Markets Opinion

Washington State Doesn’t Have EMOs or CMOs, It has VMOs

November 22, 2007 2 min read

Washington State has seen several efforts to pass charter schools legislation. The first failed because a group supporting a proposal closer to vouchers led by Dick’s Drive-In hamburger chain heir, Jim Spady, opposed a charter law put forward by the Washington Business Roundtable. (Full disclosure: I drafted much of the Roundtable’s legislation.) Subsequent attempts failed as the movement’s influence over legislators ebbed with the mixed educational results of charter schools nationwide.

One way of thinking about the charter idea is an effort to inject private enterprise into the operation of public schools - and thereby create a competitive market in public education. One manifestation of charter legislation has been the for-profit Education Management Organization and its sibling nonprofit Charter Management Organization. Neither have proved to be impressive models of financial or educational performance.

Without a charter law, Washington has no place for “bricks and mortar” management organizations, but it appears to be fertile ground for an online variant. Clay Holtzman of the Puget Sound Business Journal explains how a market for the Virtual Management Organization (VMO) is attracting serious investment from significant firms in the broad education space.

DeVry Inc., one of the nation’s largest for-profit college chains, late last month bought Advanced Academics, an Oklahoma-based online-learning company with an expanding presence in Washington.... DeVry joins University of Phoenix parent Apollo Group Inc. and Virginia’s K12 Inc. as operators of tax-funded online schools in Washington. Each company operates under contract with a public school district, but the children generally study in their own homes and can live anywhere in the state.

Online public-school enrollment has swelled to more than 3,700 in the three largest programs alone since 2005, when state legislators offered online-only courses the same per-pupil tax support as classroom courses.... DeVry, Apollo and K12 are fighting for market share in a nationwide online high school industry that DeVry executives predict will grow to $2 billion in 2011, from the current $325 million.

I would argue that the reason providers are attracted to Washington and online public schooling in general is captured in the phrase I put in bold above. Paying the same amount for online and on-site services is good industrial policy for school improvement. The high potential profit margins will attract new providers and create the basis for competition.

The question for investors and online providers is how long this will last, and what will happen after the gold rush. I think the product life cycle of this service will be measured in months rather than years, and that each cycle will be a fraction of the last.

That’s roughly 72 months for the first cycle we’ve just existed, 36 for the one we’ve started recently, 18 for the third, and then down to a school year or semester thereafter.

Online education is on its way to achieving commodity status, and the end-to-end system is becoming less important or profitable than many of its constituent parts. I’ve written about the second point often in edbizbuzz. One sign of the first concern is to be found in the other interesting virtual school market - Pennsylvania, where a state task force has recommended changes in payments that will bring fees much closer into line with direct costs.

For those following online education as a school improvement business, Washington’s public school market will be worth watching.

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The opinions expressed in edbizbuzz are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.


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