Twofish's Blog

August 18, 2006

Astrophysics and business – Challenging Harvard

Filed under: academia, university of phoenix — twofish @ 10:35 am

People have asked what use is an astrophysics degree in business. Astrophysics is partly about dealing with big numbers and asking “how big”? Business is about dealing with big numbers and asking “how big”?

Let me share with you some numbers. The total revenue for Harvard in 2005 was $4B, MIT was $2B, University of Phoenix is $2B. Total asset value for Harvard is about $26B, for MIT is about $8B, for University of Phoenix it is about $1B.

Also in terms of the commercial world these are very small numbers. Microsoft made $50B in revenue, and it is not a particularly large company. Walmarts revenue in 2005 was $288B
Some other numbers. The amount of money that Wikimedia has in the bank is about $500,000, which is also about the amount of money it took to start Olin College. Also if you take a look at how long it took to building Walmart or Microsoft, you see about 20-30 years.
If you look at the numbers, then “challenging Harvard” is far from an unreasonable prospect.

The other thing about University of Phoenix is that it is reaching saturation and something has got to change. The rates of growth are no longer as high as they were before, and the share price has plummetted in the last few months. The trouble is that UoP is saturating its markets, and for it to continue to make its shareholders happy, its going to have to do something new and different. One thing that it *could* do is to start teaching brain surgeons and astrophysicists.

Before you start laughing, and say “that’s silly”, “show me the numbers”. How much does it cost to start a medical school or a finance a telescope? (I don’t know about the former, but the answer to the latter is that Keck costs $100M). So if UoP has the money, then what is the limitation?  Lack of a viable business plan?  OK, if anyone really cared I could spend a week trying to come up with a business plan to see if I could come up with something that would make investing $10M in a telescope a profitable position for UoP.  I’m pretty sure that starting a medical school *would* be financially feasible, and at that point it becomes a bureaucratic/political problem.

You see the point I’m making. The good thing about a physics degree is that it forces you to get to the numbers, and ask questions.  “What *would* it take to challenge Harvard?”  If you start thinking like a physicist, you start pulling numbers and trying to make some sense out of them.  If you don’t have the ability to work with numbers, then it leads you susceptible to being influenced by marketing which says that it just can’t happen because we say it can’t happen.

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11 Comments »

  1. One correction. Olin College was endowed and started with nearly $430 million, not $500 thousand. The campus alone cost more than $100 million, and the annual budget to educate (only!) 300 students is around $30 million. Starting a college that can seriously compete and attract the top quality students and faculty, like Olin has, requires immense capital.

    Comment by Michael Ducker — August 18, 2006 @ 4:32 pm

  2. Thanks a lot for the correction. One important part about making statements and giving numbers is so that people can correct you.

    That puts a university between a telescope ($100M) and a deep sea oil platform ($1B). It also means that starting an top-flight engineering schoolis probably within the financial ability of University of Phoenix.

    I’m wondering about how much start up capital University of Phoenix required?

    Comment by twofish — August 18, 2006 @ 5:13 pm

  3. Just some more numbers

    DeVry has revenue of $781M and assets of $1B
    Career Education Corporation has a revenue of $2B with assets of $1.5B

    Olin required large amounts of capital because it needed to be self-sustaining with its endowments. $30M/year isn’t a particularly large corporation in the for-profit world.

    Comment by twofish — August 18, 2006 @ 5:25 pm

  4. What I think will be the interesting number is to see in five to ten years whether or not Olin College is “profitable” (i.e. take the amount of tuition and then subtract cost per student and see if the number is positive or negative). Part of the interesting number is how that $30 million scales with the number of students. One could try to look at Olin’s budget and see how much of those costs are fixed costs, and how much of that is variable cost.

    It won’t matter for Olin, but if that number is positive then I think you’ll see a lot of for-profit universities start moving upmarket.

    Comment by twofish — August 18, 2006 @ 5:48 pm

  5. Olin’s tuition is $0, or free, and will be that way until at least 2012. The value of the scholarship is tied to the highest of 42? different US engineering school’s tuitions. Like any university, their costs will always be negative, as they will draw from their endowment as well as other sources to cover the true cost of the school (Every school does this). Currently, Olin’s “scholarship”, according to the rate of tuition measure stands at $32,000 a year, but they spend nearly $100,000 a year per student. AFAIK, the bulk of Olin’s costs are fixed – the budget has not changed much as they ramped from 75 to 300 students.

    Comment by Michael Ducker — August 19, 2006 @ 7:46 am

  6. That’s the interesting thing about Olin. They have enough seed capital so that they are not in any financial danger no matter what happens.

    I do have take issue with the “their costs will always be negative.” They do draw from their endowment, but the endowment will at some point start growing because of alumni contributions, and corporate consulting. Harvard in particular has a huge endowment because in recent years, they’ve set their costs way below their income.

    One thing that I don’t do is to distinguish much between “non-profits” and “for-profits.” They have slightly different tax rules and different business models, but MIT is in as driven by money as University of Phoenix is. Ultimately, for example, MIT cares more about research than undergraduate teaching, because, frankly, that’s where the money is, and the shift at MIT from physics to biological sciences and energy is motivated in large part by money. Nothing inherently wrong with that, unless you deny it, which is bad less for moral reasons, than for the fact that you lose the ability to make rational decisions if you don’t admit the obvious.

    The fact that Olin has this pile of money makes things interesting because it means that Olin can do whatever it wants to, more so than MIT or Harvard or UoP.

    One thing that I do object to is that there is this standard line to students that “be grateful since you are being subsidized by the University” (which is true for Olin since tuition is zero), but to tease out where the costs and profit centers are is usually a complex story, and it’s unlikely to be describle by one number. However, the big problem with that statement is that it invariably uses “average cost per student” rather than “marginal cost per student” which is the relevant economic measure.

    What will be interesting is the marginal cost of adding one student while maintaining the same quality of instruction. If that number is less than an Ivy League tuition, then it becomes possible for a for-profit like DeVry or UoP to start offering four year Engineering courses.

    Comment by twofish — August 19, 2006 @ 11:16 am

  7. Gents, I certainly won’t take on your numbers — it sounds like you know much more about the endowment and organization of these institutions than I. But I will correct you on one assumption: UOP is saturating it’s markets. UOP has brand issues to deal with, but from a marketing perspective, our own data shows us just how far from saturation we are in the vast majority of our campus based markets (which represents the smaller share, though far more measurable share of our student population when compared with our online operation). Just off population and demographic information, our learning centers are the small fish in each city; we’re only 30% saturated in Portland, OR alone. Even with the thousands of students in our California campuses, they don’t hold a candle to the opportunity statement — students who’ve chosen other educational opportunities in what amounts to an extensively competitive landscape.

    Once you factor in that change, the discussion becomes more interesting. While it might be feasible on paper to “challenge Havard”, that’s not our game. We exist to serve our students, Harvard exists to serve theirs, the state schools exist to serve theirs, community colleges theirs, and so on. A full-fledged engineering or medical program takes us far enough from our core mission that it falls outside our interest to do so, given the unsaturated markets we serve. That’s, of course, not to say that these programs won’t be interesting down the road, but I can’t see the educational landscape taking us there any time soon.

    Comment by Pete Wright — September 8, 2006 @ 8:01 pm

  8. The trouble with going into campus based markets is that you are going find that that market is going to be extremely competitive. UoP may not have saturated the market in this area, but you are going to find yourself trying to pull students away from other providers which is much harder than attracting students which are not being served at all which is the case with the online world.

    In the case of campus based markets, you are going to be competing against community colleges and state public universities on their own home turf. This isn’t a bad thing, but you need to realize what a tough slog this is going to be. There are the following issues.

    1) Branding. Most major cities have a university and community college system with a night school and continuing education department, which is a familar name with a lot of brand loyalty. University of Phoenix is a new upstart.

    2) Cost. The state universities and community colleges have some degree of public funding and alumni donation which will make it difficult for UoP to compete on cost. Also, people in these markets tend to be much more cost conscious, and much less status conscious.

    3) Alumni networks. Most state universities have very extensive alumni networks and loyalty. Challenging those is going to present the same sorts of issues as challenging Harvard. One can argue that the Harvard network controls national politics and business, but state politics and business are equally dominated by the alumni networks of the big state universities.

    4) Networks in general. State universities have been there for years and years so they know people in the local community. The President of the university shows up and has probably has regular lunch with the local business community, and this gives the university a huge amount of resources and information.

    Along with this University of Phoenix is going to be operating under a number of disadvantages….

    1) Inability to adapt to local conditions. Instead of competing in one national market, UoP is going to be competing in a hundred local markets which means that the advantages that UoP has in standardization very quickly becomes a liability. An online curriculum in Portland, OR can be more or less the same as the one in Austin, TX, but University of Oregon can gear its curriculum to Portland while University of Texas can gear its curriculum to Austin. For example, the rules for being a real estate agent in Texas are completely different from those in Oregon.

    2) Facilities. You are going to have to buy or rent buildings, parking lots, whereas the people you are competing against already have central located campuses with paid off buildings.

    3) The “ranch dressing” effect. When ranch dressing first came out, people didn’t know what it was supposed to taste like, so there wasn’t a set of high expectations. The same is true for online education, since people don’t know what an online education experience is supposed to be like, one can *define* what the experience is going to be. In the case of bricks and mortar colleges, people already have standards and expectations and this makes it harder to have customer satisfaction.

    4) Bureaucracy. One of the nice things about continuing and distance education is that because it was considered a backwater in most public universities, it doesn’t have some of the sorts of pathologies that exist in other parts of academia. This means that the continuing education departments tend to be very customer focused and flexible.

    5) Distance. The president of a state university or community college, administration, and faculty lives in the community, and so they are going to be able to react much more quickly that the president and administration of UoP.

    6) Faculty pay. The interesting thing about the amount that UoP pays its faculty is that it is very competitive with community college adjuncts *because you don’t have to physically drive over to the university and can work flexibly*. If you count the time of commute and the necessity to be there at a certain time, UoP loses any cost advantage. Also, because UoP has a national market, it can get faculty in low cost areas to teach students in high cost areas. Once you start opening campuses, you are going to have to deal with the fact that what salary makes sense in Mississippi just will not work in San Franscisco, and that is going to create a lot of interesting issues.

    This is not to say that I think that UoP is doomed, and I really think that for UoP to try to enter these markets is going to provide some competition which is almost always a good thing. What I am saying is that it is going to be a really hard fight, mainly because you are dealing with a large number of local markets rather than a single national market, and at first glance, there are huge diseconomies of scale.

    The interesting thing about technology is that it causes people who were once in isolated niches to suddenly find themselves fighting each other. This is happening in this case, when UoP is going to be in a direct hand to hand fight with community colleges and the continuing education departments of public state universities over the same set of students.

    My personal opinion is that you are going to find this a *much* harder fight than opening a medical or engineering school since you are dealing with hundreds of local markets with highly entrenched competition rather than one national market with limited competition. You may be able to initially blow away the competition in many if not most of the markets, but in the markets where you lose, people will figure out how to exploit UoP’s weaknesses, and then share this information. I fully expect the gossip at one NUCEA convention to be “oh my god, University of Phoenix is coming” while at the next one I expect to see a talk on “How we fought UoP and won!!!”

    Also, competing in those markets doesn’t create any synergies. Opening a new brick and mortar school in California doesn’t add anything to UoP’s current offerings. By contrast, opening a medical, engineering, or physics school would create some interesting synergies. Even if these schools operate at a loss and are not taken seriously, having doctors, engineers, and physicists in the system is going to tremendously enhance the value of the MBA’s that UoP issues (i.e. there was a doctor on board designing the curriculum for the health administration degree). This is another reason that you are going to find competing against state universities and community colleges to be a hard slog, because they *can* bring in engineers and doctors for their night-school MBA programs.

    But this is just my opinion. I could be very wrong, and I write all of this in a spirit of constructive criticism. Every issue that I’ve mentioned could be worked around, and I hope UoP does work around them.

    Good luck!!!!!

    Comment by twofish — September 8, 2006 @ 10:39 pm

  9. Hmm… I think I see why we’re not communicating on all four cylinders right now. Let me make sure we’re on the same page.

    University of Phoenix was first and foremost a physical institution and even today, fully half of our student base attends in brick and mortar facilities — over 250 of them around the country — on the same block system that the online program uses: one course at a time, one night a week. Now, with 250 learning centers, it’s hard to see each local facility as much of a threat since that facility doesn’t bear the weight of the 100,000+ student body (of on ground students).

    But all the criticisms and challenges you bring up are exactly the same opportunities that we’ve availed ourselves to in carving local programs with local benefits. Becoming at teacher at UOP online can be challenging to implement as we don’t have online staff on the ground in every state, but at the campuses we have local staff working in the field, shepherding students diligently through the process.

    By the same token, medical programs are much more difficult. Their extremely costly to start in each state and learning center, and extremely cumbersome to manage nationally at online. Communications and Psychology are coming (see my latest blog post) which I think bodes well for the future of this discussion, but we’ll have to see where the education market takes us first.

    I hope the conversation never turns to “How we fought UOP and won!” … I sincerely do. Because, I can honestly tell you that this sort of language is not bandied about in our halls. It’s counter-productive to the service of education.

    I have so much more to pour out here, but not enough time! Still, I love the dialog and keep it up… I’ll keep checking in.

    Comment by Pete Wright — September 15, 2006 @ 10:40 pm

  10. Glad to see that you are working on this, and keep in mind that all of my comments were meant constructively, and none of them are insurmontable.

    Medicine isn’t my speciality, but physics is, and it would be very easy institutionally for UoP to start of school of theoretical physics. The problem is of course demand, but I do think that it is a very serious weakness of the curriculum that UoP doesn’t have calculus classes (or didn’t when I last taught there).

    About competition. While I do respect your position, I do think that, if not taken to excess, competition is a good thing. Universities are big bureaucracies, and without the prospect of competition, it’s hard to get anything done in them.

    Time is a problem for me too…. 🙂 🙂 🙂 🙂

    Comment by twofish — September 16, 2006 @ 12:50 am

  11. Oh, don’t get me wrong — competition is far from a bad thing, but it should be more about innovation than raw corporate evisceration. Of course, now we’re talking philosophy and not so much education. 🙂

    I haven’t blogged about it yet, but I’m just coming back from a trip to Phoenix where I had the opportunity to go out to lunch with two thinker-tinterers in our staff of deans. They were positively brilliant. They get it. They want to make the content more compelling and interesting and approachable to students in new ways. I was proud to be a resource and I think you would have found it truly compelling based on what we’ve discussed here over the past months. Stay tuned. Things are getting good! 😉

    Comment by Pete Wright — September 20, 2006 @ 12:56 am


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