The announcement this week that public company 2U was buying EdX (a non-profit formed by Harvard and MIT) for $800 million made headlines everywhere (thanks to a well-oiled publicity plan). I looked at a few of the articles (and I’m sure there will be more) covering the merger and thought I would add my comments.
Josh Kim and Edward Maloney wrote a blog article for Inside Higher Ed whose title asked, “Why is 2U Spending $800 Million to Buy EdX?” Messrs. Kim and Maloney posit that the number one reason this deal is happening is Coursera.
According to them, the Coursera initial public offering (IPO) created a potential existential threat to the existing online program management (OPM) model. Access to millions of global learners (Coursera claims to have 80 million) lowers the high cost of student acquisition. The authors claim that OPM’s spend as much as 20% of revenues on marketing – if you look at the data provided by Phil Hill as I described below, it’s much higher than that.
Messrs. Kim and Maloney write that 2U believes that having access to EdX’s 39 million learners will enable the company to scale more rapidly. They write that having access to so many learners could enable 2U to drive down its student acquisition costs.
The deal is good for EdX, according to Kim and Maloney, because it was rapidly losing ground to Coursera. Pairing a scaled massive open online course (MOOC) platform like EdX with the largest OPM provider makes sense for EdX.
More learners on the EdX and 2U platform should drive down the student acquisition cost and ultimately lower the costs of certificates and programs to students, according to Messrs. Kim and Maloney. However, they note that the online field is not one that has historically passed these savings on to students.
The last point may be their most prescient. While 2U may see some efficiencies in mining the 39 million student database of EdX learners, I doubt they’ll see short-term benefits from doing so. They would also face a complex choice of deciding whose programs would receive lower marketing charges.
Higher Ed Dive’s Natalie Schwartz provided a more in-depth assessment of the deal in her article. Ms. Schwartz wrote that this transaction is the latest deal that 2U has made to increase its alternative credential business, which includes short-term courses and boot camps.
She also cited potential marketing and sales efficiencies as a benefit of the deal and noted that company officials expect to save $40-$60 million in marketing costs over the next two years. She did not note if that was based on combined marketing costs or just 2U’s (see my analysis below based on additional information reported in other articles).
In addition, Ms. Schwartz observed that EdX continued to lose money in 2020 with $102 million in expenses and $85 million in revenues. There were no comments about EdX operating cost efficiencies available from the merger, but EdX’s CEO Anant Agarwal was quoted as stating that all of EdX’s employees would be placed at 2U in similar positions.
It is interesting that Ms. Schwartz wrote that some of the EdX non-profit clients may not want to do business with 2U, given its for-profit status. If that’s the case, who do they go to since Coursera is a for-profit, publicly held company as well?
Lastly, Ms. Schwartz noted that with the addition of EdX, 2U should be a formidable competitor to Coursera, something that EdX was unable to do on its own.
The Chronicle of Higher Education’s senior writer, Goldie Blumenstyk, wrote about the big deal this week in online ed in her weekly column, The Edge. Ms. Blumenstyk noted that the shift to online learning caused by the pandemic expanded EdX’s learners tenfold to about 39 million.
However, EdX did not have the expertise to develop and market courses for all its partners. 2U has specialized in these services since its inception.
Chip Paucek, 2U’s CEO, stated that 2U saw an opportunity with the “really compelling” low-cost micro-master’s and micro-bachelor’s pathways into higher ed degrees. The market reach of 39 million learners was viewed as a way to better compete with Coursera and its 80 million learners. Ms. Blumenstyk wrote that Kevin Carey of New America tweeted that EdX has 120 million annual visitors to its website and that access is valuable as well.
Ms. Blumenstyk reported that it will be interesting to see what Harvard and MIT do with the $800 million sales proceeds that they promised to use to continue the mission of access and affordability in higher education and upskilling.
Lastly, Ms. Blumenstyk noted that the original leaders in the MOOC movement, Coursera and EdX, stated years ago that the sheer volume of data available from their online courses would lead to new insights and knowledge into how people learn. “We’re still waiting for that,” she wrote.
Inside Higher Ed’s Emma Whitford reported that the merger would benefit both 2U and EdX and enable them to better compete with Coursera. She stated that the deal caught everyone by surprise, but logically, it makes sense. Ms. Whitford cited the lowering of 2U’s marketing costs through access to EdX’s 39 million learners and high-activity website.
She also said that 2U predicts that it can convert .03% of EdX’s users into paying 2U customers, which would save $4,000 per enrollment and lower annual marketing expenditures by $40-$60 million. If the quote is correct, that implies that 11,700 students will convert to 2U. That number seems low but multiplied times $4,000 per enrollment equates to $46.8 million in marketing “savings.”
I like the detailed marketing savings provided since it highlights how much is spent by OPMs to attract students to online programs that they operate for non-profits with a brand name. It’s possible that the real number is more than $4,000 per enrollment, since I suspect there are additional costs incurred to follow up and ultimately enroll the 11,700 students.
Ms. Whitford wrote that EdX would receive the capital infusions it needs to compete on a broader scale. She noted that Harvard and MIT funded the entity with a $30 million contribution from each, but that the annual operating losses were something that the universities were hesitant to increase.
It’s not obvious from the press releases or other articles that the operating costs of the EdX programs will be able to be consolidated with some of the operating costs of 2U or its subsidiaries. My assumption is that if the brand generates additional students, 2U will provide EdX with the cash needed to generate additional leads.
Ms. Whitford noted that the acquisition draws attention to the increased blurring of the lines between for-profit and non-profit higher education. I am thrilled that she made that point. Certain non-profit providers, EdX included, have accentuated their “non-profit” status in ads while it’s clear to anyone who chooses to examine the operations of these mega-non-profits that their advertising and marketing spend exceeds most of the largest for-profits that have been targeted as aggressive because of their marketing spend.
Phil Hill wrote in his blog, Phil on EdTech, that there are three charts that explain the 2U/EdX acquisition. The first chart provided by Mr. Hill is a summary of 2U’s statement of operations from its annual reports from 2016 to the present.
Like Amazon, 2U continues to lose money ($179 million in 2020). Unlike any college and university of which I am aware, 2U’s marketing expenses at $390 million in 2020 (50.3% of revenues) far exceed any other expenses on its statement of operations.
Mr. Hill points out that marketing and sales expenses are incurred primarily for the acquisition of students and have grown approximately 40% each year (other than 2020 when they increased by 14%). He notes that the 2U press release cites the potential to incur 10-15% in marketing efficiencies each year, based on the visitors to the EdX website.
The next chart provided by Mr. Hill is a chart provided by 2U in its investor presentations. The chart shows the positioning of 2U’s products as they relate to careers, curriculum, and continuum. The acquisition will dramatically increase 2U’s products under the MOOCs and EdX micro-bachelor’s and micro-master’s certificates that are stackable components that can provide a learner with a head start toward a degree.
The third chart provided by Mr. Hill relates to market value. He states that Coursera’s market value (as a public company) is roughly 18 times its annual revenues. 2U’s market value is approximately four times its annual revenues. Mr. Hill writes that it’s probable that 2U’s leadership believes it should command a higher market after the acquisition closes.
Lastly, Mr. Hill notes that EdX’s tenfold increase in learners during the pandemic probably caused them to realize that there were opportunities to realize value for an entity that could not scale as well as its original competitor, Coursera. He described it as “Getting out while the getting is good.”
These aren’t all the articles that provided information about the merger as well as comments about its potential to disrupt education and learning going forward. I’m sure there will be more.
It’s my viewpoint that this merger can potentially provide the opportunities stated by 2U and EdX. Most of those opportunities relate to marketing savings as well as revenue opportunities. That’s where the execution risk is most crucial.
It’s no secret that MOOC completion rates are extremely low. It took Coursera years to build a viable business model from its original launch.
EdX’s model continues to lose money. It’s impactful to see it published that a .03% conversion of EdX’s 39 million learners will lead to marketing savings of $40 million to $60 million. Those stats also highlight that the greatest difficulty in scaling most online programs is achieving positive cash flow or earnings by managing the marketing spend or cost of student acquisition.
What I would have liked to have seen was an analysis jointly provided by EdX and 2U that projected an increased completion rate for students enrolled in all the programs offered by both entities because of the knowledge acquired by analyzing the data of student learning habits over the years. The marketing opportunities may have been emphasized, but it’s a disappointment if there are no opportunities for increasing completion and persistence. Even a one percent increase in completion would greatly exceed the value realized from a .03 percent improvement in marketing costs.