Higher Education Is Not a Mixtape

Economists predict that colleges will soon become "unbundled" by the Internet. But that won't—and shouldn't—happen.   

Will higher education go the way of music albums and cable TV? Is it inevitable that the Internet will break apart degrees and colleges?

Some entrepreneurs think so. Fortunately, they are wrong.

It’s true that both cable TV and record albums have been "unbundled." By providing smaller units (individual songs and shows) on the Internet, they’ve offered customers lower prices, more content, and more options. With those examples as their guide, some entrepreneurs see higher education going the same way—being unbundled on the Internet—producing more choice and lower costs.

One of these entrepreneurs is Martin Smith, who wrote an essay last July for Quartz titled "What universities have in common with record labels." In the essay he made the case for a future in which education institutions separate their classroom-level courses from their related degrees the way individual songs have been broken away from albums. That could mean, for example, that someone could take an accounting course from a Columbia University professor and a marketing course offered at the University of Florida and build his or her own business degree, one class at a time, from the best professors.

Quoting Smith:

The unbundling of albums in favor of individual songs was one of the biggest causes of the music industry’s decline. It cannibalized the revenue of record labels as 99-cent songs gained popularity over $20 albums. It also changed the way music labels had to operate in order to maintain profitability.

This last decade of the music industry presages the coming decade of education. Choice is expanding at every level, from pre-k to graduate school. The individual course, rather than the degree, is becoming the unit of content. And universities, the record labels of education, are facing increased pressure to unbundle their services.

At first, it may appear that Smith has a point. Higher education is dominated by institutions that have not kept up with technology. And like cable TV and record companies, higher-education bundlers (colleges and universities) don’t produce the content they sell—they package it for sale and provide support services such as marketing and quality control.

There are also unprecedented reform pressures circling higher education, which means that technology has made education content more efficient to deliver at the exact moment when traditional delivery methods are becoming more and more expensive. From the outside, this looks like a perfect reform storm.

Other pundits have joined Smith in his comparisons and predictions. Michael Staton, for example, wrote a 2012 draft paper for The American Enterprise Institute that includes:

The Internet has challenged business models that serve bundled services by offering unbundled alternatives. Offering direct access to targeted services tends to disintermediate (the process of cutting out middlemen between producers and consumers) institutions whose value proposition relies on placing a premium on the aggregation of services and resources. We have seen these forces disrupt the music and journalism industries, and similar forces are beginning to affect the education sector.

It’s worth noting that Smith, Staton, and many others who foresee this shift are all literally invested in the outcome they predict. They work for, run, or bankroll companies that sell the very platforms and services colleges would need to buy in order to deliver classroom content online.

That aside, it’s a fantasy that higher education is careening toward an unbundled future of consumer choice, lower prices, and efficiency. Those making such predictions are peddling flawed analogies, while the technology they rely on is flawed. They just don’t understand the economics of higher education.

Higher-education consumers—students and parents—behave exactly the opposite: They shop for schools, not for professors. The consumer choice is for the bundler—the brand, the label, university—and not the individual course content. Consumers buy Stanford or Princeton in a way no one ever bought EMI or Universal. College data underlines this reality. For example, the 2012 UCLA annual survey of incoming college freshmen found that nearly two-thirds said "a very good academic reputation" was "very important" in their decision on which college to attend.

Accepting the premise that professors and researchers are the content creators of higher education—analogous to the artists in the music industry—universities don’t function as record labels do simply because they both bundle content. In music, the label is irrelevant. Consumers are buying the music and artist, not the companies behind them. No one ever waited in line for the newest song from Sony records. Television has a similar dynamic.

Moreover, the difference between a $0.99 downloaded song—or even a traditionally packaged $20 CD—and a $120,000 out-of-state, private college education is so vast it’s insulting. A music purchase is an entertainment indulgence with minimal investment and limited risk of bad decision making. Choosing the right college, on the other hand, often involves years of research and planning.

Moreover, the rates of students who fail to either learn from or complete online college courses are exceedingly high. In 2011, Columbia University’s Teachers College concluded a five-year study of online courses at community colleges in Washington and found that students in online courses were more likely to fail those courses and drop out of school than those in traditional, face-to-face courses. Another study, this one in 2013 by researchers at the University of Pennsylvania, found that only about half of students enrolled in massive open online courses, or MOOCs, view even a single online lecture and that the average completion rate is just 4 percent.

But the most spectacular failure of moving college classes online was in 2013, when San Jose State University launched a pilot program in partnership with Udacity, a for-profit online education company. The program offered online classes in a small number of subjects such as algebra and statistics. Fewer than one in four online students who enrolled in algebra courses passed their classes, for example, while just 12 percent of all newly enrolled college students made it through theirs. The results were so bad, the program was essentially scrapped after one year.

Moreover, the last 150 years are littered with examples of massive, technology-driven reforms that promised to expand learning and reduce costs of higher education but did neither. A 2013 report on a separate Columbia University study framed virtual college courses as simply the next iteration of distance education—the latest, unrevolutionary chapter in a history that includes millions of Americans in correspondence courses, the radio classrooms of the 1920s and 1930s, and TV lectures, which have been common since the 1960s.

Other unbundling proponents, like the New America Foundation’s Kevin Carey, an education-policy researcher and writer who has a book due out in March, argue that the digitalization of learning will open up access to college. For it’s part, Carey’s book, The End of College: Creating the Future of Learning and the University of Everywhere, contends that the "revolution" in technology and "the skyrocketing cost of college … are converging in ways that will radically alter the college experience, upend the traditional meritocracy, and emancipate hundreds of millions of people around the world."

But arguments for unbundling that are based on skyrocketing costs ignore that, in higher education, the traditional rules of cost and demand are inverted. The most expensive products are the most in demand. The top 25 universities in the country, according to the U.S. News and World Report’s annual ranking for the 2013-14 school year, include some the best-known higher education brands—institutions such as Harvard, Stanford, MIT, and Johns Hopkins. These schools are some of the most expensive (average annual tuition of $46,600) and the most in demand in the country, with an average of 36,500 annual applicants each. Colleges in the next cohort of 25 on the U.S. News list, by contrast, are easier to purchase (40 percent average admission rate versus 11 percent) and less expensive. But they are far less in-demand, with an average annual applicant pool of just 16,000.

There are two other important factors that insulate colleges and universities from the type of cost-reform pressure that could alter other markets: government support and loans. It almost doesn’t matter where someone goes to college; it’s heavily subsidized by the government in one way or another. According to an analysis last year for The Atlantic, in 2012 the federal government allocated nearly $177 billion in financial-aid money, including loans, toward public higher-education institutions. Those same public schools collected just $62.6 billion total from undergraduate students in tuition. And that spending excludes private institutions. One report found that Northeastern University, a private university in Boston, received $90 million in public funding in 2011 alone in the form of tax subsidies and student-aid payments. And other research shows that Princeton is banking $54,000 per student per year in tax subsidies and other public support—not counting direct student aid and government loans.

With government chipping in more than three dollars for every dollar a student pays in tuition at public schools, and underwriting private ones as well, the real consumers of higher education aren’t students at all. The real consumers are Congress and state legislatures—and so far they have exerted little cost pressure on higher-education institutions.

Further confusing the education cost-and-demand market is the fact that most students don’t actually pay their college costs at the time of purchase. According to the Project on Student Debt, more than seven in 10 U.S. college students take loans to pay for college. If purchase-price considerations significantly affected higher-education consumption, at least some intuitions would be lowering costs to attract students. Instead, costs continue to escalate and the most expensive schools have the most buyers.

And even if unbundling were on the higher-education horizon, it would more likely be a problem rather than a solution. If colleges move in the direction of hiring and rewarding professors who gather large online audiences, like record labels signed rock stars, the line between professor and performer would blur. Rewarding performance would inevitably undercut substance, and unbundled colleges would then, ironically, be far more like record labels than they are now—finding, promoting, and selling edu-tainers.

Moreover, a build-it-yourself online degree program may, one day, offer great content to consumers—but little else. Less-popular and less-profitable academic fields could whither. In the current system, it may not be efficient to maintain fine-arts programs, but most people think it’s important to have them. It has long been part of colleges’ mission to expose students to new ideas and disciplines. On campus, even business students, for example, are typically required to study literature and other topics in the humanities. Some may call that inefficient; others call it essential.