Feature

The Private Sector’s Market Mentality

The president of Teachers College sees investors of for-profit educational ventures ready to dive into the province of public schools by ARTHUR LEVINE


Imet not long ago with a well-known entrepreneur who told me the nation’s public schools had a reputation for low quality, bad management, low productivity and high cost. He predicted education would be America’s next health care, meaning an industry in trouble, ripe for a private-sector takeover.

More recently, I met with a venture capitalist. He asked what Teachers College, over which I preside, could do in K-12 education with $30 million?

Elementary and secondary education nationwide is a more than a $500 billion industry. What makes it attractive to the private sector are several realities.

Growing Options
First, public education is being broadly criticized. Since "A Nation at Risk" was issued 17 years ago, a steady tattoo of reports and test scores have cast our public schools in a poor light. There is a sense the nation’s schools have not made significant progress over that time.

The result is the growing view among business leaders that education, which once stood high on a pedestal in American life, has fallen. Our public schools seem weak and vulnerable. They have gained a reputation for being either unable or unwilling to change. Americans now seem willing to consider alternatives to public education.

Second, state government, which focused on improving public education during much of the last quarter-century, today is increasingly open to considering new structures for public education. Currently 36 states have authorized the start up of charter schools, which, no matter the rhetoric, amounts to an alternate if not an experimental replacement for public schools. Since 1991, when the first charter school was founded, more than 1,200 have opened their doors.

Some states have gone even further. Voucher initiatives exist in Wisconsin and Ohio. Florida has gone the furthest in establishing taxpayer-supported vouchers for students at poorly performing schools. And then there are the private and philanthropic voucher programs created by people like entrepreneur Theodore Forstmann, who have provided hundreds of millions of dollars for inner-city children to attend private schools.

What all this adds up to is the promise of a new market both for private schools and for-profit schools. The perceived monopoly on K-12 education by the public schools appears to those in the private sector to be breaking up. Charter schools offer the opportunity to create for-profit management of public schools, and vouchers provide the chance for wholly for-profit schools to replace public schools.

Applying Technology
A third force is favorable demographics. The school-age population is growing. Between 1998 and 2003, elementary school enrollment is expected to grow by 2 percent and high school attendance by 5 percent, according to the National Center for Educational Statistics.

In addition, with English the fastest-growing language in the world, the investment opportunities no longer are limited to a national market.

In short, education is a growth market in an age when limits exist on how much government is willing to invest in restoring old school plants or building new ones. The availability of the private sector is indeed something government may look upon positively under these circumstances, particularly when it is concerned about quality in public education.

A fourth factor spurring privatization is new technologies. Several years ago I had a conversation with the editor of one of the nation’s major metropolitan daily newspapers. He said his newspaper would be out of the printing business within the next several decades. Instead the news would be delivered electronically. Subscribers would be able to design the newspaper they received. They could say they want to begin the day with sports. The headlines and front-page news on their daily paper would accordingly focus on athletics. They could say they have young children and ask that political news be excised.

This has enormous import for schools. It means the age of textbooks is ending. Learning materials will be fashioned for specific classes and individual students. Already, in response, private-sector companies from publishers like McGraw-Hill to new software companies like Blackboard are developing customized products.

In the same vein, I recently read an article that described the travel agency of the future. Through virtual reality, a traveler considering different vacation venues would be able to experience the various possibilities. The traveler would be able to smell, hear, feel and see the different locales. The same might be done with historic locales. One could visit 5th-century Rome, 18th-century America or 15th-century Paris. Imagine the smells of Paris at the time--they must have been putrid--walking the cobblestones, entering the great and not-so-great buildings and seeing the people on the street.

This raises huge questions about pedagogy. How will a talking head at the front of a class speaking about medieval France compare with the experience of actually being there? As technology advances, we can anticipate dramatic, even revolutionary changes in the nature of instruction.

For instance, the technology currently exists for a teacher to offer a course in New York and for students to take the course in Los Angeles and Tokyo. It is possible for all of them to perceive they are sitting in the same classroom. The student in Los Angeles can electronically nudge her Japanese-speaking classmate, tell her she missed the teacher’s last comment and get the appropriate answer in English. The teacher can ask the two students to prepare a project together for the next class. The two students can agree to have tea together after class. If all of this can be accomplished electronically, why do we need to rely on the physical plant called a classroom?

The private sector has been faster in developing these technologies, has greater resources than public schools to purchase them and is more willing to be entrepreneurial in experimenting with them. This means the private sector can either make money by acting as a vendor to schools or by creating schools that capitalize on these technologies.

A fifth incentive to the private sector is the emerging body of brain research. For the first time in history, we will discover how children really learn and how children learn differently.

This research is likely to lead to a reconceptualization of how we design schools. They will be more individualized, focusing more on outcomes than seat time and age grouping. The teacher will become more of a coach. The private sector is betting it can make the adaptation faster than the public schools and thereby increase its market share.

Ready Capital
Another ingredient is that a lot of money exists in the private sector for investment, and education looks like a good bet to many investors. The private sector believes widely that it can do a better job than public schools. As one entrepreneur told me, "You guys are in trouble and we are going to eat your lunch." He didn’t say it as a threat, but he did direct it as a predatory challenge.

Education is actually an appealing investment opportunity. The private sector has significant experience in this area. Already more than 1,000 corporate universities now provide instruction to people in their own companies. The private sector believes the education offered through their corporate universities is of higher quality and better evaluated than the typical school or university.

Also, education is a counter-cycle industry--a rare phenomenon that makes it enormously appealing to investors. Enrollments actually rise when the economy turns sour. Students are more likely to stay in school when there are no jobs.

School attendance is also compulsory. This means people have to buy the product. And the numbers are growing at a time in which rising proportions of jobs require higher levels of education. This makes dropping out less and less of an option.

Furthermore, education has a dependable revenue stream with a good cash flow. On average, the customer base makes a purchase lasting 13 years. In addition, it is a subsidized industry. Government pays for children to attend.

Finally, the stock market is hot. While education stocks have not been runaway successes, they have done well.

So the rush to education is on in the private sector. Venture capital firms, such as Warburg, Pincus and Co. and Leeds Capital, are into the education market. Investment houses, including Legg, Mason, Nationsbanc Montgomery Securities and Merrill Lynch, have developed educational practices. One recent unpublished study, half the size of the Manhattan phone book, listed corporations entering the education market. There are conferences for investors around the country. There are newsletters and publications galore on the education market.

The private sector has two entrance points to the public school marketplace. They can directly enter by creating for-profit schools or managing existing schools in the manner of Christopher Whittle’s Edison Schools. Or one can enter the field by providing support services, such as tutoring, remediation, counseling and learning materials as Sylvan does (see related story). In education, this market is huge.

Business brings money, imagination unimpeded by current practice and speed in entering the field of education. It lacks the reputation, accreditation and in-built diploma-granting ability of education.

Knowledge Industry
A seventh and final encouragement for privatization is the convergence of the activities of knowledge organizations. Media, publishing, museums, libraries, professional associations, arts organizations, grassroots neighborhood associations and schools are increasingly in the business of disseminating knowledge. They have entered the education market. Museums, symphonies and libraries are offering courses and instruction to both teachers and students.

One publisher recently told me his company was looking into how to get credit for these offerings. At the same time, museums, libraries and other cultural organizations are entering the publishing business by creating books, monographs and other educational materials. More and more they focus on schools, teachers, students and families.

Not long ago, I visited with the technology division of Simon and Schuster, which I always thought of as a book publisher. In fact, they no longer are exclusively in the book business. They told me they were now in the knowledge and information business. I asked what this meant.

I was told the company is targeting, for example, teacher education and the professional development of teachers. They were involved with thousands of schools via television and computers with an ultimate goal of putting the Simon and Schuster brand name on professional development for teachers.

This did not strike me as a crazy possibility in that this company is connected to more schools than any college of education in the country. But I was shocked. I thought this was the work of schools like Teachers College. I never considered a book publisher as a competitor. I do now.

I asked where Simon and Schuster obtained the content for the materials it produced for teachers. The answer: They hire "content specialists." I had hoped they would say they worked with university faculty. The only shortcoming they faced in doing exactly what schools and colleges do in terms of professional development was the lack of accreditation and certification.

Simon and Schuster is unusual in its scale, but it is not unique in direction. For instance, the Public Broadcasting System has, with support from the U.S. Department of Education, created "Mathline," the largest technology-based professional development program for mathematics teachers, now enrolling more than 5,000 teachers. WNET, the New York City-based public broadcasting station, is engaged in similar activities, having developed on-line courses for schools and professional development programs for teachers.

Unanswered Questions
So what does all of this mean for K-12 educators? The honest answer is I don’t know and neither does anyone else. I would say that we will see an increasingly mixed K-12 sector in the years to come, comprised of public schools, private schools and for-profit schools and for-profit managed public schools. I do not expect to see publicly managed for-profit schools. If the movement to charters and vouchers by states continues, which seems likely, the private sector’s entrance into K-12 will accelerate.

Several big questions remain, among them: Can business make a profit in K-12 education? Ultimately, this is the bottom line. I would say that for-profit firms such as Edison will fail. There is simply not enough money to be made from the per-student dollars now given to public schools.

If profits are to be made, they probably will come from the products of organizations such as Edison--new curriculums, professional development programs for teachers and administrators, software and more. Companies that provide support and non-instructional services for elementary and secondary schools will be more lucrative than those that create or manage schools. But what do I know? I am an educator who leads a not-for-profit school, not a businessman.

Beyond the speculation, several critical questions need to be addressed:

 

  • What private-sector groups are entering the education market? What are they doing?

     

    The number of private organizations coming into education is ballooning. It is important to catalog who they are and what they are doing.

     

  • What are the real barriers to entering the market?

     

    This question entails an examination of issues such as accreditation, state licensing, scale, funding, staffing, market acceptance, reputation and brand name.

     

  • What are the actual returns? Is education actually a profitable market for the private sector?

     

    The experiences of organizations like Kaplan, Princeton Review and Sylvan suggest it is. Edison says no. But what are the results across the industry in terms of profitability, market penetration, turnover rates and the like? What are the requirements for success by private-sector entrants into education? What about the sector that is not providing services but intends to manage and create schools?

     

  • What are the differences between the process and the products of traditional education and private-sector competitors?

     

    The first assignment is identifying the differences. The second is comparing them and seeking to understand the best practices.

     

  • How effective is the private sector at delivering traditional education?

     

    This means examining delivery methods, populations educated, content outcomes and costs.

     

  • What is the effect and consequences of competition on education?

     

    Historically, education has been one of the few industries in which competition has actually raised costs. It seems unlikely that competition with the private sector would produce the same result. What results does it produce?

     

  • What state and federal policies need to be changed to respond to the privatization of the education industry?

     

     

  • What accreditation and other self-regulation policies need to be re-examined?

     

     

  • What are the opportunities, advantages and disadvantages of partnerships between public education and the private sector?

     

    We have many more questions than answers. However, we need to get answers soon. There is not a lot of time left. The private sector is moving quickly. While the educational equivalent of an HMO is yet to be created in education, tomorrow is another day. We must not waste it.

    Arthur Levine is the president of Teachers College at Columbia University, Box 306, New York, NY 10027. E-mail: ael17@columbia.edu

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