know of any institution that has, either through experience or analysis, determined that online education is too expensive for them. In the entire Sloan program, I know of only one instance where a university began to offer courses and then stopped. In all other cases, they have not only begun under the Sloan grant, but then have gone ahead and expanded using internal money or grants to produce programs that are much bigger than the ones they started with.

In the one instance where the university stopped offering a degree program online, the problem seems to have been an inability to get enough faculty involved.

Question from Walt Volland, Bellevue Community College:
How was the reduced cost of physical plant factored into the studies?

A. Frank Mayadas:
Physical plant is tricky. In a business, it is carried on the balance sheet as a depreciating asset. In colleges, buildings may be gifts from alumni, or paid with state funds. The relevant expense is the expense of maintenance. Greg Hislop of Drexel contributed a paper in which he took into account the cost of physical plant. I recommend contacting him directly on this.

Question from Tracy Mitrano, Cornell University:
In your opinion, will the distinction between for profit and not for profit distance learning endeavors endure, or will there be a collapse of one type and a consolidation. If a collapse and consolidation, in which direction?

A. Frank Mayadas:
For quite a long time, we will see the two co-exist. Remember, the for-profit part today is a very tiny part -- less than 5 percent -- of the total online scene. Most of the enrollments today are with the traditional non-profit institutions. I think we'll see substantial gains with the for-profits, but I don't see substantial gains of one or the other. I think they'll simply co-exist.

Question from Charmaine, comprehensive liberal arts university:
As we try to determine the costs involved in continually upgrading technologies for efficient distance learning connections, what kinds and amounts($) of additional fees are reasonable to be levied on the students?

A. Frank Mayadas:
My view is that the off-campus students should pay about the same tuition and other fees as the regular students. Yes, there is a "maintenance cost" -- as every year the courses need to be updated a bit, and the technology may need to be upgraded, but so what? That's the same for regular on-campus courses.

Question from Larry Long, Harding University:
Harding University is a private, religiously affiliated university. Is it likely that the university could "make money" by offering on-line degrees to a small niche market, for example, those interested in an MBA from a Christian perspective? Or would such offerings be more likely be so costly that they would best be seen as service to that market niche, not a positive cash flow?

A. Frank Mayadas:
Even for small markets, I believe that online courses of equivalent quality to the traditional campus courses can be provided without losing money. I think that for small numbers, making a profit may be hard, but you may not lose much. Remember, there is a start-up cost, so you have to get one-time money to start the program. The delivery should be about the same as your regular campus cost.

Question from Matthew McKeon of Corporate University Xchange:
About how much, if any, of the distance learning revenues earned by participating universities came from contracts to train corporate clients' employees? Were contracts with corporate clients common among the universities studied?

A. Frank Mayadas:
A couple of the universities noted that they had corporate clients. Nationally, it's very hard for me to tell how many of the online enrollments were what we might call "wholesale" or "corporate learners," as opposed to the more general population. My guess is that the corporate side is no more than about 20 percent of the total national enrollments in online education.

Sarah Carr (Moderator):
We are about half way through today's chat. Please submit any questions or comments you might have-- either following up on the issues already discussed or on a new topic.

Question from Ben Scott, Dallas Theological Seminary:
For institutions whose distributed learning is considered a profit-center, what is a good percentage return to the main campus?

A. Frank Mayadas:
Schools of continuing education, and a number of extension schools have over the years, even in their classroom programs, made a "profit," and returned some of that to the university. There are many others who could give a more precise number than I could on what that has been. Today, I don't think there is a lot of profit being made to return to the university. Over time, I think it will resemble the experience of the continuing education schools.

Question from Laura Young, UNC Office of the President:
Are states other than North Carolina being asked to measure the cost of distance education against the cost of on-campus education? If so, what kind of conclusions are being drawn? Also, what kind of reactions are others getting from legislators vis-a-vis funding distance education?

(UNC made an initial report to our legislative education oversight committee in spring of 2000--we basically found, using our best "total cost" methodology that distance education costs were higher than on-campus instruction. Not surprisingly, we found that the heavily technology-mediated instruction was the most expensive, while traditional face-to-face instruction was the last expensive. A minority, but vocal, representation from our General Assembly continues to echo the old "distance education shouldn't cost as much as on-campus instruction" chorus, and we find ourselves constantly in the reactive mode. We would be very interested in what is happening in other states.)

A. Frank Mayadas:
First of all, this is a question to which I don't know the answer. I don't know of others who have specifically asked that question.

Let me step back a minute and say something about cost of education as I see it. It's a tricky thing to talk about cost of education because the cost can be almost anything. I say this because if you spend a lot of money to create special materials, you can drive the costs way up. If you require faculty to spend more time on online education, the cost can go up. If the class size is small, the costs go up.

Our guiding principle should be that the online student gets the same quality of education as the traditional student at that university. You can get involved in expensive materials, and infrastructure.

In the end, the cost should be enough to insure that the same quality of education is being provided for online students. That said, I don't think it needs to cost more to educate students online. It all depends on how you approach the courses.

There's also the cost of kicking off the program, and then the cost of delivery. A lot of universities have been able to find the money to fund faculty members to create courses. They got the money through grants and so on. Once they have that, the ongoing cost of delivery doesn't have to be much higher than on-campus education. In time, it should get lower.

I am on the side that says online today at most institutions appears to be about the same cost as traditional education, and over time, I'm convinced that it will become lower, though not by a lot.

Sarah Carr (Moderator):
Here is a comment from Rakesh Gupta, Adelphi University:

I agree with the earlier statements by Chodorow and Miller. If academic institutions view distance education as other than a cost center, the pressure to generate profit can lead to terrible academic decisions. As but one example, "forced" use of adjunct/overload faculty to lower cost may lead to lower quality and violate accreditation criteria.

Question from David Collis Yale University:
Is there a fundamental difference between distance learning that involves extensive tutorial support, such as the Open University (which can be provided online) and lower quality distance learning that minimizes such support? Will the former always be reasonably expensive because it has to pay real people and maintain adequate student/faculty ratios?

A. Frank Mayadas:
To the best of my knowledge, nearly all for-credit education in this country is today provided through instructor or faculty-led classes. These may be adjuncts. What you call the "lower quality" distance education is available, but generally for non-credit purposes. In many cases, it makes sense to teach a very prescriptive subject without the benefit of a tutor or instructor. For example, a short course on how to do certain kinds of mechanical maintenance could be taught quite effectively through materials only, just as it was in the past through manuals. In the for-credit world, however, we believe that instructors and faculty are necessary and that seems to be happening in online education.

You asked about the cost of instructor or faculty-led courses, and yes, the delivery cost will be similar to the delivery cost we see on campuses. I don't see that changing.

Question from Philip Swain, Purdue University:
Wait a minute! Just as on-line learning can be synchronous or asynchronous, so, too, can television-based distance learning. Is the Sloan Foundation willing to fund good comparative studies of alternative modes of delivery?

A. Frank Mayadas:
Our interests, I should make clear, are in anytime, anyplace asynchronous education. This is not to say that the other kinds don't have very useful purposes. They just happen not to fit within our interests. In a number of our asynchronous programs, we have accepted a synchronous component if it is optional. So for instance, a Thursday chat session with the faculty member from 4-6 in the evening is OK if it is optional. There may be individuals who are traveling that day and couldn't participate, but who could see a transcript of that session afterwards.

Question from Seymour Wolfson, Wayne State Univ:
Although it may be true that at the start gate the initial cost of creating DL courses may be more expensive than a traditional course, but once it is done, the materials live on for a long time and the university will not have to bear much more costs and yet reap tuition revenues. Wouldn't this make DL very cost effective in the long run?

A. Frank Mayadas:
Seymour, I think that you are absolutely right. As we all know, some courses, like calculus, once developed are unlikely to change much. We also know that some courses, like software engineering, will need revision annually. I support your point, mainly, that once the initial development cost is out of the way, that the cost of delivering distance education will be lower than traditional education.

Question from Richard Hezel, Hezel Associates:
The studies and models we've developed for distance learning show that economies of scale are quite important to generating a positive cash flow from online courses. I have two questions: Did the studies conducted by your investigators analyze net revenue (actual or potential) under conditions of increasing student enrollment in each course? In a similar vein, did the studies look at actual or predictive cash flow over several years of development? In each case, one would expect more revenue, less expense, increasing efficiencies, and greater profitability.

A. Frank Mayadas:
Most of the papers are a snap-shot of the today situation. But remember, we will be having another summer workshop session this year and again the papers will be published, and we expect papers each year to have more in them. This year's papers will build on what's already been done and will take more into account in the way of trends. I might add as an aside that the summer workshop was held in 1999 and featured papers on the two topics of learning effectiveness and faculty satisfaction. The papers on the same topics a year later were much better and this year's ones will be better still. We plan to commission papers this year on all three topics again: learning effectiveness, faculty attitudes, and cost-effectiveness. This stuff is not an event to be settled in one meeting, rather a journey.

I might add, Dick, that the ALN model assumes modest outlay for course creation and this goes down on a per-course basis over time, but then to first order, cost of delivery gains only modestly from scale economies as enrollments increase, because we keep student faculty ratios about the same as campus classes.

Question from John Mainieri, Mesa Community College:
Do you see any similarities between distance learning programs and the dot com retailers? Amazon.com, one of the largest, has yet to turn a profit. Hundreds of others have gone out of business.

A. Frank Mayadas:
There are some similarities, of course, but they are superficial. Let's recognize that online education is not something where there's an unknown demand. There is a demand, and the reason for that is that online fundamentally changed the game from traditional distance education. It changed it because in the old style distance ed, you primarily provided the off-campus learner with materials. Now we provide them with a professor and other students as well. So now we have the possibility of quality education online, and this is a very sound educational model, unlike many of the dot-coms that have very unsound business models.

Question from Edward Dickinson, Victoria University, Wellington,:
I think we need to be more specific. What "products" can universities and colleges sell at a profit? Semester-length courses in the humanities? Executive MBA programs? Four-week courses in computer science or management theory?

A. Frank Mayadas:
The answer is all of the above. There is likely to be a much bigger demand for some kinds of education, such as management or I.T. However, we also see many, many more institutions offering programs in those areas. Consider the fact that today, there is no traditional humanities B.A. or a physics or biology B.A. available online, at least to the best of my knowledge. Further consider the fact that any one institution offering any one of these would easily be able to fill a class of 25-50 people from a world-wide audience, and I expect they would make money. We don't need hundreds of such degrees, but a few of them would be profitable. So in the end, it depends on how many similar products are in the marketplace and what the demand is.

Question from Ingrid Guttek, Athabasca University (student):
You mention that online education may become less expensive than campus education (c. 20%). Do you feel that physical infrastructure costs may in fact rise over time considering the cost of renovation, heating, electricity, excess space (i.e., building maintenance), which may contribute to making online education more attractive than traditional education in the future?

A. Frank Mayadas:
You raise a possibility that I did not account for in my 20 percent estimate. I have simply assumed that the cost of infrastructure will not go down, and that the cost of technology will go down dramatically. In your scenario, yes, online education would become even more attractive.

Question from Erv Boschmann, Indiana University:
How do you fairly charge tuition in the IT environment? Does it make sense to continue thinking of in-state and out-of-state?

A. Frank Mayadas:
The fact is that today, almost anything you can imagine is being tried. I know of state universities that are charging in-state tuition anywhere in the world. I know of some that follow the regular in-state/out-of-state formula. A number of private universities charge variable rates, depending on the circumstances and whether they have an agreement -- for example, with a company -- to charge a certain rate.

So in some sense, it doesn't matter what I think. State universities will have to be responsive to their state governments and will probably find it hard to explain why in-state tuition should be available to someone outside the state. And private universities, of course, will have much more flexibility in charging what they want to charge, subject to demand and what people are willing to pay.

Question from Suanne Carlson, WA St Brd for Comm & Tech Colleges:
Can you speculate about public funding for and policy regarding online eduction? Do you expect significate policy changes affecting the funding of online education? What questions should law makers ask in order to create good policy that encourages the growth of and access to online learning?

A. Frank Mayadas:
First of all, legislatures, governors, and federal policy makers have all tended to be supportive so far of online education. I see it again and again. These groups are charged with the general well-being of our population, hence, they are interested in increased access and better methods of skill-building. Positive inclinations are a good response, and I would hope that continues. They should be asking questions about access and improved skills for our workforce, and as long as we can answer those questions in a positive way, I think they'll continue to provide the necessary support.

Question from Walt Volland, Ph.D. Bellevue Community College:
How did the study participants account for the fact that the institutions incur costs for servers, IT help desks, etc., whether or not on-line classes are offered?

A. Frank Mayadas:
That's a really good question. The study participants did allocate costs to servers, for maintenance, and other care of the servers. In the end, there's a decision the university has to make, because we know that the computers, the software platform, and the service workers, will be needed for both the campus programs and the online programs. I happen to think that the burden from the on-campus programs are even bigger. In the study, they did allocate infrastructure costs and the cost of the software platform to the online program, but I don't know off the top of my head what formula was applied to do this.

I do want to reiterate that over the long haul, the costs of these online programs may turn out to be very small compared to the on-campus costs. One may argue, Why allocate any of this infrastructure to online? Today we know that tens of thousands of on-campus courses have a web component, and that requires the same kind of infrastructure as online.

Question from Jacquie Moloney, UMass:
Does the rate of growth in enrollments in online learning meet with Sloan projections from the past 3 years? If yes, why do you think that happened? If no, why not?

A. Frank Mayadas:
We're in the early stages of anytime, anyplace online education. That means that we are still in the high-growth stage, which in turn means that we're seeing roughly a doubling of enrollments right now. That certainly meets our expectations.

The fact that we're seeing this kind of growth is a very clear indication of the huge demand that exists. That demand comes from the fact that people first of all desire education, and secondly, their schedules do not permit them to take time off and drive to campus. Also, the business climate requires more travel and temporary assignments in other locations for professionals. These people can still access assignments through the web, no matter where they are.

Question from Eric Bengtson, Penn State University:
Has anything been done, or is anything being done to standardize accounting practices for Distance Learning? I come from an industry that has standards that allowed you to compare businesses within an industry on several different standards. This helps dramatically in seeing where the real weak spots are and what needs to be done to improve, and this in turn helps goal setting and strategizing. Are you aware of any attempts of coming up with accounting standards?

A. Frank Mayadas:
There are well-known standards in business, for example, FASB. There are standards for universities as well, and it's my intention to spend more time on this this year. I think understanding such standards will help us, but I really think that the most important thing we can focus on is spending money to insure that online education is the same quality as traditional education. If standard accounting practices can help us, we should certainly use them. That's an area I'll be looking into.

Question from Peggi Munkittrick, SCT:
I agree that, once developed, the cost of delivering online education should be the same or less than delivering on-campus instruction. But what about the online student services that should be made available to your distance students? By their very nature, they become expensive to develop and maintain. How might higher education approach those service requirements in a cost effective manner?

A. Frank Mayadas:
I agree that we should think separately of quality online education and quality online services. You can think of circumstances in which a quality education is being provided without quality services, and the other way around. The online learner population is and will be more demanding of quality services than the captive student, so to speak, on campus. I don't think we have done enough to think quantitatively and qualitatively about quality services, although it is an issue now coming to the forefront.

So I really agree with the need for quality services. However, I am not convinced that they need to be very costly. This is an area where academia can learn from businesses, some of whom provide quality online services, and some of whom do not. We should learn from instances where it's being done right. You reminded me of something that we at Sloan should emphasize in the coming months.

Sarah Carr (Moderator):
That's all we have time for today. I really appreciate the good questions on an important topic. Thanks again, Mr. Mayadas.

A. Frank Mayadas:
I really enjoyed this discussion. Thank you for all of your questions, and thank you for forcing me to think about some things that we at Sloan may be able to emphasize more in our own program.