Is Anyone Making Money on Distance Education?

Colleges struggle to figure out how much they are spending on online programs

By SARAH CARR

On the heels of the dot-com shakeout, reality is setting in among many

ALSO SEE: 6 Ways to Measure Costs Where the Money Goes Colloquy Live: Join a live, online discussion with Frank Mayadas, director of the Alfred P. Sloan Foundation's Asynchronous Learning Network, on the economics of distance education, on Wednesday, February 14, at 2 p.m., U.S. Eastern time.

distance-education administrators. They are realizing that putting programs online doesn't necessarily bring riches. And many of them are taking a harder look -- sometimes for the first time -- at what they are spending on distance education.

While distance-education programs are not going under like their dot-com counterparts, administrators are recognizing that the costs of expanding programs are -- in some cases -- greater than had been anticipated.

"From the very beginning, we had to combat the myth that online learning is cheaper to produce and cheaper to deliver than face-to-face curricula," says Robert E. Myers, the executive vice president of the University of Maryland's University College. "But I think we are finding that as people become more sophisticated and knowledgeable about the online-education space, there are fewer and fewer people out there that you have to disabuse of the myth that online is cheaper."

In fact, several distance-education leaders predict that some administrators will slow or stop their expansion into online learning as they develop a better sense of the costs.

And many college officials are at least trying to explore various assumptions about distance learning by focusing on costs. "There probably have been some that felt that this was the panacea, the silver bullet for responding to increasing demands for higher education," adds Bruce N. Chaloux, the director of the Southern Regional Education Board's Electronic Campus. "But I don't know that anyone has reached the conclusion that this is indeed the case. That is why the whole issue of what it costs to do this has become so important."

The twin issues of the cost of online education and its potential profitability are analyzed in detail by six new studies commissioned by the Alfred P. Sloan Foundation. Reports based on the studies, which were among the first of their kind, explore the financial costs and potential profitability of distance learning at six universities, all of which have received grants from the foundation's Asynchronous Learning Network to develop online programs. The reports were presented at a seminar last summer.

The researchers who conducted the studies tackled the issues in strikingly different ways, but their reports point to two broad conclusions: The universities aren't losing a lot of money on distance learning, but they aren't making much either -- at least not yet. And how well the programs appear to be doing depends, in part, on how their costs and revenues are defined. Those often-thorny questions are increasingly important as institutions decide whether it is financially feasible to expand their fledgling distance-learning efforts over the next few years.

Most of the reports -- based on studies conducted at the Rochester Institute of Technology, the University of Illinois at Urbana-Champaign, the University of Maryland's University College, and Drexel, Pace, and Pennsylvania State Universities -- reveal that the universities are hovering close to the break-even point with their distance-learning programs.

In most cases, the studies relied on estimated-cost projections because university accounting procedures were not always well suited to a case-study approach.

The Pace University study, for instance, revealed that the university may have lost $47,365 in the past year on a new online program that offers a telecommunications certificate.

Says David Sachs, an assistant dean at Pace and the author of the report there: "We pretty much broke even with the first year from a financial perspective, but from a non-financial perspective we did far better than that. The costs go way beyond what you think they are going to be, but so do the benefits."

The author of the Drexel report tried to compare the costs of traditional education with those of online education by using cost estimates based on one of the university's master's-degree programs that is offered in both formats. The analysis showed that the traditional program generated more revenue -- $342 per student -- than its online counterpart, although the difference dropped by almost $300 per student when land, buildings, and equipment required for the traditional program were taken into account.

At Maryland's University College, a for-profit subsidiary of the institution, the researchers estimated expenses and revenues for their online M.B.A. program. They determined that slight differences in class size would affect profitability: a class of 15 would result in a loss of $22,399, while a class of 20 would mean a profit of $61,838.

"Some people have this idea that you can save or make a lot of money in doing online learning, but I don't really believe that," says Tim L. Wentling, a professor of education at Urbana-Champaign and a leader of the study conducted there. "I just think it is another way to deliver quality instruction and reach people who otherwise would not be reached."

Gregory Hislop, an associate professor of information science and technology at Drexel and the author of the report there, says the studies offer local views of the finances of online learning, making it difficult to generalize from them. However, he adds: "If I had to describe a common conclusion, it would be that this is not a way to make a university rich. But you can at least be in the same ballpark as with traditional programs. I also get the sense that there is room for improvement."

Frank Mayadas, the director of the Sloan Foundation's Asynchronous Learning Network, says the studies' findings may not apply to all distance-education providers because the six institutions are all in the Sloan program, which gives participating institutions certain guidelines that tend to limit their development costs.

"We don't encourage them to use a lot of very high-priced media, so our model has been to spend between $5,000 and $15,000 to develop a course," he says.

Many commercial companies spend even more on developing courses -- some have put millions of dollars into a single course, Mr. Mayadas says -- making it impossible to compare their costs with those of nonprofit universities. "In our model, the cost of creating the course is not too high, but the cost of delivery is roughly the same as if it is delivered on campus," he says.

Mr. Mayadas says he expects that eventually the cost of creating and teaching an online course will end up being 20 percent cheaper than the cost of developing and teaching a traditional course.

The physical infrastructure that is needed to support traditional programs, he explains, will ultimately make the difference. "Unlike technology, these costs do not go down over time, and they are hard to automate," he says.

The reports do suggest that those who assumed it would be possible to create new sources of revenue from online programs quickly -- or even to sustain the programs without financial scrutiny -- will be disappointed.

That sentiment is spreading in academe. "The expectations were that online courses would be a new revenue source and something that colleges had to look into," says John E. Kobara, the president of OnlineLearning.net, a company hired by the University of California at Los Angeles and others to help them market and deliver online courses. "A year ago, there was no chancellor or president in the country who didn't say that universities should be seriously thinking about online courses. Today, they are going back and asking some important and tough questions, such as: 'Are we making any money off of it?' 'Can we even pay for it?' And 'Have we estimated the full costs?'"

"I don't think anybody has wild notions that it is going to be the most important revenue source, but they think it could be one revenue source in the future," he adds.

Burks Oakley II, the associate vice president for academic affairs in the University of Illinois system, says that his institution is not trying to "generate a surplus" from its distance programs. But he adds: "As we have gotten into this, we have realized that we need to make these programs sustainable. Finances are clearly an important issue that we maybe haven't spent enough time dealing with."

Mr. Kobara contends that as institutions take a closer look at finances, some will decide to scale back their online operations. "There will always continue to be random acts of progress, and individuals will continue to put their courses online. But for those institutions with a strategic approach to courses, I think the shakeout has begun. There are those who want to have a Plan B because they are not sure if they can sustain what they are doing and the needs of the program are beginning to outstrip the capacity to provide."

Some commercial distance-education ventures are already beginning to revise their business plans in light of financial insecurities or shortfalls. Leaders of Columbia University's Fathom project, for instance, have found that it is not easy to attract outside financing to their for-profit venture. Officials at Fathom, which hopes to sell online courses and articles, said last month that the university would commit another $10-million to the project and would halt most advertising in order to cut costs and keep the project afloat.

Leroy W. Dubeck, the chairman of the budget committee of Temple University's Faculty Senate, says administrators there said they would look for outside money for a for-profit division that will create and market online courses, instead of financing the venture on their own, because of its risky nature.

Mr. Dubeck says many college officials greatly underestimate the cost of developing and maintaining strong distance-learning programs. "There will, as in anything, be some that will be able to make money, but I think the vast majority will be disappointed."

He argues that universities, in some cases, will have to draw huge numbers of online students to make back the money spent on course development, faculty compensation, and student services.

Distance learning "can have some very good uses," he says. "But its good uses are not to save money."

Mr. Myers, of Maryland's University College, says that online programs are "bloody expensive to develop and develop well."

Moreover, he says, administrators who want to recoup their development costs on online programs will have to spend more time creating and following a business plan than they are accustomed to. "We know from having built our company that you need big chunks of capital infusion" to start such an ambitious program, he says. But once it has opened, he adds, "you have to attend to your business metrics on a daily basis to make sure you are controlling costs."

Mr. Myers says Maryland spent slightly more than $1-million on its online M.B.A. program, and is "very close" to having fully recouped the development costs. The $1-million was used to buy the program's technological infrastructure and to create an assess ment team to monitor the performance and satisfaction of students and faculty members, among other things.

Not all programs, though, have proved financially viable. Maryland officials, for instance, canceled a distance program in engineering management at one point. "Unlike most institutions, we are quite willing to kill a program if it appears that we are not going to recoup costs," Mr. Myers says.

Other institutions are trying to get a better handle on costs and revenue-generating potential to determine how quickly they should expand their online programs.

At the Rochester Institute of Technology, the Sloan study was timely because university administrators had decided to broaden their program and needed to figure out how much that would cost, says Christine Geith, the executive director of online learning there.

"It is one thing to put one course online. The costs are really easy to identify, and the faculty member can shoulder the burden of being the virtual university," she says. "But if we are going to grow our distance program to 10 percent of our total operations, we have to look at the concept of a virtual university in a different way, because we won't be able to just Band-Aid together student-support services."

Pamela Quinn, the assistant chancellor at the Dallas County Community College District's R. Jan LeCroy Center for Educational Telecommunications, says many colleges are hitting a point where they have to decide whether they want to become "fully ramped-up distance-education providers." If they do, she says, some will have to add new positions, such as instructional designers in their online programs.

But before administrators can make that decision, they need to understand what to include as the costs and benefits of online education, a daunting task.

"Costing is a very murky business," says Tana Bishop, an associate dean at Maryland's University College and an author of the Sloan report on that program.

The Sloan studies, in fact, varied considerably in what they counted as costs or expenses. The Drexel study included three categories of costs: personnel, technology communications, and other expenses. But the Pace researchers estimated the costs of personnel, honoraria and professional services, travel, operations, course development, and instruction.

Jeff Bartkovich, the vice president for educational-technology services at Monroe Community College, in Rochester, N.Y., and a peer-reviewer of the Sloan reports, says the authors did a good job of identifying the "obvious direct costs" in distance education, but there are "secondary costs that they need to identify, tease out, and take a harder look at." For instance, he says, a college's registration system might need to be modified to accommodate online students -- an expense that is unlikely to be listed in a distance-education budget.

Part of the problem, administrators say, is distinguishing the costs of distance programs from those of traditional ones. "When you start to put [programs offering] certificates and degrees online, you need support services," says Mr. Sachs at Pace.

"We have had an enormous amount of support from the library, and while the librarians aren't in my budget, they have spent a significant amount of time working on the online projects."

Some researchers describe the list of potential costs as never-ending and, in the final analysis, unknowable. Mr. Hislop, the Drexel professor, says one could even consider how distance education will influence the local economies of university towns, because fewer students may be visiting the campus on a regular basis.

But others point out that just as there are many obscure costs to distance learning, there are also subtle benefits.

Some administrators say examining the costs of distance learning has prompted them to evaluate university policies and procedures that they either weren't aware of or had not discussed adequately -- another indirect benefit. At Maryland's University College, for instance, the cost study has raised questions about intellectual-property rights.

The Sloan Foundation's Mr. Mayadas, for one, says he is confident that distance education will become as financially feasible as traditional education in the not-too-distant future.

Others cite even-more-elusive benefits that will never show up on the bottom line. "Much of the 'revenue' is in being perceived a leader in the use of technology," says John Milam, an associate professor in the University of Virginia's department of education leadership, foundations, and policy.

And others say there are many reasons to create distance-learning programs that have little grounding in strict finances. "Sometimes you do things in life because where it is going to take you is where you want to be," says Pace's Mr. Sachs.

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