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The Higher Education Monopoly is Crumbling As We Speak

In the last years of the nineteenth century, Charles Dow created an index of 12 leading industrial companies. Almost none of them exist today. While General Electric remains an industrial giant, the U.S. Leather Company, American Cotton Oil, and others have long since disappeared into bankruptcy or consolidation. Today, the Dow Jones includes giant corporations that hadn’t even been created when Ronald Reagan first sat in the Oval Office. That transition is generally understood as the natural consequence of innovation and competition in a changing world.

Four years after Dow invented his average, a group of 14 leading research institutions created the Association of American Universities. All of them exist today. While a few have faded from prominence, most of the original members—including Harvard, Princeton, Stanford, Berkeley, and Yale—are now, as they were then, the most sought-after and well-regarded American universities.

The historic stability of higher education is remarkable. As former University of California President Clark Kerr once observed, the 85 human institutions that have survived in recognizable form for the last 500 years include the Catholic Church, a few Swiss cantons, the Parliaments of Iceland and the Isle of Man, and about 70 universities. The occasional small liberal arts school goes under, and many public universities are suffering budget cuts, but as a rule, colleges are forever.

I think that rule is going to change, and soon. Many factors explain the endurance of higher education institutions—the ascent of the knowledge economy, their crucial role in upper-middle class acculturation, our peculiar national enthusiasm for college sports—but the single greatest asset held by traditional colleges and universities is their exclusive franchise for the production and sale of higher education credentials.

In the last few months, however, that monopoly has begun to crumble. New organizations are being created to offer new kinds of degrees, in a manner and at a price that could completely disrupt the enduring college business model. The question is: Which colleges and universities will be the G.E. of the twenty-first century, and which will be as forgotten as U.S. Leather?

THE FIRST SIGN came in mid-December, when the trade publication InsideHigherEd wrote about a group of adjunct professors at Stanford University who were offering their courses in Artificial Intelligence and other computer science topics to anyone in the world, online, at no charge. Tens of thousands of students had signed up. The availability of free Internet courses itself wasn’t all that innovative—MIT’s Open Courseware initiative is a decade old and elite schools like Yale and Carnegie Mellon have followed suit. The news was that the Stanford professors were letting students in their global classroom sit for the midterm, at proctored sites around the world. Those who did well on the A.I. test and a later final exam got a letter saying so, signed by the professors, a pair of well-known roboticists from Silicon Valley.

A few days later, MIT made a major announcement: The world-famous research university would be creating a new non-profit organization called MITx. It, too, would be offering free online courses, designed from the ground up to serve tens or even hundreds of thousands of students worldwide. And it, too, would administer exams to students who, if they passed, would receive a certificate saying so from MITx.

Then, in January, the online higher education company Straighterline announced that, starting this year, its students would be able to take skills and literacy tests developed by ETS, the maker of the SAT, and from the non-profit Council for Aid to Education, whose well-known Collegiate Learning Assessment of higher-order critical thinking and communication skills is used by hundreds of colleges and universities. Those who do well on the exams will get a certificate saying so. The following week, the Stanford professors announced the creation of an independent for-profit company called Udacity, backed by Silicon Valley venture capital, that will offer the same computer science classes that proved so popular, and, again, certificates to those who pass exams.

What all of these new ventures have in common is that they are outside of the existing system of college credits and degrees. The traditional college degree monopoly has long been sustained by three mutually-reinforcing factors. First, colleges are highly subsidized through some combination of direct government funding, non-profit status, and student financial aid. Second, only accredited colleges can receive government subsidies and offer credits and credentials that are recognized by employers and other colleges. The accreditation system, meanwhile, is controlled by existing colleges themselves. Third, our society has made an enormous psychic investment in the idea of traditional colleges. Most people don’t know how to think about credentials any other way.

Straighterline, Udacity, and MITx exist outside of that system. They aren’t accredited or subsidized. The value of their credentials will rest on nothing other than the authority of the grantor and the transparency of the process by which they were granted. That’s why it’s highly unlikely that these credentials will be worth as much in the job market as traditional degrees at first. But in that sense, they fit perfectly with the classic theory of disruptive innovation.

DEVELOPED BY Harvard business school professor Clayton Christensen, the theory holds that there is a consistent pattern across a wide range of industries where disruptive competitors start by competing against non-consumption—that is, by selling inferior goods to people who aren’t served by existing producers. These are generally low-margin businesses that existing industry leaders have little interest in serving because they became industry leaders by selling the best, most profitable products to the consumers who have the most money. But over time, the new competitors get better and better at providing the product or service, expanding into successively more profitable parts of the market, until finally they displace the incumbents.

Online colleges like to apply Christensen’s theory to higher education. But the way they apply it is often imprecise. The common analogy is between online courses and in-person courses. While an online class might not be as good as sitting in a classroom being taught in person by a learned scholar, the thinking goes, online courses are cheaper and getting better all time and so will eventually disrupt the providers of live instruction.

But just as people are ultimately interested in buying holes, not drills, higher education consumers aren’t buying courses or degree programs. They’re buying credentials. And until now, nobody has developed an innovative low-cost alternative to traditional higher education credentials. We’re still stuck with the handful of crude, time-based degrees that have been in use for decades or more. The vast majority of college students acquire an associate’s, bachelor’s, or master’s degree, corresponding to two, four, or six years attending school.

College credentials are a fantastic product to be selling in the twenty-first century. They’re pure intellectual property with a very low marginal cost of production and becoming more valuable all the time, as the economy continually reorganizes itself in a way that values the possession of deep knowledge and complex cognitive skills. They are universally recognized and never expire, golden keys to the parts of the labor market most worth entering.

Traditional colleges and universities exploit their monopoly over this market by overcharging students in order to generate revenue to support things that are important to them. Those things include producing academic scholarship, fielding cash-hemorrhaging professional sports teams, engaging in positional status competition with rival colleges, and avoiding the difficult work of overhauling inefficient administrative and organizational structures in which too many people get paid too much money. Online for-profit colleges haven’t disrupted the industry because while their business methods are different, their product—traditional credentials in the form of a degree—is not.

That’s why the recent emergence of new credentials is so significant. Companies like Udacity and Straighterline can operate without government subsidies and regulatory protections because their method of service delivery is phenomenally cheap at scale. The cost of serving 200 students isn’t that much less than serving 200,000. The predominant higher education business model of the future may be one where the education itself costs students nothing—the availability of free open educational resources is constantly growing—and students only pay small fees to cover the cost of assessing their learning.

The number of organizations offering outside-the-system credentials will only grow. The free online Khan Academy got tons of press coverage last year for Salman Khan’s charming instructional videos. Millions of students have watched them. Khan Academy also offers “badges” to students who pass certain milestones—“Artisan Arithmetrician,” “Master of Trigonometry,” and the like. These are just another kind of non-traditional educational credential. The Mozilla Foundation, funded by the people who developed the Firefox web browser, are sponsoring a competition for the creation of badge systems that will help students organize the credentials they receive from different providers.

The great unanswered question is when the abundance and quality of new credentials will reach a critical mass of acceptance among employers and society at large. Traditional degrees have the great advantage of being simple and universally understood. The problem is that they provide little information about what students actually know and are becoming more expensive all the time. The catalyst will probably be when some large, authoritative organization, like the government or a current member of the Dow Jones Industrial Average, compares the skills and performance of people with traditional degrees to those bearing certificates from Khan, Udacity, and credential-granters yet to come. If the latter can get the job done, they’ll hire accordingly, and then everything will start to change.

MIT seems like an early candidate for the General Electric role, the university that not only outlasts its peers but grows into a huge world-striding organization. Unlike Stanford, MIT is putting its brand name behind the new credentials. It can afford to, because the world will still need places where great researchers push the frontiers of human knowledge and the best and the brightest come together to learn. There will always be a market for boutique educational models that only the wealthy can afford. But for hundreds of other colleges and universities that lack such advantages or foresight, the future may not look anything like the past.

Kevin Carey works for Education Sector, a think tank in Washington, D.C.