The Economy of E-Learning

This article provides a foundation for interpreting current business models in e-learning and predicting change in the future. Trends and stakeholders are related to factors that will determine their growth and/or demise. Technology is a stimulus for change, and attempts to privatize knowledge or otherwise control this market may be only a temporary phenomenon. Paradigm change, technological innovation, and digitization of content are flattening the landscape for stakeholders in knowledge-based industries.

Current economics

There are three major sectors to the education economy as it currently exists: service provision, educational content, and infrastructure. Here's a closer look at each sector.

Service provision is the actual delivery of educational services. It's typically divided into a grade school level (kindergarten to 12) and higher ed (colleges, universities, and so forth). There is in addition large investment in corporate learning, and a large informal (uncredentialed) learning sector.

For the most part, service delivery for schools and colleges exists as a public enterprise, though in some jurisdictions, there is a significant private sector involvement as well. Corporate learning is often delivered by the corporation, though many contract such services to external agencies. The informal sector is almost exclusively the domain of the private sector.

Revenue for the public service sector is derived from (in decreasing order of magnitude):

• direct public funding, e.g., school budgets, grants to colleges and universities
• tuitions and other direct charges to users
• gifts and grants
• royalties and other earnings

Meanwhile, revenue for the corporate service sector is derived from corporations, tuitions. and other direct charges to users. And revenue for informal learning is derived from tuitions and other direct charges to users, direct public funding, gifts and grants, and royalties and other earnings.

This revenue is typically dispersed internally through staff salaries. Contracting of educational services to external agencies is minimal (though not zero). Most dispersements are in the form of salaries to employed staff, with a remainder contributed toward content and infrastructure.

The service provision sector is heavily regulated. Even where there is private sector involvement, there is (typically) a rigorous accreditation process to be undertaken. In addition, staff are regulated; there is an expectation of certain credentials (teaching certificate at lower levels, Masters and PhD at higher levels).

Educational content is the production and distribution of educational content; for example, textbooks, workbooks, supplies (such as lab kits), displays (such as wall maps), and the like. The bulk of such content is produced by private enterprise, often in accordance with guidelines and criteria specified by the purchasing institution.

Revenue for purchases of educational content is derived from (in decreasing order of magnitude):

• direct public funding, e.g., school budgets, grants to colleges and universities, library budgets, grants to museums
• corporations (for corporate learning)
• direct purchases by users
• gifts and grants.

The content provision sector is, for the most part, unregulated, with the exception of copyright regimes. The selection of material is usually made on a competitive basis, with purchase decisions being made in almost all cases (except informal learning) by the educational institution (or governing board) or the corporation.

Infrastructure is the production and maintenance of educational infrastructure. The major component here consists of educational buildings and associated expenses such as heat and cooling, power, fixtures, furniture and maintenance. It includes educational equipment, such as phys ed equipment, lab equipment, office supplies, and increasingly, computer hardware and software. Virtually all infrastructure is provided by private contractors, with some functions (especially maintenance) being handled in-house.

Revenue for infrastructure follows a by now familiar pattern:

• direct public funding, (e.g., school budgets, grants to colleges and universities, library budgets, grants to museums)
• corporations
• gifts and grants.

What should be clear from this brief overview is that there are numerous areas of economic activity in education and that direct educational purchases form only a small part of that activity. Equally important, the bulk of educational expenses are borne not by the learner but by government and corporate institutions.

Impact of the Internet

The Internet changes the nature of service provision, content, and infrastructure, creating new spending in some areas and decreasing spending in others. The expectation, typically, is that on a per-student basis, costs will decrease. However, it is also expected that because of increased efficiencies, the overall market will increase.

In general, the Internet leads to digitization of content. Many assets that existed as physical assets are now digital assets, with economies realized from that change. In addition, there is disintermediation. In many cases, intermediary management and administrative bodies are no longer required. Finally, the Internet has an impact on capacity: the productive capacities of individuals and groups is increased, reducing the need to contract specialized services

Service provision

Although the major sectors of learning (public school, college, corporate, informal) are expected to remain as such for the foreseeable future, many of the administrative structure associated with these sectors will change. In general, because of disintermediation and increased capacity, there is likely to be much greater self-management of learning. This will result in an increase in informal learning, and in traditional learning venues (public, college, corporate) will acquire many of the characteristics of informal learning.

It does not follow, however, that the funding for such services will change to any great degree. Institutions (governments and corporations) will continue to foot the larger part of the bill. Users are currently contributing to the cost of learning pretty much at the limit of their economic capacity. Arguably, this is beyond their capacity, with education being unaffordable to large segments of the population, especially in developing nations.

The shift from formal and structured learning organizations will be gradual, as the locus of funding places a natural constraint against the devolution of decision-making capacity from the provider to the user. In general, for such transfers to occur, a case will need to be made as to the increased effectiveness and efficiencies of self-managed learning. It's likely that this case will be made on a sector-by-sector basis.

Currently, we are beginning to see evidence of this shift, from charter schools and home schooling, the already established and increasing network of certification exams to Prior Learning Assessment and Recognition (PLAR) to e-portfolios to degree transfers, educational consortia, and other menu-based educational approaches.

In general, the environment will change as follows:

• the delivery of learning through direct teaching will gradually shift to learning support through mentoring and coaching
• the structure of learning will be disaggregated, with a less clear division of classes and grades
• learning will become more personalized, with some individuals specializing at an increasingly early age
• rather than being mandated and scheduled, service delivery will be on an ad-hoc and on demand basis
• rather than being sole-sources, service delivery will be obtained from a number of institutions at any given time.

This change will occur gradually as a result of a slow transfer of decision-making capacity from institution to learner. This will be accomplished in two major ways (which will typically be viewed as being in conflict with each other). First, there will be an increase in the purchasing capacity of learners; for example, through a voucher system or direct per-student payment to institutions. In addition, there will be a decrease in the cost of learner services to individuals; for example, through the funding of learning centers and educational support services.

Typically, the purchasing capacity approach is favored by proponents of increased private sector activity in the learning economy, while the decreasing cost approach is favored by those advocating a public service approach to learning. In fact, either approach can support public or private sector involvement; instead, the greater the involvement of the private sector, the greater the need to a regulatory framework, because (presumably) those funding learning will want to ensure that only educational expenses are supported through an educational grants or vouchers program.

However, the structure of disbursements in such an environment is likely to remain unchanged. The bulk of expenses will be in the form of staff salaries, whether staff are employed by private or public education providers; it is exceptionally unlikely that a cottage industry of individual educators will developed, except as contractors to major service providers (much in the way tutor contracts are handled today by, say, the University of Phoenix, or in the way guides are funded by About.com).

For independents and small producers, economic opportunities will exist in the following sectors (this list is suggestive, not exhaustive):

• online community and group facilitation
• community-based learner support
• community learning centre management
• online and personal mentoring and coaching, such as for example provided by Ensemble Collaboration
• niche applications and services, such as for example provided by LabMentors.

Educational content

This sector will feel the greatest impact from online learning. Because of digitization, disintermediation, and increased capacity, it's likely that demand for commercial educational content will drop sharply. Already we have seen a great deal of educational content placed online, from public institutions, such as SchoolNet, the BBC, NYPL, and MIT OpenCourseWare. In addition, numerous educators are producing their own content. Finally, learners are producing their own content, especially in the area of informal learning.

This impact is exaggerated by factors working against commercial publishers. Though their costs decrease dramatically (since they need not purchase paper and plastic, and need not physically deliver resources), the nature of their product has changed into one that can be reproduced for fractions of a cent. Currently, a regulatory environment prohibits the reproduction of learning materials; however, it doesn't prevent these same economies from being available to people in the production and distribution of their own non-commercial material. Consequently, even if the commercial product remains untouched, it faces increasingly significant competition from the non-commercial sector. The clearest example of this is Wikipedia, which has surpassed any commercial product, and such products as Google Maps and Google Earth, along with widely dispersed free content like the Live 8 videos, show that this impact will be widespread.

One could easily envision the complete collapse of the educational content market in a very short time, even within a decade. Factors working against it happening sooner include substantial lobby support by commercial publishers, their membership on college and school boards, quality-assurance and quality-control concerns, existing and increasingly broad copyrights, existing royalty-holders within the educational system, and lack of marketing and distribution for non-commercial content. None of these factors is sustainable on a long-term basis, therefore, as they wane, commercial educational publishing will wane as well.

The result will not be less educational content, but in all probability, more. As non-commercial content is more widely accepted, and as content creation tools become more readily available, cheaper (likely free), and easier to use, more people will contribute content on a volunteer basis or as part of their current employment.

In addition, there will be a short-term market for software tools designed to produce, distribute, manage, and display content. (By short-term, I mean approximately three to five years). A good analogy is the market for MP3 creation tools. In the Windows environment, there existed a proliferation of tools available for recording and storing audio content; these tools marketed for $30 - $60. However, with the development of a free and open source audio content creation tool, the market for these tools disappeared. In blogging, we see a similar phenomenon: Early bloggers desiring a tool would purchase Userland or Typepad, but the free Blogger service essentially closed that market. Similarly, the thriving market for Movable Type felt a significant impact by the free WordPress alternative.

Therefore, spending on learning content is expected to drop significantly over the next decade, with allocations shifting from the purchase of commercial content on a restricted license, to the production of content in-house for effectively free distribution. This content will be viewed essentially as a public service (and may eventually qualify for tax credits) and, in commercial environments, as a loss-leader for greater value-added services. For example, IBM is investing heavily in the production of Linux and other free and open source applications, and has shifted its business model from hardware and software sales to services and consulting. Smaller markets will open up for other companies in more specific niches. Vancouver-based Bryght, for example, contributes to the open source Drupal online community application and generates income through support and service.

Specific markets, either publicly funded, corporate-funded, or purchaser-funded will exist in the following areas related to educational content:

• content classification and indexing, especially with regard to quality evaluation and appropriateness ratings
• content linkages; the association of one piece of content with another, previously unrelated, piece of content
• filtering and streaming services
• content production community facilitation and support (e.g., the role played by the principals of Firefox development)
• content production tool installation, maintenance, and support
• marketing and other advertising functions
• content production, usually on a contract basis, on behalf of a public institution.

Infrastructure

The provision of educational infrastructure is not only labor intensive, it's resource intensive. The cost of resources is increasing. Consequently, the major impact of online learning will be to push educational infrastructure into systems of organization that are more resource-efficient.

Because of the greater need for information and communications technologies, the market for hardware is likely to remain stable or even increase. The production of computer hardware energy intensive as well as labor intensive. The world-wide market for computer components has also resulted in significant transportation costs. The labor differential will decrease over time (Friedman's 'flat world'), and transportation costs will increase, leading to a rebound in the local production of hardware components, especially in regions with an existing resource base and abundant sustainable energy such as hydroelectric.

Software, as numerous commentators have already observed, is rapidly becoming a commodity. And, at a pace even more accelerated than content, software is rapidly becoming something that people can produce for themselves. There is no inherent constraint on the continued expansion of open source, though factors similar to those related to content, substantial lobby support by commercial publishers, their membership on college and school boards, quality-assurance and quality-control concerns, existing (and increasingly broad) copyrights, existing royalty-holders within the educational system, lack of marketing and distribution for non-commercial software, will ensure that the expansion of open source software is gradual. As noted above, there will be short windows for commercial applications, but because these applications will not be protected by software patents in most market, this window will be a short one. In the United States, patent protection will not protect the market, and the development of free and open source software, along with its economic advantages, will move offshore.

In general, with some few exceptions, the economics of infrastructure will shift from the production of new materials and services to the support and improvement of existing or free materials and services. In particular, the following economic opportunities will exist in infrastructure:

• physical infrastructure conversion for community-based activities and services
• provision of community-based activities and services, support for locally managed activities and services
• new software, for short periods of time
• installation, maintenance, and support of free and open source software
• hardware manufacture, especially in regions with abundant energy
• wireless and other bandwidth applications for less developed regions
• hardware recycling and repurposing for such items as embedded computing applications.

Bottom line

The educational economy is shifting from what might be deemed a production mode to a service mode. In some cases, new production of infrastructure is neither efficient nor desired; in other cases, such as content and software, digital technologies are enabling consumers to take over production.

Although the locus of decision making is likely to shift from the institutional to the individual, there is no scenario that suggests any great change in the funding of educational resources, except perhaps the likelihood that both individuals and institutions will expect to spend less for a given educational opportunity. No great increase in consumer capacity to spend on educational services and products can be projected. However, while corporate and government support for learning will continue, this support is soft and will depend on continued economic health, something that can be counted on to vary.

Faced with the choice between providing the same type of education to a smaller number of people or adapting to more cost-effective educational organization, corporations and governments will opt for the latter, especially as it is demonstrated that these alternatives are effective. Accordingly, economic opportunities will exist, not in the production of new goods that will not be purchased, but rather in the support and servicing of increasingly self-managed educational activity.

This doesn't mean educational ruin for the educational industry; quite the contrary. If the sector shifts as described, the per-person cost of learning will decrease dramatically and greatly expand the market. In the public sector, this shift involves being able to provide more specialized and higher education for a greater number of people. Moreover, the shift enables more governments, especially those in the developing world, to provide educational opportunities. In the corporate sector, it extends the range of corporate education from the Fortune 500 sector to small and mid-sized enterprises.