Wednesday, July 01, 2015

Like a Phoenix from the...oh, wait…

The University of Phoenix continues to shrink.  It’s on the downside of the same dynamic that propelled it upwards so quickly.  And it’s paying for a bad call made about ten years ago, that may take another ten years to undo.

Phoenix grew by serving a niche that traditional higher education usually ignored.  And its business model was based on three major factors: the availability of financial aid, charging more than the marginal cost of production, and feeding investor expectations.  The last two are different enough from what non-profits do that they’re often misunderstood.

For-profits generally eschew many of the “student life” trappings that many people blame for the tuition spiral. (I’ve never seen a for-profit with a football team, a climbing wall, or a lazy river.)  They charge more than community or state colleges, but often less than elite nonprofits.  They keep non-marketing expenses as low as they can, and sell the prospect of growth to their investors.

When enrollments are climbing, all is well.  Because they charge more than the cost of production, growth more than pays for itself.  It isn’t a cost, as it often is in the public sector.  That means that when a hot opportunity comes along -- IT in the 90’s, say -- the for-profits can swoop in much more quickly, and at greater scale, than publics can.  They have private investment capital for infrastructure, and the prospect of steadily increasing profits keeps the capital flowing in.

Phoenix hit the limits of its niche in the early 2000’s.  Historically, it had required students to be at least 21 or 25, and to be employed.  By being relatively selective, it was able to ensure at least some level of quality control.

But by the early 2000’s, the 90’s tech boom had subsided, and the publics were starting to make their presence felt with online and weekend programs.  In other words, UoP’s niche was getting crowded.  Because it only makes sense when it’s growing -- “stability” reads as “stagnation” in the capital markets -- it decided to throw the doors open to keep the growth moving.  That “worked,” for a while, in the narrow sense that it allowed enrollments to keep growing for a few more years and keep investors happy.  But it eviscerated what quality control the institution had.  Over time, higher attrition and unhappy graduates (and employers of graduates) chipped away at the reputation.  Add an administration with a bone to pick, and suddenly the underpinnings of the business model started to fail.

When non-profits decline, they often have sources of income other than tuition.  (Sweet Briar’s alumnae fundraising drive leaps to mind.)  For-profits don’t have that; when enrollments flag, investor interest flags even faster.  Investors behave differently than alums.  Rather than bailing out the sinking ship, they flee.  Instead of blunting the impact of decline, they magnify it.

The real mistake, I think, was when it chose the wrong path for continued growth.  It tried to compete with community colleges, which have significant cost advantages.  (At a basic level, they’re subsidized and untaxed.  It’s hard to compete with that.)  Instead, it could have used the boom times to focus on getting more selective and improving both retention and reputation.  During the boom, they wouldn’t have had to choose between growth and improvement; they could have had both.  Then, when the boom ended, they would have been in a very different market position.

In most other sectors of the economy in which for-profit and public entities compete, the for-profits take the high end and the publics take the low end.  Most for-profit higher ed has focused on the low end, and now, they’re watching community colleges eat their lunch.  They missed a chance to legitimize themselves.

They still have the option, of course, but it’s harder now.  The much-maligned statement that they’re expecting enrollment declines actually gives me hope; it suggests that they’re in touch with reality.  Getting selective will likely cut short-term enrollment even more than otherwise, but over the long term, it’s the best chance for survival.  And frankly, if for-profits were to compete on quality and force everyone else to raise their game, there wouldn’t be much reason to object to them.

Good luck, Phoenix.  It’ll be a rough ride, but it’s possible.