Businessweek Archives

Education


Industry Outlook 1999 -- SERVICES

Education

The complaints are loud and familiar: Primary and secondary schools are flailing about. Colleges and universities are turning out insufficient numbers of graduates for the New Economy. And Corporate America can't keep its employees properly up to speed on technological change. Education may seem to be in crisis and decline, but therein lies opportunity: Scores of entrepreneurs and companies sense a chance to make money by doing better.

As a result, the $660 billion education industry is taking on some of the hallmarks of an emerging-growth market, fueled by demographics, technology, and dissatisfaction with the status quo. Well-financed entrepreneurs are spending tens of millions of dollars of their fortunes on education startups or on helping established companies expand. As much as $4 billion in venture capital is looking for deals well beyond the traditional secondary and college markets. Everything is being considered, from educational software to online-learning programs for college students and managers.

Financier Michael R. Milken and Oracle Corp. Chairman Lawrence J. Ellison are assembling a "cradle-to-post-retirement" collection of companies under the Knowledge Universe umbrella. "We have a broad vision," says Thomas J. Kalinske, president of Knowledge. "If you start with kids and help them learn faster and better, the chances are that when they are parents they'll have a positive feeling, and later turn to us for continuing education." He says Knowledge Universe has sales of $1 billion to $1.5 billion.QUICK TO ANGER. Microsoft Corp. co-founder Paul Allen's Vulcan Ventures Inc. has also invested in a handful of deals, including a corporate training company, Asymetrix Corp., and a series of high school advanced-placement courses for online distribution. "The opportunities are tremendous," says Vulcan President William Savoy.

Will a torrent of private-sector money suddenly transform learning? Certainly not overnight. And the public markets, which have gobbled up some three dozen initial public offerings in education in the past few years, are quick to anger at the slightest misstep. Case in point: CBT Group PLC, one of the leaders in computer-training software for companies, saw its stock plunge from a peak of nearly 64 to below 7. CBT's tumble affected many other newly public education stocks, sending an important signal. "There has been so much emphasis on education that it has driven some very good companies to tremendous [trading] premiums," says Susan Harman, one of the first education industry investment bankers, now co-president of the new venture firm Core Learning Group LLC. "It reminds me a lot of biotech--there will be blips, and you have to have a long-term perspective.""PIPE DREAM." The education industry will grow by only 5% to 6% this year--but some pieces will grow at nearly triple that pace. Among them are businesses supplying kindergartens through high schools with computers or tutoring. Others likely to grow fast are those delivering specialized college or professional degrees to the growing number of high school graduates or working adults who are seeking education at nontraditional, for-profit schools--such as DeVry Inc. or University of Phoenix Inc. In the $60 billion corporate training market, revenues in the information technology arena should rise nearly 12%, to $10.5 billion, with online delivery up 42%, estimates International Data Corp.

The troubled K-12 sector is gaining some interest, although there are plenty of skeptics. Making money by managing primary and secondary schools is "a pipe dream," says Nationsbanc Montgomery Securities analyst R. Keith Gay, "but the ancillary opportunities are enormous and nonthreatening." Still, The Edison Project has contracts to run 48 schools in 25 cities. And Sylvan Learning Systems Inc. is expanding beyond tutoring centers into on-site coaching in reading, math, and writing in hundreds of public schools. In response to a looming teacher shortage, Sylvan is pushing hard into the training and testing of future educators.

The increasing ability of teachers to control so-called supplemental teaching materials--texts or CD-ROMs--is creating yet another new investment area. Now a $2 billion market, supplemental education could grow as much as 9% this year, vs. 4% for traditional textbooks, says Tribune Co. education unit president, Robert Bosau. Tribune plans to boost its sales in this sector, in part by acquisition, from around $325 million to $500 million over the next year.

Supplemental education is also attracting the technology-minded. A San Ramon (Calif.) startup, ZapMe! Corp., is putting computer labs with Internet connections into middle and high schools, free of charge. Technology vendors and other corporate sponsors will advertise in corners of the Web pages.

In the coming year, there will continue to be new forces driving the market for learning beyond high school. For one thing, the sheer numbers of projected full-time and part-time college students is fast expanding: From a trough of 2.2 million students in 1992, the total is expected to grow to 3.2 million by 2004. And 44% of those students are now working adults over the age of 24. Companies such as DeVry, Apollo Group Inc. (parent of the University of Phoenix), and ITT Educational Services, which have prospered by providing narrowly focused technical degrees, are all expanding their facilities and course offerings. Sales could jump 18% for the group, to $1.7 billion in '99, estimates NationsBanc.BREATHLESS RUSH. The ability to deliver college and professional certification courses over the Internet is generating an almost breathless rush to the medium, sometimes bringing together for-profit and traditional schools. Sylvan and MCI WorldCom Inc. developed a joint venture, Caliber Learning Network Inc., which they took public last May, with the goal of providing distance learning for professionals in classrooms. So far, Caliber has signed deals with Johns Hopkins University and the Wharton School at the University of Pennsylvania to deliver medical and business courses at sites around the country. But the company is losing money. "There are great growth prospects, but it won't happen overnight," admits Sylvan President Douglas L. Becker.

That hasn't stopped plenty of educators from eyeing distance-learning prospects. Kalinske, of Knowledge Universe, hopes to roll out a Knowledge University in the fall of '99, offering professional certificates and, possibly, a master's in business. He's aiming for a program that captures the attention of the busy professional. "You can't just put up endless hours of lectures and note-taking," he says.

Corporate trainers are especially keen to go high tech. They're using the Internet and CD-ROMS to teach managers everything from how to use software to the principles of finance and staff diversity. International Data Corp. reckons that technology-delivered training will grow from $1.9 billion in 1998 to $2.7 billion this year and hit $7.8 billion in 2002. "Companies have to live with the fact that, with tight labor forces, they have to train who they have," says Vulcan's Savoy.

But the industry is learning it can't take corporate customers for granted. A common problem: Companies don't become repeat buyers of the courses without regular follow-up and, often, in-class teaching and customization. "Too many companies are designing products without regard to the customer's needs and how they'll use them," warns Matthew Feldman, managing director of Learning Insights, which offers CD-ROM finance products. This fast-emerging market has little tolerance for such shortsightedness.By Richard A. Melcher in ChicagoReturn to top


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus