Classroom Technology

New Player in Online School Market Pursues Profits

By Rhea R. Borja — December 07, 2004 4 min read

The Colorado Connections Academy, a K-8 online school, faces the picturesque Inner Harbor here, just off the Chesapeake Bay. But its 379 students can’t see the bay from their desks. They’re some 2,000 miles away in Denver, in Littleton, and down near the New Mexico border in Pueblo.

The Colorado school is one of eight such online schools nationwide operated by Connections Academy Inc., a for-profit online education provider and former subsidiary of the Baltimore-based tutoring-services company Educate Inc.

Connections Academy is one of a growing number of players in the online school market, which also includes companies such as McLean, Va.-based K12 Inc., and Akron, Ohio-based White Hat Management LLC. Among the nonprofit regional players are the Pennsylvania Cyber Charter School and the Florida Virtual School.

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About 3,300 charter schools exist across the country, serving 800,000 students. Of those largely independent public schools, 80 are online charter schools, serving 28,000 students in 17 states and the District of Columbia, according to the Center for Education Reform, a pro-charter research group based in Washington.

Education industry analysts say those numbers are drawing companies into the online charter school market. Enrollment in Connections Academy schools, for instance, has jumped from just 400 students to 3,000 in two years.

“It’s certainly a growing marketplace,” said J. Mark Jackson, a senior analyst with Eduventures Inc., a Boston research firm that tracks the education market. “The potential upside is huge.”

Market Convergence

The convergence of three trends—the charter school movement, the growing popularity of home schooling, and greater acceptance of online learning—has fueled the emergence and growth of companies that run these online schools.

“This is a very interesting dynamic,” said Barbara Dreyer, the president of Connections Academy Inc.

That dynamic sparked the Baltimore-based for-profit education company Sylvan Ventures, an arm of the precursor of Educate Inc., to create Connections Academy in 2001, said Ms. Dreyer.

$7 Million Invested

The first Connections Academy school opened in Appleton, Wis., in 2002. Now the company has online schools in Arizona, California, Colorado, Florida, Ohio, and Pennsylvania.

Michael Handwerger teaches students in grades 6-8 who are enrolled in the Colorado Connections Academy.

Connections Academy’s biggest competitor is K12, a for-profit virtual education company co-founded by former U.S. Secretary of Education William J. Bennett. K12 has about 15,000 students in virtual public schools.

The Connections Academy schools are free to students, who are provided with a computer, textbooks, curricula, and an off-site teacher. States or school districts pick up most of the costs. A home-based “learning coach,” usually a parent, helps guide the student’s school day.

A New York City-based investment bank, Apollo Management LP, along with other investors, bought Connections Academy in September from Educate Inc., investing $7 million into the company.

Partly as a result, Connections Academy officials expect to open online charter schools serving students in two to four more states by 2006, potentially adding 2,000 students for a total enrollment of 5,000.

But that growth is dependent on whether more states adopt legislation beneficial to companies running online schools, said Mr. Jackson of Eduventures. At least 13 states pay the per-pupil costs for students attending online schools, according to the Education Commission of the States.

“These schools are absolutely dependent on the legislative whims of the states,” Mr. Jackson said in reference to cyber charter schools.

“There’s a risk, certainly,” he added. “Will this [cyber charter] market grow to all 50 states, or will it be limited to the more innovative states?”

Critics Raise Concerns

Also, while online schools have fewer overhead costs than traditional brick-and-mortar schools, some of their expenses, such as technology bills, are higher, Mr. Jackson said.

“From a business perspective, can they manage these schools and provide a full school solution within a cost structure that allows for profitability?” he said.

But other observers say it’s a lack of state legislation that has allowed online schools to grow so quickly and with little accountability. And their lack of facility and other overhead expenses can make for a fat profit margin.

“This is a very fertile land,” said Luis Huerta, an assistant professor of education at Teachers College, Columbia University, who has serious concerns about the emergence of companies running online schools. “There’s a lot of profit to be made here.”

He calls for states to change per-pupil funding to reflect an online school’s actual costs.

Connections Academy schools, for instance, receive $3,500 to $7,000 per student from states, close to the state allotments districts receive. Built into those figures is a management fee, which is generally around 15 percent of per-pupil funding, according to Susan Fancher, the company’s vice president of marketing.

Some online schools also have very high pupil-teacher ratios, Mr. Huerta pointed out. Colorado Connections Academy has a ratio of 54 students per teacher. The average student-to-teacher ratio in the nation is 16 to 1, according to the National Center for Education Statistics.

“There are few teachers and few buildings,” Mr. Huerta said. “If states are not going to decrease per-pupil funding for schools with ridiculously low overhead, they’re promoting that there are profits to be made here.”

Coverage of technology is supported in part by the William and Flora Hewlett Foundation.

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