A Game Changing Combination

A Coursera executive once described visiting Delhi, India and upon telling his cab driver where he worked, the driver excitedly told him that he had, in fact, taken a Coursera course. Hearing the subject of the course, the Coursera executive told the driver that Coursera actually had two university partners providing courses on that particular subject and asked him which university’s course he had taken. The driver thought for a long minute and then responded, “I’m not sure. I think it was… perhaps Princeton?”

And therein lies the conundrum that Coursera and EdX represents for universities. The academy and all of its resources and IP have supported the creation of the content that is dramatically expanding the number of people accessing university courses. And yet in aggregating courses from multiple institutions onto a single commercial platform, the MOOC providers offer unique value. Even though the courses carry no university credit, they represent an attractive and affordable alternative to a degree program. In specific combinations they promise their own pathway to labor market success.

So, in partnering with these companies have universities found an intriguing new method of expanding the size of their global audience, or empowered a new competitor?

2U (NYSE: TWOU) may be hoping the answer is a little bit of both. Last week the higher education services company which boasts a $3.2 billion market capitalization, announced it had agreed to purchase the assets of the previously non-profit EdX from owners MIT and Harvard for $800 million. The proceeds will be used by the two founding universities to promote further equity in education (details reportedly to follow) and to maintain an open source platform for hosting courses. But the site’s existing revenue-generating businesses and Web traffic will become part of 2U.

Like Coursera, EdX in recent years has partnered with select higher education institutions including Georgia Tech, the University of Texas, Boston University, and others to enter the online degree market, marketing low-cost degree programs to its users that have demonstrated interest and proficiency in related subjects. Because it can identify interest from among its tens of millions of global users, it is able to spend far less on marketing and thus offer degree programs at lower prices as a result. In announcing the deal, which is expected to close within 120 days, 2U told investors that it expects to save $40-$60 million annually in its own student marketing costs as a result of gaining access to the EdX network. 2U currently spends about $400 million on student recruitment annually.

But the short courses themselves are not merely fodder for acquiring degree program leads but are growing in popularity in their own right. Both Coursera and EdX experienced rapid growth through the pandemic and investors clearly find this development intriguing. Coursera, whose revenue is predominantly in short course versus degree program offerings trades at 17.1x revenue versus 2U, whose revenue is predominantly based on degree programs trades at 3.8x. So the acquisition of EdX is more than simply a marketing gambit for its existing graduate programs, but a deeper investment in alternative credentials for those unable or unwilling to pay degree program prices. And 2U further moves from being a white label provider, to being a destination in its own right.

This combination of short course and degree program offerings provided by Coursera and now even more powerfully in the combination of 2U and EdX is a game changer for online higher education – particularly in the graduate degree market. The ability to source students at dramatically lower prices by leveraging the pre-established interest and aptitudes of short course learners will drive growth for 2U and Coursera’s partners and give them the ability to scale in ways that should further enhance their appeal and clout. Scale will allow them to invest in better instruction and lower prices, eventually taking share from smaller, discrete offerings.

While most online programs have remained strongest in the geographies in which their institutions are based, these regional advantages are likely to erode as the mass consolidation for which the Internet is famous manifests in this market. For those institutions unable or unwilling to participate in this consolidation, the ability to specialize, align to labor markets and differentiate will become increasingly important.