Many People Saw The Crash Of A Billion Dollar EdTech Company Coming

Sometimes, even when you see it coming, the crash is spectacular.

That was the case with 2U, the public, for-profit company hired by colleges to manage and market their online degree programs. In 2U’s case, those programs were mostly graduate tracks in areas such as nursing, business or social work.

The arrangement was simple – 2U would find the students, sign them up, get them in and, in exchange, take a cut of whatever tuition the student paid. The business type is known as an online program manager (OPM) but, in reality, 2U and other OPMs function like student recruiters, getting paid based on how many students enrolled.

Since online programs are theoretically unrestrained by size, for years, times were good. The company convinced prestigious brands such as USC, Yale, Vanderbilt, Harvard, Rice and NYU to sign on. Online college programs were growing and 2U, it seemed, could do no wrong. In 2012, a Forbes writer named them one of, “10 Startups Changing the World.” Two years later someone at Inc Magazine said 2U was one of, “10 Tech Companies Helping Humanity.” In September of 2018 a different Forbes writer called the company’s CEO a “mastermind” and pictured him posing as an education angel in the 2U offices.

Less than a year ago, 2U’s value was estimated at $4.7 billion. Just a month ago, on July 30, 2U stock was $36.50 a share. By the end of the next day, the stock was trading at just $12.80. One of the darlings of online education profiteering had lost two-thirds of its value in 24 hours.

But here’s the thing, nothing happened. There was no scandal. There was no higher education earthquake that triggered the fall. Instead, the trigger was an investor call by 2U’s CEO Chip Paucek in which he announced the company would change the way it arranged deals with its college clients, shifting away from splitting student tuition payments in favor of more flat fee-for-service deals. In addition, the main services they provided, namely marketing and recruiting, were getting more expensive and the number of future colleges looking to sign on was lower than expected. 2U was going to spend more time in the certificate, credential, working adult, non-degree space.

The other thing is that everyone who understands higher education saw this coming. It was not speculation, it was inevitable. Inside Higher Ed charitably described the announcements that triggered the fall as, “messages that wouldn’t have surprised many who watch the online education space closely.”

What education observers knew that investors did not is that the era of private companies cannibalizing forty, fifty, sixty percent of student tuition was over. It probably never should have been. Whatever it was that corporate leaders said to colleges more than a decade ago to convince them of such a bizarre arrangement, to sell them the idea that colleges were not capable of marketing and managing their own programs, is not the case anymore. Colleges have wised up. They now realize that 100% of 50 students is better than 40% of 75 and they simply aren’t willing to mortgage a decade’s worth of tuition revenue for anything.

Another thing the education folks knew was that the colleges that need marketing help the least are the big brands, the very customers 2U built their company around. No one needs to recruit students to Harvard or Stanford. The big boys and girls of academia certainly don’t need to share their tuition revenue for the help. If Harvard Business School can’t figure out how to market Harvard Business School, they have bigger problems.

2U had been smart in sticking largely to the post-graduate space, which is less regulated and attracts older, higher-earning students to big ticket sales. But bad behavior and greed by other online schools and OPM companies had increased public, market and regulatory scrutiny on the entire online, profit-sharing scheme. Sooner or later, even if schools didn’t wise up, changes were coming.

Then there’s the observation anyone could have made, that graduate enrollment was stagnant so, more and more schools angling for slices of that pie meant smaller pieces for everyone. It just wasn’t possible to promise outrageous, unsustainable enrollment growth to colleges who hired OPMs – the students simply were not there. Sure, part of that is driven by economics and zeitgeist, but it was not a mystery.

This April, before the call and announcements, 2U announced it had acquired Trilogy Education, a coding bootcamp, for $750 million. In 2017, 2U bought GetSmarter, another short-run training provider for “working professionals.” As CEO Paucek told investors, that’s where the company plans to pitch a new tent.  

After the call, some speculated that these acquisitions were tips that 2U knew their runway with online graduate programs was ending, even though just seven months earlier Paucek told Forbes, “We have a massive amount of market runway.”

What some education observers know already though, is that the new runway for 2U is pretty short too.

Today, non-degree programs and certificates for working professionals is a largely unregulated, unscrutinized market. That dynamic has sparked a cattle-call of providers of varied quality and motive and unfavorable public and regulatory attention is already in progress. If that level attention damaged OPMs operating at real colleges, this will be worse.

Moreover, research is already abundant that many of these non-degree certifications and credentials are worthless. And students who chase them anyway are ineligible for federal grants and loans, deeply limiting the pockets of potential purchasers. At the same time, the bootcamp experiment is far from settled; consensus is growing that technology focused camps may help some people get entry-level technology jobs but probably don’t provide the type or depth of education that can lead to a top-notch career.

There’s a business story about whether 2U can seamlessly shift from selling premier degrees from elite intuitions to less credible, cheaper alternatives – if any company can jump from steakhouse to roadside burger joint. But the education story is nearly over already. The profit-fueled, online OPM market is in the process of making a hard, unscheduled landing. The twin wonders are how it stayed aloft for so long in the first place and why only those in education saw it coming.