Disruptive Innovation

PBS program Frontline recently covered the private college industry, in which how the government-backed (now government-run) student load programs have fueled a $400B education industry.   I had several reactions to this program:
1. Unintended consequences: Any time the government wants to do something, the ‘legal arbitrage’ – where private companies figure out perfectly legal, but questionable methods to profit from the government program.  Government will first react with lawsuits, hearings and finally a new law to close THAT loophole.  Then the cycle repeats.

2. Public universities have been doing a poor job of educating undergraduates for a long time and the tuition fees have been rising faster than inflation for couple of decades.  Christensen’s disruptive innovation comes to mind: the universities are really good for advanced research, but they have overshot the needs for undergrad education – especially for the basic first couple of years.   It is just too expensive to have a chair professor teach a class of 25 undergrads how to solve differential equations.  So, such tasks are increasing relegated to adjunct faculty, teaching assistants and now, increasingly to computer software.  When I walk by this huge warehouse with rows of computer terminals teaching students math courses, I wonder why the students don’t demand lower tuition for these courses, though it costs lot less for the universities to run them.

Why are universities able to get away with providing such poor value?  Bundling and Branding.

3. How incumbents react to threats: Incumbents are definitely hurting.  Between the rising expenses, reduced government spending on education, reduced alumni contributions and increased competition, many lesser known universities are struggling.  When threatened, they are either coopting – but providing online programs to match the for-profit schools or moving upstream – by letting the students go to community colleges for two years and transfer credits.  However, high fixed costs of a large university makes it difficult to pull it off.  Considering how difficult it is to get any group of academics to agree on anything, for-profit colleges have a big advantage and will change the face of higher education in coming decades.