Do Emerging Markets Want Their Education Disrupted?

This article was published at Educelerate on March 7,2016.

Have foreign education companies “cracked the code” for educating the rest of the world?

Earlier this month the online education company Udemy reported that over 10 million students had taken “at least one of its courses” and that growth overseas was surging. While this milestone should be applauded, such a grand, but largely meaningless figure is increasingly routine among online platforms in a world full of massive, under-educated populations. Rather it begs the question: if developing countries have such an enormous need for education and skills development, and online education is providing the access and “disruptive” forces to hoover up millions of students, why do so few US education companies boast large international enrollments, or at least disclose a more detailed accounting of their international operations?

Building Global Silicon Valley Leaders in EdTech

Is EdTech too focused on satisfying Silicon Valley-centric user metrics at the expense of thinking about truly massive global numbers?

With an estimated 2.37 billion workers in the world’s key emerging markets and an additional 416 million high school and college students projected to enter the workforce over the next 35 years, the developing world is in a race against time to absorb impending youth bulges and head-off potential employment crises.

Figure 1 shows the relative level of working age population (ages 15-64) from key emerging markets in 2010 and projects them out to 2050. These estimates immediately underscore where the most acute employment pressures will occur through 2050 — India (+318 million additional workers), Pakistan (+115 million), Bangladesh (+41 million) and to lesser extent Indonesia (+28 million) — all of which lag far behind the OECD and other Asian peers in both high school graduation and college enrollment rates. Furthermore this data set does not even include several other countries in Emerging Asia or a surging working age population in Africa where the 15-19 year old population is expected to exceed 151 million by 203o (see Figure 2 for comparative data).

Figure 1: Working Age Population, 2010-2050 by Country

Figure 2: Comparative Education Data by Region

 

Comparative Education Data Globally

Not surprisingly, the most challenged countries are confronted with debilitating gaps in public funding for education and are turning to technology and the private sector for help. Hence the familiar opportunity for disruptive innovation that uses low-cost access and technology or fills unaddressed market segments.

But the view from the ground is more complicated. To get my head around this, I scanned the data on some of the new “disruptive” companies (whether backed by venture capital or foundations) involved in professional skills and higher education, but this only resulted in more questions:

• How can so many companies in my sample claim to be serving 178 or 180 countries around the world, but only a few indicate the actual percentage of subscribers and student users, or revenue derived from these markets?((And forget about profits, the 10 million-student Udemy “might be profitable in 2017 or 2018.”))

• Is it possible that so many competitors can operate as self-proclaimed “global leaders” or “leading global platforms” all at once? At what point can companies represent themselves as legitimate, serious international competitors without merely blowing smoke to investors?

• Can a collection of loose channel partnerships or international investors, a strategy used by many rapidly scaling online entities including start-ups, truly provide the level of control, sustainability and local incentives to ensure future and profitable growth in such large and diverse markets?

My research led to Figure 3, a simple matrix which aligns so-called “global depth” (y axis), based on indicators such as enrollment, staff, and partnerships, with a level of product pricing (x axis) that takes into account both non and for-profit entities. Admittedly the matrix is based on a cursory scan of available public documents, announcements and information gleaned through internal inquiries. Private companies are also under no obligation to report these details and most do not. I also understand that the absence of evidence is not evidence of absence (and if any companies wish to set the record straight, we will happily review such), but lack of data is precisely the point of this post.

Figure 3: Selection of Global/EM Intensity, Estimated Enrollments versus Pricing

 

 

There are, of course, competitors that show meaningful international market penetration (across the top quadrants in Figure 3). But this does not change the fact that the many companies under review appear to have an insignificant if not overrated presence in global markets despite statements to the contrary. Examining evidence in terms of geographic presence, student enrollments, users or subscribers and most critically (for commercial entities), revenue and profits, supports this contention.

Global Intensity and Education Companies

Why, Then, the Discrepancy between Rhetoric and Reality?

Here are a few hard facts to consider. In the context of education — which carries its own added social, economic and regulatory context — we need to immediately resist the tendency to define international expansion as a scalable, plug-and-play, and inevitably lucrative option that indiscriminately displaces local competitors, institutions and culture because it was built in Silicon Valley or based upon Western education models. There have been many promising international models, both in education and broadly across technology, which have utterly failed in emerging markets, let alone supplant local competition. Back in 2013, I raised a few such issues about the MOOC rush into China (see “MOOCs in China—Dream On?”) and the legacy of initial failures from such illustrious names as Google, eBay, Zynga, Groupon, Facebook and others. Challenges remain for foreign education competitors based on regulation, language, domestic competition, and market entry models, in China and elsewhere.

Planting Field Offices in a Few, Comfortable Capitals

There are also conceptual differences over what constitutes a deep international presence. American education competitors have long deployed what I would call a “global light” strategy by expanding into developed trade and finance centers such as Hong Kong and Singapore, or English-friendly markets such as Australia, the UK and South Africa. Some focus on single countries. Very often such moves provide a semblance of global presence that appease a risk-averse (and English speaking) Board of Directors and provides a little sizzle on their investor story ((Actually, for start-ups like Knewton and Minerva Project, it is uncertain if international opportunity attracted their recent foreign investors, or if the need to look abroad for new capital brought their market expansion roadmap along for the ride.)), but offers little reach into the far larger though less accessible developing markets which would offer far more material impact. For example, General Assembly provides high-priced IT and related courses overseas in London, Sydney and Hong Kong, but has little physical presence in large emerging economies themselves. Cengage previously ran its main offshore presence in Australia, before it was sold to another party and became Open Colleges, landing eventually into the hands of Apollo Global. DeVry’s international strategy is overwhelmingly focused on Brazil. Lynda, prior to its merger with LinkedIn, managed an European markets hub in Vienna and posted some Spanish language content.

Make no mistake, placing nodes of operations in selected markets or finding Chinese investors to prop up a capital table can certainly add to an overall business and global baby steps are fine. But this does not equate with being a “leading global platform” and, at its worst, merely passes for international window-dressing.

Free Online or Premium On-Ground, but not Premium Online?

What is clear is that demonstrably “international” competitors in online education have tended to be low-cost or freemium models. MOOCs such as Coursera and EdX, as well as Khan Academy’s Global Schoolhouse Model, are prime examples of mass online platforms delivered at no or low cost to students and which have deep global roots. By comparison, the premium online training site Pluralsight (which, unfortunately, discloses few details on international operations) notes some activity in India, but not in China or the vast majority of countries. Within school models (i.e., on-ground), private international K-12 schools have scaled impressively — from premium level tuition in Asia (e.g., Nord Anglia, Dulwich) to low-cost provision in Africa at Bridge or Omega schools — but most are using online solutions to compliment their physical presence. There are also classroom-based higher education players such as Laureate, Kaplan, Pearson, and to a lesser extent Apollo who have scaled internationally through aggressive in-market M&A strategies.

Bottom line: given the thousands of ambitious US-based education companies and start-ups that want to disrupt the education world, the field is considerably thin.

Flat World Fallacies

The World is FlatTo understand why, consider the “The World is Flat” argument popularized by Thomas Friedman. In his 2005 book of the same name, Friedman’s insight was that the world was “flattening” —culturally, geographically, physically (in terms of distance) and economically — with direct competition from India and China creating intense job dislocation in the US, from computer software to radiology. The argument was compelling in the midst of rapid changes in information technology and communications, and at the margins some US jobs were impacted, but most were not and many never will be.((In a lengthy rebuke to Friedman’s argument, Economist Edward Leamer wrote an entertaining and lucid paper (See A Flat World, A Level Playing Field, a Small World After All, or None of the Above?) which describes how difficult it would be to rapidly “flatten” the global labor market as evidenced by slow changes in income inequality between rich and poor nations. He goes on to conclude that “physically, culturally and economically the world is not flat. Never has been, never will” (his italics).))

Simply put, distance, location and things like trust between business exchanges matter quite a lot. As a practitioner in emerging economies, I make a living in search of solutions to such problems, and I mention the Flat World idea here for a specific reason: because it has become a mantra for many people running edtech businesses in the US and who seek to expand globally with little, if any, friction.Clayton Christensen Institute for Disruptive Innovation

The close cousin to the Flat World — disruptive innovation — is another tonic to Western educational entrepreneurs and companies who think they can magically disrupt a wide variety of disparate educational systems across the emerging world. Taken together, both concepts are compelling: who can doubt the ability to disrupt a $6 trillion education industry with superior technology in a Flat World? No barriers to entry. Massive scale. Instant adoption. Differentiated content. Limited local competition in overlooked segments. Pricing power at the low-end of the pyramid, selected affordability at the upper middle end.

If only it were so easy. Much as my colleague Christopher Nyren laughs at Silicon Valley’s flat-headed thinking about the ability for software to eat the $1 trillion US education market (see “Why Education Does Not Need Marc Andreessen“), there are many reasons to be level headed on the global disruptive power of Western education products, services, technology and intellectual property (“IP”). At a time when US for-profit colleges are under immense pressure, and amply funded edtech firms fight over a limited US market pie and ways to sustain themselves, most Western education groups have yet to make a dent in emerging markets. The newest technology-centric entrants have tried to maximize market exposure through a scattershot of “partnerships” or field offices or foreign investors on their way to being disruptors in 180 countries, but true leaders in none.

Conclusion: What is Disrupting the Disruptors?

From the above market observations and commentary, I have drawn the following four key challenges facing US edtech upstarts as they belatedly look abroad.

University degrees remain the gold standard in emerging economies and a key aspirational objective at the household level. In many countries, replacing or even disrupting college degrees is anathema to upward mobility. According to one reputable source, the level of higher education enrollments globally could exceed 520 million by 2035, from less than 100 million in 2000. College enrollment rates in Africa are projected to rise from 7 to 30% over the coming decades when students already face capacity driven wait lists of several years, a problem being addressed by the Silicon Valley edtech start-up One University Network. In Vietnam, a World Bank skills analysis underscored the country’s concentration on higher education degrees over technical skills, in part since households looked down on vocational training. Non-traditional online degrees in Asian countries such as Indonesia, China, Malaysia and Korea offer non-traditional education, but are priced cheap, considered inferior and usually do not do not carry equivalent accreditation (not to mention value in the workplace). Naturally, credentials can and do supplement degrees and provide some form of skills training and signaling for high school graduates — as they do in the US — but the drive toward a traditional university degree is only going to intensify. Degrees are sticky — replacing them with something else of value in the developing world will not be easy.

Second, new Credentialing models are not new in many countries outside the US where vocational and skills-based education has long been a substitute for poorly developed higher education systems. It seems as if an entire generation of US-educated entrepreneurs have discovered skills-based, vocational and competency-based education as a disruptive innovation. But many emerging economies have operated deep vocational and competency-based education systems for decades led by a diverse group of institutions, from public institutions, “Open University” systems and corporate universities to small, mom-and-pop private training organizations. Parts of Asia, for instance, have been heavily influenced by Germany’s dual-VET Meister system and Australia’s TAFE qualifications. In more advanced Asian countries such as Korea and Japan, a so-called “license regime” that matches jobs with licenses, which require specialized training, has a long tradition from the placement of higher-end technology technicians to Japanese ikebana flower arrangers.

What this means for foreign education companies is that many emerging markets are already highly competitive, well acquainted with credentialing, and have local systems that favor incumbents and their relationships with employers. Local companies and institutions are also increasingly technologically savvy, deploying the latest adaptive learning or online service platforms (for relevance in Asia, see “How Asia is Emerging As the World’s EdTech Laboratory“). In this sense, vocational and skills-based sectors cannot be considered “overlooked” market segments ripe for disruption, but rather are embedded within local education-to-employment systems — though to be sure, there is always room for more differentiated products and services at a quality level.

Third, cost pressures that give rise to student debt loads in the US — and a compelling case for disruption — are largely absent in the developing world, where tuition is often heavily subsidized by the state. For 2015-16, the College Board estimates US tuition costs $9,041 for 4-year public colleges and $32,405 for $-year non-profit colleges. At around $500 to $3,000 in India, and $2,500-$3,500 in China, education costs in the US are anywhere from triple to over 10 times the levels in emerging markets. Of course, these figures have not been PPP-adjusted for affordability, but neither do they take into account household savings rates that are comparatively low in America or college living costs which are generally higher. Rather it is meant to illustrate that the market for substituting a Western credential or education service based on relatively low cost is often less applicable outside the US context.

This is not to deny major financial constraints and their impact on education access in emerging markets, or the massive need for private capital and innovation in regions such as South Asia, West Africa or Brazil to meet demand. However, it is clear that cost will not drive foreign college students to consider new, disruptive models.

Fourth, the historical record is largely against foreign business models that favor multiple cooperative partnerships over deeper investment on the ground in terms of time, resources and equity — in short, having skin-in-the-game and tolerating higher risk-payoff options. I have previously discussed some these challenges and failures among universities and other groups expanding globally in this context (see “What Multinationals Can Teach Universities Expanding into Emerging Markets“) including many cases of misaligned partnership incentives, a lack of sustainable financial returns, insufficient understanding of product adaptability and acceptance in local markets, and remote-control management with insufficient day-to-day commitment. The implications for online learning models are equally serious, where “asset light” approaches can lead to insufficient control over product, distribution, IP and management.

There are always exceptions, such as the Khan Academies of the world, and companies certainly still have time to succeed abroad (especially one like Lynda which can leverage LinkedIn’s own growing global presence and deep network effects), but it is no coincidence that many education businesses with physical assets and concrete acquisitions have thus far outstripped their online and organic focused peers in penetrating emerging markets with durability and depth — such global plays and ranged from international K12 and language schools to college campuses, training facilities and research centers.

The foregoing issues do not in any way diminish the exciting opportunities for education companies across the student cycle and the vast majority of the world. Do emerging markets want their education disrupted? Yes, but at varying degrees and with many operational limitations. Are US edtech companies effectively disrupting these markets? No, but there is still massive untapped opportunity — though the challenges will be formidable without a committed and coherent global strategy.