The Digital Skeptic: Online Education Fails Economics

NEW YORK ( TheStreet) -- Turns out the Notre Dame Fighting Irish, Alabama Crimson Tide, Florida Gators and all the other jocks jockeying for a piece of the NCAA men's Bowl Championship Series action ain't the big men on campus anymore.

No, in this nutty digital age, the red-hot online thing is no longer college athletics, but old-school, throwback university classes with a Web-age twist: They're free.

"The course is working out better than I dreamed," Michael J. Cima told me in an email. Cima, the David H. Koch Professor of Engineering at MIT, teaches a free, online version of one of his chemistry courses at the school.

"We started with 27,000 registered and it has settled down to 5,000 active students," he said -- about 10 times the number of students he usually teaches in person.

Cima is not the only super geek rocking the quad with free online higher ed. MIT's OpenCourseWare initiative, which offers vast swaths of the MIT catalog for free, claimed an impressive 2 million visits in November 2011, up roughly 9% from the previous year.

A-list universities are in turn competing with a wave of similar, no-cost higher-ed sites. Big names include the Khan Academy, Academic Earth, Open Culture and what is emerging as the Instagram of free online higher ed, Mountain View, Calif.-based Coursera.

Launched this year by two Stanford University computer science profs, Andrew Ng and Daphne Koller, Coursera sits at the top of the Web content class. The BBC, The Chronicle of Higher Education and The New York Times, to name just a few, have reported on the definite smell of money at Coursera. No less than John Doerr, a partner at the top-shelf Silicon Valley venture capital shop Kleiner Perkins Caufield & Byers, is a founder. Doerr is the made new-media man behind Amazon ( AMZN), Google ( GOOG), Intuit ( INTU) and many others.

Like other hip, free Web brands, the service has passionate advocates. "Coursera is the change I have been waiting for in online higher education for 10 years," a Columbia University grad named Regina Saphier, who blogs about the service, told me in an email.

And based on my experience of signing up for a way-wonky data science class, Coursera definitely has Web game.

So where's the investor bummer? That's sadly far too easy. Just spend one minute studying how the money actually flows into Coursera and it's way clear this business will graduate to become the next Netflix ( NFLX), Facebook ( FB) or Twitter.

That is, yet another digital brand struggling to make its next dime.

School's out forever
All it takes to see the rough course ahead for Coursera is to bone up on the actual contract published by The Chronicle of Higher Education between the company and the University of Michigan. Here you should recognize most of the value-killing bad habits that have crippled the digital music, publishing and movie businesses.

First, Coursera tries to do business not only in a new digital way, but in a terribly complex one. Go to Page 3 and there is not one business Coursera is in, but three. There's the "Coursera Monetization Model," the "University Monetization Model" and the "Registered Students Model." Besides having the "your guess is as good as mine" vibe as to what businesses these actually are, there are what appear to be tricky revenue splits all over this campus. That means anybody close to this outfit should tool up for painful audits, complex disclosures and the bad blood that pollute the music and movie business.

Not surprisingly, tensions seem to be flaring between different players in the school course content supply chain.

"Wow. That contract looks terrible for instructors," Cima wrote to me when I emailed him the Michigan memo. Cima was concerned about a release he would have to sign and losing control of his courses.

Coursera's Daphne Koller responded via email that Cima had nothing to fear. The release was merely for marketing photos. She was firm that professors and schools control their material and no deals are exclusive.

"This is entirely on a volunteer basis," Koller wrote.

Which graduates us to the 800-pound gorilla sitting in the classroom. Just like in the music or movie industry -- where Napster, Spotify, Last.fm, Netflix and dozens of other content sites fight a no-win battle selling the same stuff -- Coursera faces essentially limitless competitors from existing and as yet to-be-born outfits offering the same content.

Koller told me over the phone that the multifaceted business model sounded far more complex than it really is. And the level of competition her firm faces does not concern her.

"Our goal was to offer free education to everyone in the world," she said. "Whether it makes money or not is not at the heart of what we are doing."

Which is handy, since like many other Web classmates, Coursera is really in the "business" of offering valuable content -- this time, its $6,000 classes -- for nothing.

To these tired eyes, all this company will do is prove, yet again, that this model is as broken on campus as it is in the real world.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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