Online Learning: Where is the Money?

MIT offers their MITx online courses and certificates for a price, Stanford offers some online courses free, and Utah State University professor Wiley provides successful students with letters confirming course completion. But offering online learning has failed many using these business models. Cambridge, Chicago, Cornell, Michigan, New York and Oxford, Stanford, Temple and Yale Universities, University of Maryland University College and the London School of Economics all terminated their online courses for financial reasons. They were all started assuming student tuition and fees would pay for both the cost of operation and for developing very effective, high quality course materials.

As Case Western Vice President for Information Services Lev Gonick summarized: ”University presidents got dollars in their eyes and figured the way the university was going to ride the dot-com wave was through distance learning.”

Others have successfully offered online learning with the same subsidies that public colleges and universities receive for other students. The community colleges that developed, and shared the costs of television courses through licenses—the core of the Instructional Technology Council—continue to lead the way in developing online learning materials and have sufficient enrollments and quality instructional materials to breakeven. Others have achieved breakeven by offering limited online content and depend upon faculty-student interaction to achieve acceptable quality.

Now the U.S. Department of Education believes all online learning should be less expensive for students and considers lowering federal financial aid eligibility for those taking online courses.

Perhaps the most innovative business model that both offers free courses to some and courses with tuition and fees to others has emerged from the Open Universities.

In January 2006, following a briefing and discussion of the use of the Sakai Collaborative Learning Environment, Open University Netherlands  [OU NL] Senior Researcher and University of Utrecht Professor Paul Kirschner described a well-developed model for offering online courses.

Open University Netherlands  (OU NL) is leader in instructional design in higher education. Their course materials are both sophisticated and effective. Like other Open Universities, OU NL has limited resources; student fees support both course offerings and the development of course materials.

In this context Kirschner suggested the same course materials underpin three online models. One is free access to the course materials, including progress assessments. No supporting services are provided. A second is to provide tutorial support for the course materials at a fee that supports access to faculty—similar to “auditing” in U.S. universities. The third is the complete course, including certification assessment and certification for academic credit.

His model are summarized in Figure 1:

OU NL describes its programmes:

Besides academic programmes, students can choose from nearly 300 modular courses. This modular-course system implies that students can enrol either for full-length degree programmes or choose to study one or more courses.

Students can also follow short programmes. These include short vocational training courses, postgraduate courses and short undergraduate programmes which [may be offered] in co-operation with universities of professional education, academic universities, professional bodies or commercial programmes.

OU NL reports “60% of students remain in paid employment throughout their studies, and nearly 35% have enrolled because it leaves them free to choose their own time and place of study and lets them progress at their own pace.” Open University Netherlands and Open University UK serve students who cannot be accommodated in universities because of constraints on time and schedule, or lack of previous educational experience sufficient for admission.

The Open Universiteit in the Netherlands is open to anyone aged 18 or over, regardless of prior education. Students are free to study where and when they choose. Instruction is based on guided individual study. Generally, there are no compulsory classroom or tutoring sessions.

Students may enroll at any time, are free to study at their own pace and can generally decide for themselves when they are ready to take an examination.

OU NL describes its focus on lifelong learning:

In both the Dutch and international market of lifelong learning, Open Universiteit wishes to establish firm footing. Our organisation aims to play a key role as the prime university for lifelong learning. The key element is lifelong, open and flexible learning, available for everyone. Linking up with formal education, an expansion is needed to forms of education that are not primarily aimed at acquiring diplomas, but also to education that recognizes competencies that have been gained elsewhere and in alternative ways. Too, education that eliminates thresholds and motivates more people to enroll for study programmes and to keep studying. Various initiatives demonstrate that Open Universiteit fulfils its role as the university for lifelong learning successfully and with enthusiasm. It has all the resources needed to fulfill this role with passion: over twenty years of experience in open and flexible education that students can follow wherever and whenever they choose.

Beginning in 2006 OU NL introduced free, accessible, open learning materials via the Internet as a means to increase participation in higher education. The access was funded by the Dutch Ministry of Education and the William and Flora Hewlett Foundation. This follows Kirschner’s business model; free access builds participation in supported (tutorial) and credit courses.

The “market” for Open University then is a large and increasing number of students who cannot participate in classical university course offerings and those who participate in lifelong learning—often complementing employment skills, and businesses and agencies that want specific courses for employees. Their market is limited by offering its academic programmes only in Dutch; there have a small but increasing number of courses being offered in English. OU NL acknowledges this saying “For English speaking people in the Netherlands, who would like to start or continue an academic course or degree programme, the British Open University might be a better option. In our study centre in The Hague a local office of the British Open University offers service to their students.”

The sustainability of Open University NL courses depends upon creating the courses students need and maintaining their reputation for quality. Although the Ministry of Education provides partial funding for some courses, OU depends, in large part, on student fees and must be efficient. OU must also bear the investment in course materials—and quality costs. Breakeven implies large course enrolments to lower unit costs.

Some further analysis, using U.S. data, suggests sustainability is possible if the development of course materials can be amortized over a large number of students.

Estimated costs are shown based on U.S. 2008-2009 experience. Four hours of tutorial assistance would, using fully allocated costs, vary from $102 to $308. The difference is between the lowest cost 9 month full-time faculty (two-year private colleges) and the national average 9 month full-time faculty.

The estimated costs for the equivalent to a U.S. three credit-hour course would be $652 using OU UK experience and $1,562, based on historical course costs in the U.S. For a course to be self-sustaining tuition would need to both equal these costs for course delivery and a proportional part of the costs for developing course materials. In 2009 the average tuition per course in the U.S. was $530 per course for public institutions, $1,793 for private institutions with an average of $793. This suggests offering courses with the same the quality of course materials as the Open Universities, available faculty support, and method of delivery could only marginally be supported under U.S. current tuition.

Textbook publishers offer one way of amortizing course development costs over a large number of students. Some current course materials and online access at published prices of $15, $64, and likely more per course enrollment.

Referring to Open University UK Erik Ledbetter explained:

Two of the most striking aspects of the Open University [UK] paradigm are the large sums of money invested in course development, and the low tuition cost of an OU course. The apparent contradiction is explained by economies of scale. Because OU invests heavily in developing specialized distance learning course designs which include fully integrated self-assessment, assessment of mastery, and the use of instructional technologies, its course development budgets are considerably higher than those at a traditional British or American university. However, because those development costs are amortized over very large numbers of enrolled students during the lifetime of the course, the cost of an OU course per student is sharply lower than that of a course at a traditional institution.

These economies of scale have not gone unnoticed, and have fueled the growth world-wide of what OU Chief Executive Officer Sir John Daniel calls “mega-universities”: institutions with enrollments of 100,000 or more, which do all their teaching through open and distance learning. OU itself has been a significant force behind this growth.

The enrollment in Open University UK for 2009-2010 was 253,075 and Open University Netherlands 26,182.

Now, six years later, Paul Kirschner and his colleagues at the Open University Netherlands have demonstrated their business model works. The open access courses generate additional demand that lowers unit costs. OU’s courses serve a broader and different market from other Dutch universities.

Believing online learning is the wave of the future (and that traditional higher education with established brands will not collectively provide equivalent education services), Silicon Valley venture capitalists are now funding for-profit distance learning startups. There is more than a decade of successes and failures than can provide guidance. Don’t underestimate the cost of creating high-quality course materials, and don’t overestimate the number of students who are willing to pay tuition and fees, and value the brand.

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7 Responses to Online Learning: Where is the Money?

  1. Phil Hill says:

    Good article, Jim – very informative as usual. I definitely agree that viable business models and student affordability are important issues to track, and Open University is a great example.

    One clarification – University of Maryland University College is still offering online courses (disclosure – they are a client), as well as instructor-led and hybrid courses. I believe they offer one of the largest online programs from any public institution.

  2. Jim Farmer says:

    Phil is correct in his comment: the University of Maryland University College has a successful online program.

    Most of the failures listed were about a decade ago. UMUC “closed its profit-based online arm last October (2001) and folded it into the college. In May 2002 The New York Times Katie Hafner in “Lessons Learned At Dot-Com U.”, referring to the Fathom initiative led by Columbia University, also commented: “Columbia has found decidedly little interest among prospective students in paying for the semester-length courses. Now Fathom is taking a new approach, one that its chief executive likens to giving away free samples to entice customers.”

    Hafner quoted Eduventures writing “In 2000, some $482 million in venture capital was spent on companies building online tools aimed at the higher education market. So far this year, that amount has dropped to $17 million.” This is also the year Lev made his quoted comment about the motiviation. Of presidents.

    Coursera and Ascend’s course materials are significantly more sophisticated and will require a major investment by the Universities. For example Open University UK spent $1 billion to develop the video-based courses for their Baccalaureate degree program. These materials had the same features Coursera expects from the university-developed courses.

    Those colleges that participated in developing telecourses—those offered by television—made the needed investment supported by cross-licensing with other colleges and universities. They entered the online era with substantial video, audio, graphic and text materials that could be and have been used. They should be where higher education turns for guidance.

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  4. Ben Betts says:

    Great article.

    I still don’t get the fascination with providing bespoke ‘very high quality’ course materials. Firstly, the course materials in a face to face environment are often awful – tired old Powerpoints. Secondly, the world is now full of rich content. TED, YouTube, iTunes U; these places are just the tip of what’s out there and a lot of it is outstanding. In my opinion developing huge amounts of bespoke high quality material is a fools errand. Instead, universities should be acting as Curators of these resources, picking out the best. And students should be doing assignments, making contributions back to the class as they progress. Getting the students active in the learning experience doesn’t require high quality bespoke materials. And it doesn’t even involve a lecturer much these days either; peer to peer involvement can replace much of that role.

  5. Jaime Metcher says:


    Read the Ledbetter quote again – he’s not just talking about slick content. This is about high quality pedagogy online and at large scale. Unless you think that all instructors ever did was to provide access to content, it follows that some effort and ingenuity has to go into each and every learning experience. Doing that well at scale is difficult and expensive, but in my opinion can be very much worth it.

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