Online course management company faces difficulties; is industry reshuffling on the horizon?

For most of the past decade, 2U has been on a rapid upward trajectory. The company initially built its reputation by helping top universities launch online education and operate degree programs, and later expanded into non-degree certificates.

The company has signed contracts with dozens of universities, providing assistance in marketing, enrollment, and course design. In 2021, 2U's annual revenue approached $1 billion, compared to just $29.7 million in 2011.

However, in recent months, 2U has encountered multiple obstacles.

In July, the company announced company-wide layoffs to cut employee costs by 20%. The company also stated that revenue in its degree business segment declined slightly. Additionally, it faced negative press—two investigations by The Wall Street Journal pointed out that 2U used aggressive recruitment tactics to attract students to its bootcamps and degree programs.

2U is not the only online program management (OPM) company facing problems. Over the past few months, several such companies have reported declining revenue or lost key clients. The entire OPM industry is under close scrutiny from lawmakers and policy advocates, who question whether these companies' business models comply with federal laws designed to prevent aggressive recruitment.

Take Coursera, a MOOC platform with a small OPM business, for example. The company reported a 4% year-over-year decline in revenue from its OPM segment in the second quarter of 2022, mainly due to lower-than-expected student enrollment. Publisher Wiley, which has an OPM division, reported a 0.7% decline in revenue from that business in fiscal year 2022.

Pearson, known for its publishing business, reported that its OPM segment lost 1,000 students in the first half of 2022 compared to the same period last year, and will lose key client Arizona State University in 2023.

Zovio—a company that became an OPM provider less than two years ago—terminated its contract in August with its only OPM client, the University of Arizona Global Campus (an institution the company once owned under a different name).

These difficulties are unlikely to subside in the short term, and multiple trends point to more problems ahead. Phil Hill, a partner at education technology consulting firm MindWires, said the current environment for OPMs may even make it harder for some companies to survive.

"In my view, it's a mess out there," he said.

Is OPM enrollment a "canary in the coal mine"?

2U, Coursera, and Wiley have all recently reported that revenue issues related to enrollment are impacting their profits.

At 2U, approximately 60,300 students were enrolled in degree programs at its partner universities in the second quarter of 2022, roughly flat compared to last year. But average revenue per student fell 1.9%.

Meanwhile, Coursera said that in the second quarter, approximately 17,500 students were enrolled in degree programs on its platform, up 19% year over year.

But revenue in that segment still declined.

That's because enrollment in some of the platform's oldest European and American programs, where revenue is more concentrated, did not reach expected levels.

On the other hand, Wiley said online enrollment at its partner universities fell 8% in fiscal year 2022. Revenue in that segment declined 1% to $226.1 million.

But these are not problems unique to online programs—enrollment across all of higher education has been declining since the pandemic began.

According to the latest data from the National Student Clearinghouse Research Center, colleges and universities have lost nearly 1.3 million students since spring 2020, a decline of 7.4% over the past two years.

Although graduate enrollment initially rose during the pandemic, it began to decline last spring. This is a problem for universities and OPMs, as many institutions rely on online graduate programs for a significant portion of their revenue.

"OPMs are being affected by the same factors impacting the entire higher education industry," said Daniel Pianko, managing director at Achieve Partners, a private equity firm focused on the future of learning and work. "They're more exposed to public view, so I think you're almost witnessing a canary in the coal mine for the entire industry."

In economic downturns, college enrollment typically rises, but that was not the case during the pandemic. Instead, a strong job market is pulling students away from higher education.

And these difficulties are expected to persist. Higher education is heading toward a so-called "demographic cliff"—a projected decline in the number of high school graduates starting around 2025 due to lower birth rates during the Great Recession.

"We're going through a fundamental shift," Hill said.

Hill said that in the future, only some universities will see enrollment recover, while many others will continue to see declines.

"You'll see more winners and losers," Hill said. "It's going to be a very complex situation."

Increased industry competition could pose a danger to some growth-based OPM models. For example, 2U, as a public company, has never been profitable and carries approximately $1 billion in debt and other liabilities.

Hill said the story being told to investors is changing.

"Maybe you can't just assume you'll keep growing," he said.

Paxton Riter, co-founder and CEO of OPM company iDesign, agrees.

"We'll really see which OPMs have sound business models, because finding a way to actually be profitable will become crucial," Riter said. "It will be interesting. There could be a bit of industry shakeout."

Uncertain Regulatory Environment

OPMs also face a changing regulatory environment. These companies emerged only about 15 years ago and have largely operated without government oversight since their inception.

A recent report by the Government Accountability Office (GAO), a federal oversight agency, found that the Department of Education has not done enough to ensure that contracts between universities and OPMs comply with federal guidelines.

Many OPMs use revenue-sharing contracts, where they provide services in exchange for a portion of the university program's revenue. According to the GAO report, these percentages typically range from 41% to 60%.

These services often include enrollment. To prevent aggressive recruitment, universities are generally prohibited from contracting with companies for enrollment services on a revenue-sharing basis. But 2011 guidelines created an exception for companies that provide such services as part of a larger service package.

The GAO report shows that the Department of Education plans to revise that federal guidance, but it remains unclear what impact it will have on companies using the revenue-sharing model.

The timeline for such regulatory changes is unclear.

The Department of Education is currently advancing several broad regulatory proposals—including those affecting college athletics, student loans, and for-profit education—so specific rules for OPMs may not be a priority.

Nevertheless, OPMs should be prepared to change their strategies. Many of these companies rely heavily on revenue-sharing agreements for most of their business, but lawmakers and policy advocates are increasingly questioning this practice.

"I don't know what's going to happen," Riter said. "I wish I did. But whether it happens in 10 years, 15 years, 5 years, or 3 years, I think if you're not considering alternative models to revenue sharing, you're probably making a mistake."

Some companies have been diversifying. In recent years, 2U has expanded into certificates, short courses, and bootcamps. The company even acquired the well-known MOOC platform edX last year in an $800 million deal.

"Rethinking Partnership Arrangements"

Other threats to revenue-sharing agreements may also be on the horizon.

For example, the Department of Education is developing regulations that would impose stricter rules on universities converting from for-profit to nonprofit status. Some well-known for-profit university owners have used such transactions to become OPM providers.

This includes a deal involving Purdue University, which acquired for-profit Kaplan University in 2018 to establish a public online university. In exchange, Kaplan's former parent company became the OPM for the new institution under a 30-year revenue-sharing agreement.

Zovio followed a similar pattern, selling its for-profit university Ashford University to the University of Arizona, which renamed it the University of Arizona Global Campus (UAGC). Zovio became the OPM for the new online university under a 15-year agreement, but the two parties terminated the contract earlier this year after facing enrollment challenges.

The Department of Education's new rules propose that a university with a revenue-sharing agreement with its former owner would generally not be considered nonprofit—unless the agreement is priced at fair market value. The public comment period for the proposal ended last month, and the department is pushing to have the regulations take effect by July of next year.

The agency also issued guidance this summer reminding universities that they cannot outsource more than half of their programs. According to a recent article by the left-leaning Century Foundation think tank, the guidance states that using companies to provide course design (as many OPMs do) counts as outsourcing.

Stephanie Hall, a senior fellow at the Century Foundation, said universities should recalculate how much of their programs are outsourced based on this guidance and make adjustments if they exceed the limit.

"This has huge implications," Hall said. "I think this alone will prompt a rethink of partnership arrangements and even give schools greater incentive to operate independently and reduce outsourcing."