UV Letter - Volume II, #17
Over the past decade, sales of recorded music are down 50% and continue to fall each year. The reason isn’t online piracy. It’s that digital technology has forced a revolution in a business model that had relied on bundling the music consumers wanted (singles) with music they didn’t (the rest of the album – at least for most albums). In an industry unbundled by technology, consumers can purchase only the content that they want and bundled product is no longer viable.
We are seeing glimmers of the same thing in print and on television. Newspapers and magazines make their content available to RSS feeds. And thanks to DVRs and Internet video, we no longer watch channels or networks, but rather individual shows. Many viewers aren’t aware of what network their favorite shows air on.
Bundling has been even more important to higher education. Universities not only bundle a diverse set of courses into a degree program, they also bundle together entirely different value propositions:
Bundling has been the primary way universities have managed to avoid the cost/benefit analyses consumers make for virtually every other purchase decision. Just as it has for music, unbundling would dramatically reduce per student revenue in higher education. In microeconomic terms, bundling captures surplus for producers. Unbundling moves some of that producer surplus to consumers and may create new consumer surplus.
If colleges and universities are the next object of the Great Unbundling, many in higher education will see a dystopic future. For television networks, popular programs support new, innovative and struggling shows. For universities, we might see popular courses and programs thrive, while the rest are left to wither on the vine and institutions are less willing to take risks on new programs. In addition, in the world where the higher education consumer is king, it will be challenging to insist on gen ed. requirements, distributional requirements, and the precepts of a liberal arts education.
In considering whether this is likely, bundling in any industry is sustainable under three circumstances.
Bundling can be supported where there are efficiencies from producing different products together rather than separately. There are two elements to efficiencies: the value of what is being produced, and the cost of doing so. Fundamental to the concept of a university is the notion that new knowledge is created when disciplines rub shoulders, or through serendipitous conversations on the quad – although the extent to which this translates into better learning outcomes for students surely varies by institution. Regardless, most colleges and universities would have a hard time arguing that the added value for students (as opposed to research) outweighs the administration, overhead and inefficiencies borne in the name of comprehensiveness. In higher education, there may well be diseconomies of scale in production.
Bundling is more easily sustained when consumers value different parts of the bundle differently. For example, television viewer A might value ESPN at $20 per month and the Food Network at $5 per month, while another viewer B might have exactly the opposite preferences. In an unbundled world, if the cable network charges more than $5 for either channel, one of the viewers will refuse to buy it. Only by bundling can sellers and buyers achieve an optimal result.
Students are undoubtedly heterogeneous in how they value different aspects of the higher education value proposition. But the college affordability crisis and an increasing focus on return on investment is leading to a dramatic narrowing of these differences – much more homogenity in preferences than heretofore. And for many students, time is as important as price. Bundled products like a 4-year degree program a great deal of time to consume, and time is a precious commodity for students.
Bundling tends to persist when consumers appreciate simplifying the purchase decision. This is why we don’t buy books by the chapter or newspapers by the article. While we think this continues to be true, it won’t be sufficient to propel continued bundling for all.
In the long run, bundling will only continue in higher education where the bundle creates clear value or ROI for students relative to unbundled alternatives. In our view, only elite institutions – where the degree has more value, the credentials greater credibility, and the return from the Admissions and Intangibles value propositions much more certain – will have sustained demand for the bundle in the long run. And while accreditors might attempt to fight unbundling for the other 95% of institutions, we don’t think they’ll be successful given the focus on affordability, government support of unbundling in other industries (e.g., cable), and greater federal scrutiny and pressure on accreditors.
So at some point in the not-too-distant future it will be official: a two-tier system of higher education. The bundled elite and unbundled, huddled masses. Although appalling, it may prove to be the best outcome for students. If many consumers no longer have the discretionary income to spend on cable – Time Warner and Comcast cable had 1.2 million customers unplug last year – they won’t have the funds (or willingness to assume debt) to buy the higher education bundle. They would prefer to spend less for a value proposition best tailored to their personal circumstances. Policy makers and higher education leaders must consider this future as they attempt to optimize across cost, economic benefit, and the crucial role universities play in establishing and maintaining an educated populace.
It is in this context that massive open online courses (MOOCs) must be viewed. Harvard, Stanford, MIT and other elite universities are embracing MOOCs through organizations like EdX and Coursera. Although they continue to receive more public attention than any higher education innovation in memory, MOOCs are best viewed as higher education’s version of TV networks offering individual shows (i.e., parts of the bundle) online for free. The massive irony is that the elite universities offering MOOCs are the institutions that won’t need to unbundle. As such, they are doing a disservice to the other 95% of colleges and universities for whom the question shouldn’t be whether they should also launch MOOCs, or even what their online strategy should be, but rather their post-unbundling mission and strategy.
MOOCs are a sideshow – a distraction to the primary long-term challenge facing non-elite universities. Smart TV networks aren’t simply wondering which shows (i.e., which components of the bundle) to make available for free and which technology companies to partner with to do so, because in doing so their attention continues to be focused on the creation of the bundle. The sage on the stage model will die in the next decade after thousands of years as the dominant knowledge distribution system. Smart universities are thinking about their “product” in the context of viable unbundled business models. This means that they’re not launching a new course or program because of how it strengthens the bundle, but rather because the product will support itself in an unbundled model.
The difference may seem small, but requires revolutionary thinking. Some non-elite universities have begun thinking about the degrees and credentials they offer and are moving to increase not only the number but also the form and type. Others may be thinking about models that will help students rebundle and certify credentials they might earn in an unbundled world. There are many opportunities for universities to thrive after the Great Unbundling. But only those that begin viewing themselves as more than one-dimensional deliverers of a traditional bundled product will get there.
University Ventures (UV) is the premier investment firm focused exclusively on the global higher education sector. UV pursues a differentiated strategy of ‘innovation from within’. By partnering with top-tier universities and colleges, and then strategically directing private capital to develop programs of exceptional quality that address major economic and social needs, UV expects to set new standards for student outcomes and advance the development of the next generation of colleges and universities on a global scale.