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Published in Print: July 14, 2010, as Virtual Ed. Biz Seeks Mainstream

E-Education Inc. Seeks the Mainstream

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The for-profit e-learning company K12 Inc. grew 40 percent last year, generating $385 million in revenue by providing virtual courses to 70,000 students across the country. Connections Academy, another such provider, generated about $120 million in revenue serving up online courses to some 20,000 students. And last month, the education technology company PLATO Learning announced that it is now offering online Advanced Placement courses, marking the first time the company will do so as part of its courseware for school districts.

Experts say for-profit providers of online courses—long seen as an option for home-schoolers and a potential rival to public schools—are breaking into the public education mainstream as more schools mix face-to-face classes and online courses to expand their curricular offerings. With demand for that “blended” approach expected to grow, other players in the online-coursetaking marketplace, such as Apex Learning, Aventa Learning, Compass Learning, and Kaplan Virtual Education, are also seeking business in public schools.

“Most of the growth is in hybrid environments,” said Michael Horn, the executive director of education at the Mountain View, Calif.-based Innosight Institute and a co-author of Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns, referring to the combined use of online and face-to-face courses in schools. “There are lots of definitions of what this means.”

'Big Question Mark'

But the growth of such companies has also attracted critics, who say schools should take a closer look at the benefits the providers tout.

“I haven’t seen anything in this industry that is special in terms of its pedagogy or its delivery,” said Alex Molnar, the director of the Education Policy Studies Laboratory at Arizona State University in Tempe.

See Also
For more information on the business of e-learning, read: “District IT Leaders Examine E-Learning Companies”

Mr. Molnar said that hooking up school districts with online courses to fill gaps in curriculum is certainly helpful, but that using for-profit companies to do so is unnecessary.

“What benefit does a for-profit entity provide over and above what could be readily provided at a university extension?” he said. “Why wouldn’t you use a nonprofit publicly supported university that’s transparent and politically accountable?”

Henry M. Levin, the director of the National Center for the Study of Privatization in Education, based at Teachers College, Columbia University, added that online coursetaking may be a good option for many schools and students, but that more independent research is needed, especially at the K-12 level, to evaluate its effectiveness.

“It’s a big question mark out there right now,” Mr. Levin said. “More claims are being made than are justified. Both the effectiveness and the cost side of [online coursetaking] have really not been studied carefully.”

Despite such concerns, many small companies are also entering the online-course market.

“A lot of e-learning CEOs are educators,” said Susan D. Patrick, the chief executive officer of the Vienna, Va.-based International Association for K-12 Online Learning. “They’re looking for a better way.”

Players in For-Profit Virtual Education

Apex Learning
Cheryl Vedoe, CEO

Aventa Learning
(Part of KC Distance Learning Inc.)

Connections Academy
Barbara Dreyer, President and CEO

CompassLearning
Eric Loeffel, CEO

Kaplan Virtual Education
Charles Thornburgh, President

K12 Inc.
Ron Packard, CEO and Founder

KC Distance Learning
Caprice Young, CEO

PLATO Learning
Vin Riera, President and CEO

Part of that “better way,” she added, is bringing research and development and economies of scale along, too.

That’s the aim of K12 Inc., based in Herndon, Va. Ron Packard, who has a master’s degree in business administration and once worked at Goldman Sachs, founded the publicly traded company 10 years ago. At the time, while working as the CEO of Knowledge Schools, which provides early-childhood education services in community- and employer-based child-care centers and operates several charter school companies, he saw an opportunity to deliver education to students no matter where they lived.

Mr. Packard said his business role model is Heinrich Emanuel Merck, who founded the giant pharmaceutical company Merck, which is expected to generate more than $45 billion in revenues in 2010.

“He always said that he didn’t worry about money or profits,” said Mr. Packard. “He worried about delivering the best medicine. And we worry about delivering what’s best for each child.”

Mr. Packard and others believe that for-profit schools offer a decided advantage: access to capital. That translates, they say, into the ability to scale up at a much faster—and more cost-effective—rate than public schools can.

The biggest challenge, though, is developing course content from scratch, which cost K12 Inc. $30 million last year. Besides the cost of developing content, money is also needed for K12’s technology needs.

Some critics have said that such content-development costs have prevented for-profit online course providers from adding the kinds of multimedia features that are the hallmarks of high-quality online courses. They say that in many cases, traditional content is merely placed online.

Even e-learning proponents concede content costs are a barrier.

“Content is very expensive,” observed Michael Moe, a co-founder at the Chicago-based venture-capital firm NeXtAdvisors LLC. But Mr. Moe and other venture capitalists think there’s a better road for e-learning companies to take in the years ahead: using open content available on the Internet.

“Very little content will be paid for,” he predicted. “It will come from subject-matter experts everywhere,” and the companies will be able to package and deliver the content to schools and other customers.

Mr. Moe sees significant growth ahead for the e-learning industry.

And that growth is happening well beyond the borders of the United States. The venture-capital firm Sequoia Capital, which funded Google, PayPal, and other famous startups, has already financed companies in India’s fast-growing e-learning market.

Higher Ed. Partnerships

Though K12 Inc. offers individual courses, its core mission is starting full-time virtual schools. It already operates 37 virtual schools in 25 states.

Whether working with a state or a district, full-time virtual schools typically start with a request for proposals. Then a contract is signed—for one year, at many e-learning companies—noting service-level requirements, courses, and teachers. Virtual schools can take anywhere from months to years to get up and running.

“They can be more challenging from a regulation standpoint,” said Peter Stewart, the senior vice president of school development at K12. “A hybrid program”—in which a regular school blends face-to-face and online courses—”is more familiar,” he said.

Of course, both models come with costs. K12 estimates it costs $6,000 to $7,000 per student to run a full-time virtual school, and about $9,000 per student to operate a hybrid program.

K12 is also leveraging higher education resources to build its business. Recently, it forged a partnership with Middlebury College in Vermont to create online foreign-language programs. Called Middlebury Interactive Languages, the beginning French and Spanish courses are now available to high school students. K12 is also folding videos and simulations into the content. ("Vt. College, K12 Inc. Forge Language-Learning Partnership," May 19, 2010. )

The new venture taps into surging demand among high school students to take online courses to prepare for college. More than a million precollegiate students took an online course during the 2007-08 school year, a 47 percent increase over the previous year, according to the Sloan Consortium, a research and advocacy group based in Newburyport, Mass.

“There’s a huge need nationwide that’s not being met,” said Michael Geisler, Middlebury’s academic-development director.

Technology and Curriculum

Connections Academy was started around the same time as K12. “We saw what K12 was doing,” said the company’s chief executive officer, Barbara Dreyer, a former venture capitalist who co-founded Connections. It now has full-time virtual schools in 14 states and also sells individual courses.

The privately held company, which has grown at a rate of about 35 percent a year, is now profitable, said Ms. Dreyer. A small number of private-equity investors, including one of the biggest global players, Apollo Management, and the smaller firm Sterling Partners, back the company. Ms. Dreyer is a veteran of many other startups, including the online-research firm Ntercept.

But she said that building a company that provides online courses is not easy.

“You have a lot of investment in technology and curriculum,” she said. “We just now have positive profitability. It has a lot to do with scale.”

Her goal, she said, is guiding the company to more than 35 percent growth a year.

“We’re moving beyond full-time virtual schools,” added Ms. Dreyer, noting that the number of hybrid Connections Academy courses in high schools is growing by more than 50 percent a year.

Like K12, Connections has encountered hurdles in the virtual school market.

“Since 2002, we’ve worked on getting a full-time virtual school in Georgia,” said Mickey Revenaugh, a senior vice president at Connections Academy. “There are lots of policy decisions before they can be created.”

For example, Connections works closely with a lobbyist in Oregon, where there are enrollment caps on virtual schools.

“We make sure that policymakers have the most up-to-date information.” Ms. Revenaugh said. Getting a virtual school’s operations under way can take anywhere from one month to more than a year, she said.

Much like what K12 is doing with Middlebury College, Connections is partnering with colleges to offer online courses for college credits to high school students.

New players are also breaking into the e-learning industry.

Kaplan Virtual Education, based in Hollywood, Fla., was launched in 2007 by its 78-year-old parent company Kaplan Inc., which is owned by The Washington Post Co. Now the e-learning company has full-time virtual schools in seven states and provides hybrid courses in six states. The course catalog numbers over 200.

“We saw this as a natural extension,” said Charles Thornburgh, the president of Kaplan Virtual Education. “Kaplan was already working with school districts for state exams.”

Mr. Thornburgh is a seasoned entrepreneur, having started such education technology companies as ClickSafety.com, which offers online safety training.

“Our mission [at Kaplan] is to serve underserved populations,” Mr. Thornburgh said. “They need another alternative.”

One of Kaplan Virtual Education’s top services, he said, is data tracking. Teachers are constantly updated on student performance by tracking assignment completion and how student time is spent online. “Teachers can see what categories students are failing in,” he said, “and then there’s an intervention.”

Banking on Hybrids

Some for-profit online-course providers are banking primarily on the success of hybrid models.

Take Apex Learning. Currently funded by various venture capitalists, Apex was started in 1997 by Microsoft co-founder Paul G. Allen, through his private investment firm Vulcan Inc.

CEO Cheryl Vedoe was recruited by Apex investors in 2002. She was formerly a software engineer who moved into marketing and then educational technology. Ms. Vedoe declined to disclose specific revenues or profitability for the private company, but said that revenues have grown 50 percent over the past few years.

She added that Apex’s primary growth comes from students who are academically at risk and are taking online credit-recovery classes to stay on track to graduate.

Apex has developed more than 100 courses sold to 600 school districts last year. The company’s success is partly driven by the venture capitalists who sit on Apex’s board, including lead investor MK Capital, a venture-capital firm with offices in Chicago and Los Angeles.

“They look at how aggressive we are,” Ms. Vedoe said of those investors. “Do we understand the risks in reaching our plan?” Venture capitalists also help brainstorm and look at the bigger picture at Apex, and they offer business perspectives from a wide range of companies and industries.

Given the lessons learned from other companies, Ms. Vedoe rejects the idea that for-profit schools taint e-learning because of their motivation to make money.

“They’re more objective and bottom-line-focused,” she argued. “There’s a sense that education is all about not-for-profit schools. But schools buy furniture, contract for school buses, and buy school lunches.”

Still, some educators question the argument that for-profit providers are more clear sighted and efficient than nonprofit ones.

“You have examples out there of companies that have great tools, but do they have the teachers or instructional support [that students need]?” said Bryan Setser, the chief executive officer of the North Carolina Virtual Public School, a state-sponsored online-course provider.

Apex has a direct sales force of 25 to 30 people that contacts superintendents and other school administrators about its e-learning course offerings. Apex Learning’s list price for access to all its courses is $200 per student per year. The company also offers volume discounts, and contracts generally last one year.

Districts that sign a contract with Apex can be online quickly—within a few days—since the technology piece is outsourced rather than customized in-house.

Aventa Learning, a division of KC Distance Learning that focuses on hybrid e-learning, says it is also seeing strong growth.

“Blended learning is where it’s going,” said Caprice Young, the chief executive officer of KC Distance Learning, a subsidiary of Knowledge Learning Corp., that is based in Portland, Ore. “We’re seeing schools take whole courses online as a group.”

Ms. Young was once a vice president at Knowledge Universe, a holding company co-founded by the financier Michael Milken that has stakes in more than 50 education companies, including KC Distance Learning. But she cut her teeth as the CEO of the California Charter Schools Association.

“I believe that every kid deserves an equitable education,” Ms. Young said. “That’s why a lot of us are here. We were misfits in traditional schools.”

Vol. 29, Issue 36, Pages 1,16-17

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