The disruptive business model for higher education is open source

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How do you make money from something that is free? Borrow some moves from the commercial open source playbook.

Massive Open Online Courses (MOOCs) are disrupting the higher education marketplace the way free and open source software disrupted the world of proprietary software more than two decades ago. The disruption in higher education, however, will be different in two key ways:

  1. It will happen twice as fast.
  2. It may spark a competition far different from the one you expect.  

At America’s top universities, MOOCs are fueling a heated debate between faculty and administrators. Many professors fear that intimate classroom settings will be replaced by online courses where superstar professors teach on the web and everyone else becomes a glorified teaching assistant. Administrators, in contrast, see MOOCs as a way to reduce costs, gain efficiencies in non-core offerings and 'export' courses that reflect their university’s strengths.

Meanwhile, startups like 2u and nonprofits like edX are ready to capitalize on new business models evolving around MOOCs. These arguments for and against MOOCs make sense if you believe that the leading higher education institutions are in the business of selling and delivering education. Given this business model, the focus naturally falls on who teaches courses today, who will teach tomorrow and who will make money producing, delivering and distributing the courses.

But, what if we consider for a moment that the business model of leading universities may be undergoing a significant change that could render these discussions irrelevant?

Sound absurd? Well, it also sounds preposterous to be in the business of free software. When I tell colleagues from other industries that I run an open source software company, they immediately ask, "How do you make money if you give away your product for free?" Here is where the collective experience of commercial open source strategy might be able to shed some light on emerging business models ready to disrupt higher education.

Let’s imagine that the top tier of higher education is actually not in the business of selling education. Instead, they are in what I would term the "talent identification" business. The real payoff for universities comes not from selling courses but rather from finding and nurturing talent and then waiting for payback in the form of contributions to their endowments.

Look at the size of the endowments of Harvard ($30 billion) and Stanford ($17 billion) and the returns that these universities make off of these endowments compared to income from student tuition. In 2012, Harvard had total operating income of $4 billion. $264 million—or 6.5%—of that amount came from undergraduate tuition. Meanwhile, investment income (return on the endowment) was worth more than $1.5 billion.

Besides through investment, endowments grow when successful alumni donate large sums of money back to their alma-mater. Harvard alumni donated $289 million for current use and $361 million for the endowment in 2012. Total giving increased by 2% over the previous year.

Therefore, there should be growing competition to identify talent early, nurture it, and build loyalty. Furthermore, if tomorrow's talent can come from anywhere, then it’s advantageous to develop sophisticated "lead funnel" management techniques to spot and woo talent around the world.

Free courses could provide what free software provides for commercial open source companies: a way to build the lead funnel. MOOC providers or universities could offer courses free—including tests and a certification—to create the perfect "self-identifying lead funnel." Students take the courses and tests on their own, and then the provider can identify the best talent and the brightest minds everywhere in the world. Apply a little marketing automation software from a company like Marketo, Acton, or Pardot, and bingo: the next Steve Jobs, Marc Zuckerberg, or Bill Gates shows up at the top of the list whether they live in Palo Alto or Karachi.

So, let’s compare the two models of higher education. On one hand, we have the exclusive proprietary education (i.e. Harvard) which we can equate to the sales style of the proprietary software companies. Of course, the best of the best will always do well with this model. On the other hand, we have the market disrupters (i.e. 2U, Edx, or another upstart) which start by giving away courses and end up owning the talent identification business.

By making that their business model 2u and Edx would not necessarily compete with higher education. They could instead invent a new market by selling data to universities, which are constantly searching for better ways to identify talent. Better yet, MOOCs could partner with firms in a similar business—venture capitalists, incubators, and accelerators who identify talent, give money and bet on outcomes. Or, MOOCs could just dive into the talent business headfirst and compete.

The funds that have setup shop in India and China in the past 10 years get it. They know that Silicon Valley may own the market for finance and have the best ecosystem for startups, but no geography has an exclusive lock on brains and talent. If you want to see which city in the developing world has the best chance at producing the next hundred billion dollar company, read the World Startup Report. VCs want first dibs on talent that is difficult to spot and cheap to cultivate, but MOOCs could beat them to it.

Y Combinator, TechStars, the Founder Institute, and others are creating huge networks that identify and nurture talent early on in hopes of capitalizing on future success. Companies like the Starter League (formerly Code Academy) could have gone the same direction but instead decided to charge for coding classes. lumni.net, which offers finance education in return for a fixed percentage of future earnings, is yet another business model betting on future talent. It’s not hard to imagine students who are identified in a MOOC and instead of paying $200,000 for the Harvard education and landing in debt, they simply pay a small percentage of future earnings to the MOOC provider who covers their tuition.

As someone who has grown up in the open source world and founded a commercial open source company, I can’t but help but think about the unobvious ways to derive revenue from something that is ostensibly free. Higher education need not run from MOOCs, but they should give some serious thought to how the education business of tomorrow could be quite different from today’s.  

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Brian Reale
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Brian Reale, CEO & Co-founder of ProcessMaker, has more than 20 years of experience managing high tech companies. Prior to founding ProcessMaker in 2000, Brian was the General Manager of Unete Telecomunicaciones Ltda., a long distance voice and data carrier in South America that he founded in 1997 and sold to a publicly traded US Telecom company in 2000.
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9 Comments

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Robin Muilwijk | October 16, 2013
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The title caught my eye, with regards to the term 'disruptive'. You should really read the following post about disruptive technology: http://www.cmsconnection.com/technology-is-no-longer-a-disruptive-force.

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kbeck | October 16, 2013
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One piece of the educational model that should and does endure, despite MOOC efforts at its "disruption," is the instructor/student relationship. While the costs of employing living, breathing, high-quality mentors may be prohibitive, eliminating those instructors is disruptive to the learning process. Such effort to eliminate instructors has played out at universities, for example, San Jose State: http://tinyurl.com/lclgbyz

While MOOCs may offer a great repository of excellent information that can be widely disseminated, it is in essence a virtual library rather than a school.

Most of the experiments being conducted now in online education have been done, and we know their outcomes. (See Useractive founder, Scott Gray’s series of articles from 2010. The third post in the series is particularly illuminating: http://www.oreillyschool.com/2010/07/the-story-of-the-oreilly-school-of-technology-part-iii/)

According to Debra Woods, OST Executive Director, "One problem with MOOC’s having such a low completion rate is that they still haven’t changed the mode of instruction all that differently than the traditional face to face lecture model of instruction. They are still requiring students to complete the course by the time the professor is finished delivering the course. Once students fall behind, they begin to feel it is hopeless to continue and then they disengage.

A model where the instructor is more of a facilitator of learning and where students remain actively engaged in the material by interacting with mentors throughout the course would make a world of difference."

Space exists for the MOOC library to serve students in an educational environment, but so far this has not been the case. However, simply replacing the teacher with a video doesn't change education for the better.

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Tony T. Squid | October 22, 2013
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Your points are very valid but suggest that you don't have much experience in the University sector. First off; there are the 'top' Universities of this world, the Harvard's if you will:

1. They don't need to teach and they know it. There was a not-entirely-a-joke proposal at Oxford to stop accepting students. If you are business minded, work out what the profit margin on that 6.5% is and see that it is one of the less profitable things they do.

2. What they sell is not education; it is signalling value. For this the need to maintain their brand, so they have to educate to a very high standard and select students well. What you are proposing as a new business model is a concequence of their existing one.

3. As such, they see MOOCs as a revenue stream where they can sell things with similar branding but less signalling value. For every car that Ferarri sell, how many items of branded clothing do they sell? How many people who buy a Ferarri cap could afford the car? They are interested in MOOCs but if some 'disruptive' takes over, they don't really care. Is Ferarri worried by the sales of Burberry caps?

Next you have the 'national top 20' Universities:

1. They get enough of their income through teaching that they are interested but their teaching offerings are such that they aren't that worried by MOOCs. If you really believe that a MOOC can replace education at an elite University then you have been drinking the Internet kool-aid too long and should get offline and go outside for a bit.

2. Many of these want to get involved in MOOCs but their brand probably isn't high profile enough and their organisation not willing or able to commit what it would take. Expect them to have an offering, more 'widening participation', 'foundation courses' and 'distance learning' and trading much more on "the student experience".

Then you have the non-research Universities. Many of these, due to poor management, have been delivering poor value for money for many years and in some cases the degrees simply aren't worth the paper they are printed on. They have been trading on the signalling value of 'having a degree' while undermining it's value through budget education. They are the people who are really threatened by MOOCs.

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And if you don't believe me, look up the Open University and seem an organisation with 40 years experience in massive participation distance learning that has already exceeded most of the non-research Universities in the UK but is not regarded as a threat to the top Universities.

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Marcel Guzmán de Rojas | October 22, 2013
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1) The problem with most universities around the world is that most teachers do no add real value to the education process, they just repeat content in a way similar to a virtual course. It is not uncommon that the content is obsolete and ignores world class best practices.
2) Facebook, LinkedIn & Co. have already proved that networking can be initiated virtually. Of course face to face relationships are necessary to develop trust and confidence. But virtual networking is an excellent starting point and travel has become economically available.
3) Talent is spread out through the world, and most companies have difficulties identifying the talent. Talent shortage is a common problem, not just in G8 countries but all around our planet.

I think the greatest challenge of MOOCs is to produce world class content, this requires some "superstars" but in most cases just very good teachers. In many fields content quickly becomes outdated. And talented people that also are productive regularly update their knowledge.

Identifying this very good teachers is probably the greatest challenge of MOOCs and government education agencies. Teachers have "titles", categories, "names", artificial reputations, etc. that can make it very difficult to identify the ones that really excel in teaching.

Identifying talent and productive people is a great business for MOOCs. They do not compete with Harvard & Co., they reach out to a talent source that due to economical and relationship constraints they can never tap into.

MOOCs do not compete with top universities, the focus on another segment in the business of identifying talent. They will be successful only if they provide top instruction at Harvard level.

Open Source does not focus on the economical elite, it is open to whoever has the talent, will and discipline of taking advantage of it. Now imagine this last statement on developing professionals that have the talent, will and discipline to take advantage of MOOCs.

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kbeck | November 1, 2013
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I strongly disagree with your first presumption: "1) The problem with most universities around the world is that most teachers do no add real value to the education process, they just repeat content in a way similar to a virtual course."

We know from experience (as do many MOOC providers now, after experiences the excruciatingly low completion rates in their courses) that most students require the participation and guidance of an excellent instructor to succeed. Personally, as a student and an educator, I have found this to be true in both the traditional brick-and-mortar universities, and in online learning.

Of course the MOOC (which for all intents and purposes thus far, is a library, a repository for often great information) so far has been a good tool for from which great students may learn, but most students are not top-tier learners.

I have always been pro libraries. The more good information we can get out to the masses, the better! We also want to be sure address the needs of the masses, as well though, as they are the vast majority of students

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Marcel Guzmán de Rojas | November 1, 2013
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Interesting article on NYTimes on the subject:

http://www.nytimes.com/2013/11/01/education/us-plans-global-network-of-free-online-courses.html

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kbeck | November 1, 2013
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Thanks for sharing this article. It suggests (as I do) that adding an actual teacher to the equation will bolster the currently floundering MOOC (Coursera), and hopefully help to change it from a library to an actual course:

"The learning hubs represent a new stage in the evolution of “massive open online courses,” or MOOCs, and address two issues: the lack of reliable Internet access in some countries, and the growing conviction that students do better if they can discuss course materials, and meet at least occasionally with a teacher or facilitator."

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Ethan Presberg | November 13, 2013
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Very good article. I love the comparison of the online service like edx and coursera to open source software!

Thank you for this great article!

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Maurice Dawson | December 11, 2013
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Interesting book chapter on the same topic.

Title: Use of Open Source Software and Virtualization in Academia to Enhance Higher Education Everywhere

Abstract: As costs around the world continue to rise for education, institutions must become innovative in the ways they teach and grow students. To do this effectively, professors and administrative staff should push toward the utilization of Open Source Software (OSS) and virtual tools to enhance or supplement currently available tools. In developing countries, OSS applications would allow students the ability to learn critical technological skills for success at small fraction of the cost. OSS also provides faculty members the ability to dissect source code and prepare students for low-level software development. It is critical that all institutions look at alternatives in providing training and delivering educational material regardless of limitations going forward as the world continues to be more global due to the increased use of technologies everywhere. Doing this could provide a means of shortening the education gap in many countries. Through reviewing the available technology, possible implementations of these technologies, and the application of these items in graduate coursework could provide a starting point in integrating these tools into academia. When administrators or faculty debate the possibilities of OSS, gaming, and simulation tools, this applied research provides a guide for changing the ability to develop students that will be competitive on a global level.

Link to book chapter: http://scholar.google.com/citations?view_op=view_citation&hl=en&user=i7acQcEAAAAJ&citation_for_view=i7acQcEAAAAJ:IjCSPb-OGe4C

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