Kaplan-150squareBy Kristina Setzekorn, Nainika Patnayakuni, Lynne Williams
Massively open online courses are bringing creative destruction to the higher education industry, and incumbents must reconfigure their value chains to survive. MOOCs, as they’re known, are free online courses that use pre-recorded, asynchronous lectures, discussion boards, and peer-grading to reach hundreds of thousands of concurrent students.
Among the non-profit MOOC platforms is the edX platform, which includes courses from MIT, Harvard, the University of California, Berkeley. It is funded by the Gates Foundation and Google, among others. Then there is a variety of for-profit startups including Coursera, Udacity, and Udemy. These organizations’ legitimacy, venture capital funding, current job market demands, and escalating tuition costs have created a perfect storm for the creative destruction of the traditional university.
Innovations in information and communication technology have for centuries produced economic winners and losers as businesses leverage them to reconfigure value chains to reduce costs and offer more consistent quality products and services. Food production, manufacturing, and media are among the many sectors that have been altered by tech advances. Higher education is now poised for the same.

(Image via Shutterstock)
(Image via Shutterstock)

We see the changes in the newspaper industry as indicative of what’s coming in higher ed. Ever since information and communication technologies enabled the un-bundling of information content from physical delivery system, the marginal cost to produce online information has approached zero, as has its price to consumers. Consumers are disincentivized to pay for the paper product, opting instead for free online versions.
This revenue shortage was exacerbated when Craigslist and other sources of free online classified advertising replaced the newspaper industry’s key revenue generator. Classifieds had subsidized newspapers’ journalism. When revenues declined, publications raised subscription prices and cut costs by using cheaper paper, firing journalists, and publishing smaller and fewer issues. Lower quality content with a higher pricetag drove away subscribers, and shrinking readerships reduced the rates newspapers could charge for advertising.  This cut revenue further, necessitating more cost-cutting and higher subscription prices.  Thus began the newspaper industry’s death spiral.
MOOCs have the same potential to upset bundling and cross-subsidies in higher ed. By offering free, consistently high quality content, MOOCs will substitute for professors’ and universities’ more expensive, more variable offerings in the value chain. Vulnerable producers and sellers of that high cost, variable content must restructure their value chains to survive.
MOOCs may also deconstruct the university business model, much as online classified advertising helped deconstruct the newspaper business model. By substituting for traditional universities’ large, lower-cost freshman classes, which subsidize the more costly small, specialized, senior-level, classes MOOCs could eliminate a key revenue link from the university value chain. This could trigger an industry death spiral like the one experienced by traditional newspapers.
Without freshman tuition to subsidize graduate classes, universities will need to find another way to fund low-enrollment advanced courses, such as raising tuition and fees or reducing costs, neither of which is attractive in the current marketplace.
One approach to restructuring the higher ed value chain is a concept called “flipping,” which involves assigning students, as homework, to watch pre-recorded seminars that teach theories and techniques, and using class time to engage students in discussing, applying, and practicing those theories and techniques.
One professor used a Stanford University MOOC to “flip” his machine learning class. He personalized it with his own interpretation, guidance, and encouragement, thus leveraging and improving upon the MOOC. This professor is not competing directly with the Stanford brand, faculty, or MOOC delivery platform. Instead, he is incorporating the Stanford MOOC as a low-cost input to his class. He has outsourced production, and added value by providing world-class interactive components unavailable to MOOC students.
Universities may need to outsource the development of their lectures and assignments to reduce cost and increase quality, rather than competing head-on against “free.” MOOCs represent a new era, which may lead to a better-educated population, but an entirely new form of higher education.