Embanet and 2U: More financial insight into Online Service Providers

While I have written recently about UF Online and 2U, there is actually very little insight into the operations and finances of the market segment for Online Service Providers (OSP, also known as School-as-a-Service, Online Program Management). Thanks to 2U going public yesterday and the Gainesville Sun doing investigative work on UF Online, we have more information on one of the highest growth segments for educational technology and online learning.

2U’s IPO

2U went public yesterday, initially offered at $13.00 per share and closing the day at $13.98 (a 7.5% gain). The following is not intended to be a detailed stock market evaluation – just the basics to present the general scale of the company as insight into the market. While there is not a direct comparison, this IPO is a much better IPO than the most recent ed tech offering when Chegg (down 2.7% its first day and down 26% to date). Based on 2U’s first day of trading and the IPO filing:

  • 2U’s market valuation is $547 million, and the company raised $120 million from the IPO;
  • 2U’s annual revenue for 2013 was $83.1 million with $28.0 million in net losses, representing a revenue growth of 49% per year;
  • 69% of this revenue ($57 million) came from one client, USC, with two programs – masters of education (Rossier Online) and social work;
  • Across all 9 customers, 2U makes $10,000 – $15,000 in revenue per student per year;
  • Across all 9 customers, 2U makes an average of $10 million in revenue per customer per year;
  • Across all 9 customers, 2U’s customers make an average of $10 million in net revenue per year; and
  • Across all 9 customers, 2U’s customers are charging $17,000 – $45,000 per student per year in tuition.

Pearson Embanet’s Contract with UF Online

Meanwhile, the Gainesville Sun has been doing some investigative work on the University of Florida Online (UF Online) contract with Pearson Embanet. Embanet is the largest OSP in the market and was purchased by Pearson for $650 million in 2012. From yesterday’s article in the Sun we get some specific information on the UF Online contract.

The University of Florida will pay Pearson Embanet an estimated $186 million over the life of its 11-year contract — a combination of direct payments and a share of tuition revenue — to help launch and manage the state’s first fully online, four-year degree program.

Initially the financial terms of the contract were hidden by University of Florida officials due to “trade secrets”, but the Sun was persistent, found a presentation with similar information, eventually leading to UF providing the contract with most redactions removed.

According to the article and its interview with Associate Provost Andy McDonough (who took over the executive director position at UF Online when the first one resigned after just two and a half months), Pearson Embanet will be paid $9.5 million over the first five years to help with startup costs. After this point, Pearson Embanet’s pay will come from revenue sharing (similar to 2U and most OSP contracts).

Gov. Rick Scott signed a bill last year tapping UF to create an online university that would offer a full, four-year degree program at 75 percent of the tuition that residential students pay. The Legislature gave UF $35 million in startup funds for the first five years, and also gave the university six months to get the program up and running.

The program started in January 2014 with 583 transfer students, with the first freshman expected in September 2014. What we don’t know about the program startup is how much Pearson Embanet will invest in the program. Typically an OSP loses money for the first 3 – 5 years of program startup ($9.5 million will not cover costs), which is one of the rationale’s for the long-term contracts of 10 years or more. The model is that up front the provider loses money (see 2U’s losses for comparison) and makes a profit on the back end of the contract. For UF Online, the state legislature plans to stop subsidies by 2019, assuming the program will be self-sustaining.

For the fall term (first term not purely based on transfer students), UF Online is planning on 1,000 students, and so far 91 have signed up. I do not know if this is on target or not.

Under its new contract with UF, Pearson is responsible for creating “proprietary digital content,” providing admission and enrollment support, generating leads and signing new students, tracking retention rates, engaging in joint research and development, and providing on-demand student support.

Note that this set of services is not as comprehensive as what 2U provides. For example, UF Online will use the Canvas LMS from Instructure, like the rest of the University of Florida, whereas 2U provides its own learning platform built on top of Moodle and Adobe Connect.

After 2018, UF will also stop paying Pearson directly and Pearson’s income will come entirely from its share of tuition revenue and any fees it charges. UF projects it will have over 13,000 students in UF Online generating $43 million in tuition revenue by 2019 — of which Pearson will get close to $19 million.

By 2024, with 24,000 students anticipated, revenues generated will be about $76 million, with $28 million going to Pearson, McCullough said.

Based on these numbers, UF Online expects to make just approximately $3,167 per student in revenue with Pearson Embanet making $1,167 per student.


Below are some additional notes the 2U and Pearson Embanet examples.

  • It is important to recognize the difference in target markets here. 2U currently targets high-tuition master’s programs, and the UF Online example is an undergraduate program with the goal of charging students 75% of face-to-face UF costs.
  • While the total contract values seem high, the argument for this model is that without the massive investment and startup capability of OSP companies, the school either would not be able to create the online program by itself or at least would not have been able to do so as quickly.
  • Despite the difference in market and in services, it is still remarkable the difference in revenue per student between 2U and Pearson Embanet – $10 – $15k for 2U vs. $1.2k for Pearson Embanet.

Full disclosure: Pearson is a client of MindWires Consulting but not for OSP. All information here is from public sources.

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About Phil Hill

Phil is a consultant and industry analyst covering the educational technology market primarily for higher education. He has written for e-Literate since Aug 2011. For a more complete biography, view his profile page.
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