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A Financially Viable MOOC Business Model

University Business, Feb 2013

Type “MOOC” (massive open online course) into Google, and you get 2.7 million hits. Type in “MOOC business model,” and you get about 110,000 hits, most of them considering what a viable business model will or should be. More concretely, referring to the websites of the most popular online course providers—Coursera, Udacity, or edX—one is hard pressed to find a clear business model that works, in particular for the institutions that provide the course content.

At present, the institutions producing MOOCs (MIT, Stanford, Harvard, and others) have relatively healthy balance sheets, sizeable endowments, and minimal competition. There is no business model that clearly indicates a viable revenue stream for these institutions or the companies that offer the courses. Yet we believe there is a business model that can work for institutions that intend to benefit financially by offering large-enrollment online courses.

Many universities and colleges already have extensive online courses, programs, and even degrees—many of which are well established. The online offerings, however, are fairly limited in scale and scope and very much focused on a domestic audience. MOOCs, on the other hand, create an unparalleled interactive experience available free of charge to anyone with a computer. But MOOCs are generally not credit-bearing and, for the time being, are fairly arbitrary in their offerings. There is no obligation to offer either a particular course or a course on a regular basis. Thus, despite the rich offering of courses, it is difficult to build a curriculum for certificates or degrees.

We believe a viable business model exists that looks different than the current online programs and MOOCs. This model focuses primarily on selling scalable online courses produced with regularity that fulfill core needs of certificate- or degree-granting institutions. The essential economics of such a model is based on matching the supply of these courses with large-, and not necessarily massive-, scale demand. Clearly, by serving a larger number of students, course providers can benefit from economic efficiencies and lower per-student costs, which, in turn, allows for lower tuition per student enrolled—interestingly, these efficiencies begin not at 50,000 or 100,000 students, but instead at 500 and 1,000.

Our proposed business model is predicated on the basic notion that the entity producing the course need not be the same entity that delivers or certifies the course—known as “unbundling” of higher education. Accepting this basic notion will allow an institution to focus on producing scalable online courses while a university, perhaps located abroad, buys and delivers these courses. The same foreign entity might certify or credential the students, or a third party or employer might provide the credentialing. This approach goes a long way to addressing reputational and brand concerns that will almost certainly be among the largest early roadblocks raised within potential partner content-providing educational institutions.

Outside the United States, the demand for post-secondary education is at an all-time high. Rapid population growth in South Asia, coupled with the need for a highly skilled workforce throughout East Asia and the developing world, has created sizeable demand for scalable, consistently produced online courses to form a basis for a curriculum to be delivered by local universities in the developing world.

While some institutions may wish to engage in the matching of supply and demand themselves, market logic suggests this may be the time to instead allow for third parties to emerge as brokers—much as one sees in other content-centric industries, such as media, that have clear modular roles for different types of companies all along the value chain, from creation, editing, and management to distribution and monetization. Such brokers or “course aggregators” would perform the enrollment research, engage foreign universities or colleges to assess demand, and bundle courses for certificates or degrees to be offered by the foreign universities.

Regardless of which path is chosen (direct negotiations or use of a course aggregator), universities are advised to formulate value statements and general policies and practices to guide their actions in online education. In addition, it is critical to fully understand the cost structure, development and production costs, opportunity costs, and revenue distribution models. It is also important to facilitate discussions within academic departments to consider organizational cultural challenges, faculty teaching and service expectations, and faculty compensation policies.

Understanding and using the technology embedded in MOOCs and being ready to offer scalable courses are not only good for revenues but can also be a great differentiator as universities compete for faculty with other institutions. The best faculty already think about extending their reach, and institutions should take the initiative to provide these types of opportunities.

The simplest business models usually win the day. That is the case here. Scalable online courses have the potential to generate real and substantial revenues and, in doing so, create a foundation for long-term success.