As Competition Mounts, 2U Signals Big Changes for Online Education

Jamel Toppin, The Forbes Collection, Contour RA

In the minds of many college administrators, as 2U goes, so goes online education. Since the company’s founding, in 2008, it has locked down contracts with some of the country’s top colleges to start — and rapidly expand — dozens of online master’s programs.

That era appeared to end this week. The online-program manager, as companies like 2U are called, helped pioneer a model that offered traditional colleges a way to recruit and enroll online students. But students have more online options than ever before, the company said. Now it’s diversifying away from its bread-and-butter market — professionally focused graduate programs — and pursuing shorter courses, nondegree programs, and tech-focused boot camps.

“It’s becoming obvious that all schools are going online,” said Chip Paucek, co-founder and chief executive of the company, in an earnings call on Wednesday. “We believe this represents a new reality in the marketplace, and requires us and others to adjust to it.”

In the face of “many more offerings and more competition to enroll students,” Paucek said, the company expects to ratchet down the average size of its graduate programs, and will start fewer of them in the coming years. No more would it assume ever-higher enrollments and revenues. The company reported a slight drop in graduate-program enrollments in its second quarter.

Paucek’s company had become the “mental model” by which colleges and programs measured themselves, said Phil D. Hill, who runs an education-tech blog, as well as MindWires Consulting. “And that story is going to radically change.”

While the scope of the change is surprising, “it’s a much more realistic strategy,” Hill said. “I definitely agree with them that the nature of the market has changed.”

That hasn’t stopped fallout among shareholders. As of Thursday afternoon, 2U’s stock price had fallen by more than 60 percent, to about $13 per share, deepening a slide since the company peaked, at over $90 per share, last summer.

“Unfortunately, most companies do go through this as a public company,” Paucek told The Motley Fool in June, referring to the broader stock slide. “We just have to ride it out.”

Online-program managers, often called OPMs, have drawn scrutiny in recent years. Some critics have called them reincarnations of predatory for-profit schemes, attaching themselves to host colleges and promising to deliver huge enrollments while extracting high shares of revenues — often around 60 percent. In 2013, John Katzman, a founder of 2U, disavowed his own creation to found Noodle Partners, another such company that he says is less expensive.

The companies have argued that their often-restrictive contracts and high prices are necessary, given how costly it is to start a program. It can take years for the programs — most often offered in fields like health, business administration, and data science — to become profitable, and many colleges lack the resources and know-how to go it alone.

But more are trying. After meeting with a slew of companies over the years, for example, the University of Kentucky decided to design its own online programs instead — 25 of them are to start this fall alone. The task of creating, expanding, and managing online programs can strain space and manpower, but having total control over administration and instruction is worth it, said Kathi Kern, associate provost for teaching, learning, and academic innovation, in an interview this summer.

An Industry in Flux

Not all analysts believe that in-house programs like Kentucky’s can meaningfully compete with OPMs. But they have warned of looming upheaval, even chaos, in the industry. (In a cartoon, Hill’s firm likened the sector to the apocalyptic movie Mad Max.) Many see more consolidation coming as companies merge and acquire one another.

Some of that consolidation has come by way of 2U, which previewed this week’s change by buying up smaller education companies focused on shorter-term programs. In May it acquired Trilogy Education Services, which brought along deals to offer boot camps through Butler University, the University of Connecticut, and the University of Texas at San Antonio, among others.

A 2U spokeswoman declined a request to interview Paucek and referred The Chronicle to the company’s earnings call and news release. “We also strongly believe in the long-term viability of the university degree,” the company said in an email. “We do not believe the graduate business will wind down. This is an ‘and’ approach as opposed to ‘either/or.’”

Despite investors’ queasiness, Paucek told shareholders the company was well positioned for the future. While competition for students is high, 2U is still in high demand among colleges, he said.

Trace Urdan, managing director at Tyton Partners, an investment bank and consulting firm, saw things much the same way.

Data collected by Tyton show that colleges that team up with OPMs expand enrollments and revenues much faster than colleges that don’t.

“Any school can go out and get 3,000 online students. And basically, that’s what is happening now,” Urdan said. “But not every school can go out and get 30,000 students.”

That state of affairs will keep OPMs like 2U in business for the foreseeable future, Urdan said, as they diversify their programs. “I am very skeptical that universities will get there on their own.”

Update (8/2/2019, 10:33 a.m.): This article has been updated to reflect that Tyton Partners is an investment bank as well as a consulting company.

Follow Steven Johnson on Twitter at @stetyjohn, or email him at steve.johnson@chronicle.com.