When I saw the news that Purdue had acquired Kaplan, my first reaction was surprise. But when I thought about it, I realized this deal made perfect sense.
A lot has been written about this acquisition, as it should have been. It’s one of the first deals of its kind, and it brings together one of the most well-known names in the for-profit space with a highly respected nonprofit brand. Of course, it’s not final yet, and there are many hurdles still be overcome. I think this deal will end up happening, though. And if it does, what does that mean for our industry?
Reverting to the Mean
In many ways, this deal is the culmination of trends that I’ve been watching for almost a decade. First, the for-profits experienced massive growth. At its peak, the University of Phoenix had almost 500,000 students, making it one of the biggest universities in the postsecondary market. That growth was due to a number of factors — the for-profits staked out online education earlier than the nonprofits, they tied tuition to military reimbursement to make it easier to use the GI Bill, and they aggressively marketed to students who were the first in their family to go to college. That growth was never going to be sustained; before their explosion, for-profits averaged 5 percent to 7 percent growth annually.
A lot of attention has been paid to the regulations placed on the for-profits by the last administration, and that certainly contributed to their decline. But I think good old-fashioned market forces had more to do with their decline. Nonprofit universities started seeing the potential in online education and began offering their own programs. With their more robust brands, nonprofits over the last five years have been able to attract more online students than the for-profit universities, once they built the programs and infrastructure. Those programs and infrastructure could be built directly, as Arizona State University and Southern New Hampshire University did, or be created indirectly, through partnerships and outsourcing. Competition lowered prices and offered more choice to the consumer, and those consumers tended to choose the brands they knew, which were more likely to be local nonprofit universities. Not only did competition increase, but the coming gainful employment rules and the shutdown of some for-profits like Corinthian and ITT both took supply volume out of the market and forced the existing for-profits to self-govern by changing the way they acquire students, including a much deeper focus on outcomes. The lack of focus on student outcomes is what really sealed the fate of some of the for-profits, although many such as Grand Canyon and Capella will do just fine in the long run.
Mutually Assured Benefits
So if the free market is working, why would Purdue want Kaplan? And why would Kaplan agree to sell for $1? As with any deal, it works because both sides think they can gain more together than separately.
Purdue has clearly lagged behind its peers in the online space, both in enrollments and in building its infrastructure. This deal offers an opportunity for the university to acquire the infrastructure needed to be a major player in the online space, both in Indiana and also throughout the United States and even globally. Mitch Daniels, the president, is an incredibly innovative thinker who is willing and ready to take risks to make Purdue one of the premier universities in the nation. He’s launched initiatives around competency-based education (CBE) and income share agreements, both of which have done well.
Daniels sees the opportunity around adult education; there are more than 30 million working adults in the United States with some college credit but no degree. About 750,000 of those adults live in Indiana. There is a market out there, waiting to be tapped. But tapping that market takes not only offering courses, but having the ability to find those students, enroll them, put programs online and teach according to best practices (which are different than teaching face to face), help those students graduate, provide technology support … as an online program management (OPM) provider, I can tell you that there is a lot to offering online programs, and developing the right systems takes a significant investment in both monetary and human capital. Daniels saw an opportunity to layer the Purdue brand on top of the existing system, hastening the development of a robust online presence.
On its part, Kaplan saw an opportunity to expand its reach while decreasing its risk. As I mentioned above, enrollments in for-profit universities have dropped precipitously, and the trend doesn’t look like it’s reversing anytime soon. Kaplan has been losing money, and this gives Kaplan a shot at survival. At the same time, it also helps Kaplan assure the quality of its offerings; Purdue, by putting its brand behind Kaplan, will provide quality assurance to thousands of students. All of a sudden, Kaplan has the ability to serve a global market in a way it could only dream of before.
A New Provider in Town
Part of that service comes by shifting how Kaplan thinks of itself. Frankly, it’s now a competitor to Learning House. However, given the scale of its operation and singularity of its first client, Purdue, I would imagine Kaplan would be going after big opportunities to partner with other large university systems.
During the Obama administration, the government had said that universities could not serve students and at the same time function as a program manager (what we now call an OPM). That enabled third-party companies, like Learning House, to fill the gap so universities could focus primarily on serving students.
With this acquisition, Purdue is launching a self-sustaining online university, but also contracting out in the form of a 30-year contract with a new OPM provider in Kaplan. The length of the contract might seem daunting, but there are many opportunities for Purdue to opt out of the contract. To do so, however, Purdue would likely need to plan several years ahead to build out its online infrastructure. The current deal has systems and assets, including instructional design, marketing, enrollment, academic advising and more, remaining primarily the responsibility of Kaplan.
So what does this deal mean for the higher education space? A few things. First, it announces Purdue as a major player in the online space, looking to compete with giants like Liberty, Arizona State, University of Maryland University College and Southern New Hampshire University.
Second, it offers an opportunity for other schools to see the advantages of an OPM partner and to consider how that might benefit their own online programs.
And finally, it allows us to reimagine what the higher education world will look like. The universities that will survive are those with a specific strategy that fills a need in the marketplace. This is true of both the for-profits (like Strayer, with its deep focus on employer partnerships, or Walden, with its doctoral programs) and nonprofits (like Western Governors University and its focus on CBE programs). Purdue, which already has a strong brand, is partnering with an OPM provider that will allow it to develop and execute an online strategy that could make it a significant player in the space.