JANUARY 10, 2000
INDUSTRY OUTLOOK 2000 -- SERVICES

By: William C. Symonds in Boston


Education


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POSITIVES
A record flow of venture capital will help nurture the continued expansion of for-profit firms in the new education industry.

E-learning will explode, fueling the growth of companies' offering distance learning.

NEGATIVES
Education stocks will remain volatile, as investors punish companies that fail to deliver on expectations.

Corporate training firms that focus on classroom-type training will shrink unless they adapt to e-learning.

Although education is a huge part of the U.S. economy, until recently it wasn't much of a business. Revenues of for-profit education companies account for only 10% of the $780 billion spent on education.

And the total market capitalization of education stocks makes up less than 1% of U.S. capital markets.

But as the millennium dawns, the private sector is poised to play a much larger role. ''This is the infancy of a new education industry,'' says Douglas Becker, president and co-CEO of Sylvan Learning Systems (SLVN), which runs the nation's largest network of tutoring centers. The advent of the knowledge economy, combined with mounting dissatisfaction with the dismal state of many public schools, is creating vast openings for for-profit companies. They're doing everything from running elementary and secondary schools to conducting corporate training for companies that traditionally taught employees in-house. Simultaneously, the Internet is changing the way much education is delivered. ''2000 will be the year when the revolution will become very visible,'' predicts Michael Moe, an analyst at Merrill Lynch & Co.

CASH GUSHER. This revolution is being fueled by an explosion in the money available to education startups. In 1999, the amount of private-venture capital pouring into education quadrupled, to $3.3 billion, figures Eduventures.com, a Boston-based market-research firm. And in 2000, it predicts the infusion will swell to at least $4 billion. With venture capitalists embracing education as a promising frontier, ''hundreds of entrepreneurial education enterprises have been established in the last few years,'' says Eduventures.com Chairman Michael Sandler. They range all the way from Advantage Schools, which runs for-profit charter schools, to ZapMe! (IZAP), an e-commerce startup that is installing free computer labs in thousands of schools to help capture potential customers.

Investors see enormous potential in education. Thanks to record enrollments in both colleges and K-12 schools, the overall education market will grow about 6% in 2000, figures Moe. But revenues of for-profit companies will rise at a 15%-to-20% clip, he predicts. ''The major competitor is the government,'' says Scott Soffen, an education analyst at Legg Mason, ''and over time, the for-profit sector is going to consistently capture business from the government.''

For all the euphoria, huge challenges lie ahead. Keith Gay, an analyst at Thomas Weisel Partners, points out that in 1999, ''a lot of education stocks were pounded.'' Despite the continuing bull market, an index of 30 major education stocks tracked by Eduventures.com was down 25% through mid-December. And though most analysts expect a recovery in 2000, ''this industry remains a work in progress,'' cautions Sylvan's Becker. ''Lots of these new companies will fail.''

Nowhere are the challenges more evident than in the fledgling business of running for-profit elementary and secondary schools. This sector cleared a milestone in November, when Edison Schools--the largest of the for-profit operators--went public, with an initial market capitalization of more than $700 million. In addition to Edison, more than a dozen other for-profit startups compete in this arena. All are promising to do a better job at educating youngsters than traditional public schools, while making money in the process.

These schools are riding the biggest reform wave in American education: the movement to create publicly funded charter schools in order to give parents a choice in their children's education. The number of such charter schools exploded from fewer than 100 in 1994, to nearly 1,700 last fall, and should reach 2,300 this year. While most charters are nonprofits, the for-profit operators are gaining market share and growing rapidly. But they remain intensely controversial, and none of these companies has yet turned a profit.

For many other sectors, though, the outlook is far rosier. The $63-billion corporate-training market, for instance, has always been dominated by private firms. Most training is done in-house, but companies are increasingly outsourcing it to firms such as Provant (POVT) and SmartForce (SMTF) with impressive results. ''While overall corporate training is growing 5% a year, the outsourcing piece is growing 10% to 12% a year, which gives us growth of 15% to 17%,'' says Paul M. Verrochi, chairman and CEO of Provant.

Similarly, the growing number of over-25 college students has created a huge opportunity for private-sector providers that cater to them, like Apollo Group (APOL). It runs the University of Phoenix, which is growing 20% a year--far ahead of overall college growth--and now serves more than 60,000 students. Meanwhile, in the highly fragmented child-care market, the business of providing day care at the workplace is growing 15% a year, figures Roger H. Brown, CEO and president of Bright Horizons Family Solutions (BFAM), the leader in employer-sponsored child care.

Enthusiasm is also running wild in the emerging dot.com education sector. ''There will be a tremendous migration away from classroom learning to online learning,'' predicts Howard Block, an analyst at Banc of America Securities. Some are even calling education the next ''killer app'' for the Internet.

''HARDLY A LAYUP.'' In the online world, corporate training programs are in the vanguard (below). But higher education isn't far behind. In 2000, ''dot.com will come to higher education in a way no one could have imagined even three years ago,'' predicts Mike Smith, Acting Deputy Education Secretary. ''There are already thousands of college courses on the Internet, and by this fall, there will be tens of thousands.'' That's boosting growth at the Apollo Group, whose online campus is expanding at 40% a year, more than twice the pace of its classroom-based instruction. And hordes of others are rushing into this space. Kaplan Educational Centers, a unit of The Washington Post, now offers an entire online law-degree program--for just $4,200--through its Concord University School of Law.

Many companies see huge e-commerce opportunities if they can capture some of the 53 million K-12 students in the U.S., plus their parents and teachers. One leader is Family Education Network, which offers a series of education Web sites, including one that connects parents with their children's schools. Some 9,000 schools are already taking part, which helped Family Education attract 2.5 million visitors to its sites in November. Going after the same market, startup ZapMe! has now installed its labs at 1,200 schools and expects to have wired 4,200 by yearend 2000.

It's not hard to fathom the gold-rush mentality in the education market. Eduventures figures high school students control $100 billion in disposable income. But like much in the education industry, capturing this market ''is hardly a layup,'' cautions Jonathan Carson, Family Education's chairman and CEO. ''There isn't enough oxygen in the ecosystem to feed all the life'' being created by the venture capital flooding into education dot.coms, he says. Still, education is the last big bastion of the economy largely controlled by the government. And given how poor a job the government has done, it's no wonder the private sector is rushing in.



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