The Chronicle of Higher Ed reports on February 21, 2014  . . .

Online-Education Platform 2U Inc. Plans to Go Public

2U Inc., an online-education platform that counts the University of California at Berkeley and the University of Southern California among its clients, filed plans on Friday for an initial public offering of up to $100-million in common stock.

The company did not disclose the stock’s IPO price. The money will be used to expand student enrollment and to fund technology and content development, the company said.

2U develops and services cloud-based education software used by colleges to deliver courses, and sometimes entire degrees, online.

In the filing, the company reported a net loss of $28-million in 2013 and revenue of $83.1-million, up from $55.9-million in 2012. Enrollment in its clients’ 2U courses nearly doubled in 2013, to 31,338, the company said.

The stock will trade on the Nasdaq under the ticker symbol “TWOU.”

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There are a couple of things that puzzle me about the OESP (online education service provider) market. 2U’s plans to raise 100 million through an IPO has rekindled my interest. Maybe you can help.

I understand that these services address the confusion among academic and administrators about how best to go about building a successful online program. I get how the upfront investment by the OESP reduces short-term financial risk for the institution. And I get how these institutions don’t feel confident that they can pull together a marketing program that will draw enough students. I get it.

What is less clear is why more investment has continued to flow into the OESP business model from investors during the past couple of years when, firstly, the success of the business model appears to be dependent on the client institutions having a nationally recognized brand. (Schools without a nationally recognized  brand cannot achieve one through heavy ad spending and still achieve a sufficient net revenue.) The list of institutions with national reach that are open to the OESP model is quickly depleting. The big names have all been approached. Some signed on. The slice of pie left for these new companies is thin and getting thinner. (Clients will likely look unfavourably on the OESP signing agreements with their competitors to offer similar programs – as noted in 2Us well-written SEC filing.) While enrolment in online education continues to grow, this may not offset the already clear limits of this particular approach of serving the online education market.

Secondly, institutions that see online learning as a fundamental part of their mission will continue to (a) invest in internal resources and (b) deploy these resources in a centralized model. As the internal investment level increases, and the institutions develop greater internal capacity, it will make less and less sense for the institutions to invest in a third-party service provider. Why, in other words, would  University X – which is directing more and more resources to its increasingly centralized online course development services, online learning unit, and student support systems – turn to an online service provider. Yes, they may see value in working with an OESP in 2014, but the value should decrease over time, as internal investment and capacity increases.

Isn’t, then, the total market shrinking, along with the value of the services?

See, also, OESPs and (Non) Disruptive Innovation

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Keith Hampson, PhD is the founder of digital / edu / strategy, a research and consulting service that helps colleges, universities and education businesses develop better strategies for maximizing value.