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Editor’s note: Guest contributor John Katzman is the founder and CEO of 2tor, an education startup that partners with universities to deliver selective degree programs online to students across the world. Katzman also founded the Princeton Review where he served as president and CEO from 1981-2007.

The Internet will save higher education, but it may kill your alma mater

Peter Thiel believes smart people don’t need college, and he’s right: There have always been autodidacts who can learn without assistance. Of course, we don’t really need supermarkets and restaurants either; we could all grow and cook our own food.

Yet having professionals help us has always been a cost-benefit decision. What are the costs of a great education, including the opportunity cost of four years of work, and how do these costs balance against the impact of that education on your life?

The Internet is the first technology since the printing press, which could lower the cost of a great education and, in doing so, make that cost-benefit analysis much easier for most students. It could allow American schools to service twice as many students as they do now, and in ways that are both effective and cost-effective. For reasons that will be outlined below, however, it will probably end up doing this with half as many schools. And your school, even if it’s bumper-sticker worthy, might not make the cut.

Rising Costs

College tuitions have risen 2-4 points over inflation each year since World War II; we stand on the brink of the $250,000 undergraduate education. The rising cost of college was predictable: William Bowen, who later became President of Princeton, first put some math to this in 1966. The problem is not the cost of football teams or palatial dorms; it’s a lack of productivity growth. Putting a professor in a room with 25 students cannot become more efficient every year, while almost everything else in society does.

The ability to offer an online program of equal quality to its classroom peers can make education somewhat less expensive and, by letting universities continue to improve productivity at the same rate as other parts of the economy, allow them to hold tuition increases flat to inflation. (Note: Some people argue they can give a perfectly good college course for nothing or for $100 per course; these are simply correspondence courses on steroids, more helpful to those autodidacts than the rest of us. Any college that can be replaced by those programs should be.)

Good distance learning solves other problems as well. There are many more students in the world qualified and able to go to a great American university than spots at those schools. Rather than building billion-dollar campuses in the United Arab Emirates, a school can inexpensively turn the entire globe into its campus.

Investment & Scale

The Internet rewards scale; by trading higher up-front costs for lower marginal cost, market leaders can invest in better technology and service. As a result, there is nothing online that is both great in quality and small in scale. Amazon wasn’t originally a better bookstore than the small shops we mourn, but it is now.

This is why the Net tends to consolidate markets. As we’ve seen with booksellers and travel agencies, industry winners can invest more in great technology and build on their large networks; losers have neither the quality nor the community to keep up.

Traditionally, universities have seen size as potentially dilutive to quality. If you doubled the size of campus and faculty, most would argue that you would make it a less compelling school. However, online schools will be as good as their classroom peers only if they are large enough to afford a substantial and ongoing investment.

Of the universities who launch online programs, a few will thoughtfully navigate the quality/size cycle. They will invest heavily in quality, using great technology, millions of dollars of content and student support. That quality, in turn, will make them popular within their target community (e.g. adult learners, high-achieving students). Finally, that popularity will give them the resources to further improve their programs, enticing more and more qualified students.

Again, a high-quality online education is not free—there are no magic bullets here—but that technology and scale will help turn the tide on costs. As online courses and programs become a larger percentage of these schools, their tuition increases will moderate and eventually reverse.

Since there is a finite supply of qualified students, however, other schools will end up suffering.  Their costs and tuitions will continue to rise more than inflation, putting them at an increasing competitive disadvantage. More and more of their students will find it compelling to study online, and the larger programs will have more advanced technology and global communities.  Even their faculties may be drawn away by the reach and research budget of their hybrid peers.

These will all be contributing factors to a consolidation in higher education, a process that will mirror the way the Net has disrupted other parts of society, like bookstores and travel agencies. Every year, schools that are scraping by right now will find the world a little harder. The smartest will merge into other schools; the others will go bankrupt in the time-honored way: very slowly, and then very quickly.

Winning Your Tier

Some might imagine that in this consolidation, the top schools will win and the less prestigious schools will lose. Not so.

Universities and bookstores compete differently. Schools are more specialized—engineering schools don’t compete with music schools, for instance—and they are of varying levels of selectivity. Since much of a school’s value comes from the interaction among students and between students and faculty, universities both recruit and are attractive to students of similar academic backgrounds. Harvard, in other words, does not compete for students with Devry.

The likely winnowing, then, will happen within each tier of university. Instead of competing for students on a regional basis, online schools targeting adult learners compete on a national basis; so will the elite schools or the schools focused on any particular academic discipline. And within each tier, only the schools that properly navigate the quality/size cycle will survive the shakeout.

Within the elite tier, a few others will have a second chance. Due to their endowment and general excellence, most Ivy League schools might become less central to the global education world, but still be islands of research and learning.  Within other groupings of universities, though, the new competition will be less forgiving.  As states continue to lower subsidies, and as schools with similar reputations step up their competition, this could be a difficult decade for many colleges.

Evolve or Else

Like any other disruptive transition, the move to online and blended universities will bring tremendous benefit to students—better education in more places at lower tuition. However, these changes will be painful for many schools. Most bookstores and travel agencies found themselves on the wrong side of a steadily growing force; the schools that thrive over the next two decades will do so only because they have carefully harnessed that very same force: the Internet.

Photo credit: Musical Photo Man