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Are the Costs of 'Free' Too High in Online Education?


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2012 MIT symposium on The Future of Education

In fall 2012, MIT hosted a symposium examining the influence of technology on new teaching and learning methods in higher education.

Credit: Dominick Reuter

Over the past year, there has been a flurry of activity by private entities as well as renowned universities to offer "free" and massive open online courses (MOOCs). The Internet, along with software learning-enhancement tools as well as techniques such as crowdsourcing for grading, are creating a revolution in education. Technology now makes it possible to reach many more students at minimal costs compared to on-campus education. These "distance learning" efforts began years ago, but have gained special prominence recently. There is the success of Khan Academy (http://www.khanacademy.org), which offers for free nearly 4,000 10-minute lectures on a variety of subjects. Other free online education efforts involving universities include Coursera (http://www.coursera.org), a for-profit company formed in 2011 by two Stanford professors. This initiative now has more than 30 partners, including Princeton, Brown, Columbia, Duke, Stanford, the University of Pennsylvania, and Johns Hopkins. As of November 2012, Coursera offered 200 courses and had 1.9 million users. It is supported by $33 million in venture capital while the partners pay their own operating costs. The management team has yet to announce how it plans to make money and eventually repay investors.6


We can expect that free MOOCs will continue to grow and educate millions of students, often in effective and creative ways.


At the Massachusetts Institute of Technology, where I have been teaching since 1986, we have been one of the leaders in free and open online learning. We started with Open Courseware in 2002 (http://ocw.mit.edu), which has been supported by the Hewlett and Mellon Foundations, as well as MIT funds, with an annual budget of over $3 million. It offers a variety of courses, syllabi, and other educational materials, with more than a dozen other universities now as partners. Although the program will soon run out of funding, MIT followed up with MITx and then edX in 2012, a $60 million joint venture with Harvard.a The University of Texas, Berkeley, Wellesley College, and others have also joined (http://www.edx.org).

We can expect that free MOOCs will continue to grow and educate millions of students, often in effective and creative ways. Although dropout rates are about 90%, they may still force universities and colleges to control their costs better and lessen the steep rise in tuition rates that has become an obstacle for many families. So free and open online education should be good for everyone, right? Maybe, but maybe not.

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Positive and Negative Network Effects

Initially, "free" and "open" as in Linux and Apache open-source software or Wikipedia as a user-generated encyclopedia came with the assumption that users would participate and contribute to the accumulating knowledge or technology base in a way that was cost-effective and of high quality. As long as there is peer pressure to be a contributor as well as a user, we might even be able to observe positive platform-like "network effects"the more contributors, the more valuable the knowledge source becomes, which encourages more users and more contributors, ad infinitum.

I worry, however, based on the history of free products and services available on the Internet and their impact on the software products business as well as on the music, video, book publishing, and newspaper and magazine businesses. We have learned that there can also be "negative" network effects. In education, this would occur if increasing numbers of universities and colleges joined the free online education movement and set a new threshold price for the industryzerowhich becomes commonly accepted and difficult to undo. Of course, it is impossible to foresee the future. But we can think about different scenarios, and not all of them are good.

Economists and management researchers see prices as important signals of value. Prices may signal other things, such as status and cost. But if we agree they have something to do with value, then "free" sends a signal to the world that what you are offering costs little and may not be worth paying for. If more or less comparable products and services are easily available and some are free, users should gravitate toward the free. When universities offer free courses or inexpensive extension school classes as part of their non-profit mission, it is laudable. It is even feasible economically if foundations contribute money to such efforts, which they did for MIT's Open Courseware (at least initially, and they did not contribute as much as MIT administrators had hoped). Wealthy universities and colleges can subsidize their free or low-fee efforts from other revenue sourcesstudents who pay tuition, donors who add to the endowment, or companies, governments, and foundations that fund research and education.

Some online ventures will probably pursue a middle road and charge for certificates. There will then be more pressure to give course credit for classes completed online. But most non-profit educational institutions have high costs and limited resources, and the quality of potentially free contributions from users will be difficult to administer. Someone ultimately has to pay for what the online programs give away. Given that there are real costs and quality issues, what are some potential downsides of a free or low-fee college education, especially now that nearly all the elite U.S. institutions have jumped onto the bandwagon?

One real possibility is that universities and colleges that are not so elite will be unable to survive in the new environment. For-profit universities, whose degrees and promises of employment are already being questioned and investigated by the U.S. Congress, will probably be the first institutions to disappear.2 That may be a positive consequence for society. I also am not too worried about the survival of MIT, the Ivy League, or comparable schools of very high quality and global reputations, though their ability to charge tuition rates that reflect actual costs may well be threatened, sooner rather than later. I am mostly concerned about second- and third-tier universities and colleges, and community colleges, many of which play critical roles for education and economic development in their local regions and communities.

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Paying the Costs of Free

In other industries, we have seen that the real costs of free are absorbed by other parts of the market, with positive as well as negative effects. On the negative side in education, "free" in the long run may actually reduce variety and opportunities for learning as well as lessen our stocks of knowledge. For example, usage of Wikipedia is up, but contributions have been declining steadily over the past several years.4 Meanwhile, encyclopedia companies, including the venerable Encyclopedia Britannica, have closed or found it increasingly difficult to sell their traditional products.5 Will the world be better off if most encyclopedia companies shut their doors and most people only use Wikipedia? Maybe, but maybe not. We have already seen a major decline in the variety and health of book publishers as well as newspapers and magazines. We lost Newsweek in 2012 to bankruptcy and since 2009 have almost lost The New York Times more than once except for massive cash infusions by Mexican investor Carlos Slim.1 Many other newspapers and magazines have failed or had to be bailed out by local and foreign investors with a variety of agendas, and may no longer be the bastions of free speech and press they once were. Web content has replaced a lot of for-fee content, but is the quality and objectivity the same? Again, maybe not.

Free products and services appear over the Internet because the marginal cost of reproducing and delivering a digital good is essentially zero. The marginal cost of adding users to an online class of thousands of students is also close to zero, especially with grading done by computers or free crowdsourcing. But these calculations ignore the expenses associated with research, development, marketing, sales, infrastructure overhead, quality control, and administration. So, yes, digital goods and services such as software products, newspapers, magazines, books, music, video, and even college classes may have close to zero marginal costs and "gross margins" of up to 99%. But if revenues collapsewhether they are software product sales, newspaper subscriptions, or college tuitionthen at least some institutions will have another calculation to make: 99% of zero = zero.

Companies that survive the on-slaught of competition from free alternatives generally have business models and economies of scale and scope that enable them to take advantage of what we call "multi-sided markets." Their products are really "free, but not free." They subsidize one side of the market to gain users and make money from other parts (see "The Evolution of Platform Thinking," Communications, Jan. 2010). For example, Netscape in the 1990s gave away browsers to educational or trial users for free, but sold hundreds of millions of dollars worth of servers and development tools to companies that wanted to set up websites, intranets, and extranets. Then later it sold advertising through its website to companies that wanted to reach users of its browser. Nonetheless, Netscape eventually lost the browser wars after Microsoft started bundling its Internet Explorer browser for free with Windows.3 (Microsoft still gives away Internet Explorer while Windows continues to generate nearly $20 billion in revenue each year.) Adobe gives away the Acrobat Reader, but every year sells billions of dollars' worth of other products, such as servers and editing tools. Open source software like Linux is free but the leading distributor, Red Hat, sells more than a billion dollars' worth of professional services each year (and also pays itself for a lot of Linux development). Google gives away the Android operating system and the Chrome browser for smartphones and tablets, and much other software functionality delivered over its website. But Google is not in the business of selling software products; it primarily sells advertising to companies who want to reach the billions of users of its search tools and other free products and services.


What are some potential downsides of a free or low-fee education, especially now that nearly all the elite U.S. institutions have jumped onto the bandwagon?


I worry especially because my research going back several years found that about two-thirds of the public software product companies existing in 1998 disappeared by 2006.b Part of the explanation is the Internet boom, which allowed some fledgling companies to go public, followed by a wave of failures as well as acquisitions led by stronger companies such as Oracle, IBM, Microsoft, Cisco, EMC, SAP, and Adobe. But another reason why many failed or struggled was the increasing prevalence of free or cheap alternatives that were "good enough" and available over the Web. Most software product companies can never reach a scale big enough to sustain their businesses simply by selling advertising, like Google does. They need to sell services or monetize another side of the market related to the free products (for example, give away the reader but charge for servers, tools, and services). For companies that would like to sell products, "free" as in Google's software or Microsoft's bundles can be very destructive, and sometimes fatal, to their business models.

The industries I follow closely are still struggling to recover from the impact of free. The New York Times made a mistake when it offered its content for free over the Internet, and is now trying to backtrack and adopt a hybrid model and charge for some usage. This hybrid model is what The Wall Street Journal has successfully utilized. Hulu.com, the TV distribution joint venture formed in 2007 and led by NBC, Fox, and Disney-ABC, once gave away all its content for free, with advertising. It has evolved as well to a hybrid model, adding a monthly subscription service with premium content, much like Netflix. The music industry was nearly destroyed by free (and often illegalremember Napster?) sharing until Steve Jobs found a way to price and distribute songs with Apple's iTunes service. Music is no longer free, for the most part, and the industry and its creators, the artists and publishers, have survived. Book publishers are still figuring out how to compete with free Web content and new entrants into publishing such as Amazon.

Universities may gain some benefits to their reputations and attract more students and employees or create more scholars by giving away some knowledge for free. But free such as we have seen in software as well as digital music, book publishing, newspapers, magazines, and video, when it works economically, really needs to be more like "free, but not free," a term we first used with reference to the Netscape browser. The survivors have found indirect ways of covering their costs and generating a surplus.

Do we have more variety and a better world when only a few players survive in an industry? The expansion of free massive open online courses now being offered by elite universities (whose reputations are already high, without free Web courses) creates the risk that lesser institutions will suffer the fate of many software product companies as well as other producers of digital goods and services. Will two-thirds of the education industry disappear? Maybe not, but maybe! It is hard to believe that we will be better off as a society with only a few remaining mega-wealthy universities. Then there is the other issue of whether online education is truly a desirable substitute for in-class learning and face-to-face interaction. We often say at MIT that the personal networks and bonds our students form while at the university are probably the most valuable part of their education.

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Conclusion

Stanford, MIT, Harvard et al. have already opened a kind of Pandora's box, and there may be no easy way to go back and charge students even a moderately high tuition rate for open online courses. Free learning via the Internet seems here to stay. It is probably most valuable in moderation and as a complement to traditional university education and degrees, not as a substitute. It also will probably force educational institutions to bring down the rising costs of education, as well as the rising prices of tuition. This seems positive but may lead to potentially negative effects and unintended consequences: Elite universities need to ensure the true costs of their MOOCs do not become too high for society as a whole by destroying the economic foundations of less-prominent educational institutionsor of themselves.

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References

1. Adams, R. Carlos Slim boosts stake in New York Times again. The Wall Street Journal (Oct. 6, 2011).

2. Crotty, J.M. For-profit colleges thrashed in congressional report. Forbes (Aug. 2, 2012).

3. Cusumano, M. and Yoffie, D. Competing on Internet Time: Lessons from Netscape and Its Battle with Microsoft. Free Press, 1998.

4. Dillow, C. Is Wikipedia in decline? Scientists search for answers in Wikipedia's numbers. Fast Company (Aug 3, 2009).

5. Eaton, K. Microsoft shutters Encarta as Douglas Adams' encyclopedia model wins. Fast Company (Mar 31, 2009).

6. Korn, K. More colleges team with for-profit educator. The Wall Street Journal (Sept. 19, 2012).

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Author

Michael A. Cusumano (cusumano@mit.edu) is a professor at the MIT Sloan School of Management and School of Engineering and author of Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Unpredictable World (Oxford University Press, 2010).

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Footnotes

a. P. Cohan, "Will edX put Harvard and MIT out of business?" Forbes, May 6, 2012. See also MIT News Office, "What is edX," May 2, 2012; http://web.mit.edu/newsoffice/2012/edx-faq-050212.html

b. M. Cusumano. Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Unpredictable World (Oxford University Press, 2010), p. 94. Also see M. Cusumano, "The Changing Software Business: Moving from Products to Services," IEEE Computer 41, 1 (2008), 7885.

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Figures

UF1Figure. In fall 2012, MIT hosted a symposium examining the influence of technology on new teaching and learning methods in higher education.

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Copyright held by author.

The Digital Library is published by the Association for Computing Machinery. Copyright © 2013 ACM, Inc.


Comments


Anonymous

"This seems positive but may lead to potentially negative effects and unintended consequences: Elite universities need to ensure the true costs of their MOOCs do not become too high for society as a whole by destroying the economic foundations of less-prominent educational institutionsor of themselves."
says the professor at the MIT Sloan School of Management.
Translation:
"Boo hoo, we want to continue charging enormous fees but will not be able to do so due to these pesky idealists and the damn thing called the Internet! The best excuse I could come up with despite being author of a fancy-titled book is saying we really care for less-prominent educational institutions; of course not our bottom line. Please buy this lame excuse so that we could continue feel prominent!"

This is an amazing article and ACM should be congratulated for publishing it. The goal is to expose those who are not fond of people gaining knowledge, right? Wait.., did I misunderstood?

Seriously, it is a new world and it will be better for everyone (as intended consequence) except people who have a vested interest in the current system and their lame apologists (unintended consequence). Don't worry about "less-prominent" institutions, I am sure they will be fine.

An asst. professor in a top 50 university, who does not mind finding another job in the future if it means giving his sons a chance to access knowledge without paying a fortune to such people when they grow up!

PS: I am curious to see if this will be rejected as a violation of your ACM comments policy! We would not want to offend our distinguished colleague, right ;)


Anonymous

Tuition is too high at elite schools and our costs need to come down, I agree and say in the article. But nothing is really free and someone has to pay for what universities do, at least for credit courses and degrees. Otherwise we could end up with a bunch of Google-like institutions crowding out alternatives. I also spent my freshman year at Montclair State in NJ before learning about financial aid and moving on to another school. It was very important for me to have this alternative.
--Michael A. Cusumano
Massachusetts Institute of Technology


Isaac Christoffersen

We're witnessing the commoditization of educational classes and more people are gaining access to quality content at a lower cost. This is a good thing.

Free learning via the Internet is here to stay, but without a doubt be a "pay-for" premium version will evolve out of these or similar courses.

People pay for quality content and as the article mentions - the Music and Publishing industry have adapted to survive while also being able to charge for content.


Melanie Jutras

This was a great article and raises some thought provoking points. The current availability of distance learning and free quality online courses is truly incredible.

I do not believe the problem of high tuition at elite schools will be affected any time soon. A four year
program completed on site with collaborative efforts (and the resulting credentials earned) is considered by enough people as "priceless", to prevent a meaningful drop in tuition rates to accommodate those who view the online completion of coursework as an equal experience. Completing all of the degree reqirements online is simply not the same as the traditional scenario. Furthermore, if tuition is not charged and degrees are not granted then the end result is in fact less "valuable".

As noted, however, nothing is really free. I see the associated costs manifesting in various ways. Perhaps after taking some free courses, a student will decide to pursuit a degree or certificate program with the institution. Maybe advanced courses will require contributions to open-source or university sponsored programs as part of the course content. In this way, the student will "pay" by participating in research and development that is not compensated.

The availability of quality online courses to those who might not otherwise have the opportunity is what makes the concept so powerful. Pioneers in this effort are to be applauded, and I imagine more good than negative will come their way as a result.


Anonymous

"Tuition is too high at elite schools and our costs need to come down, I agree and say in the article. But nothing is really free and someone has to pay for what universities do, at least for credit courses and degrees. "

Dear Michael, sorry if I was a bit too harsh in my previous comments. You are making two wrong assumptions above:

1) Information is free; it was always free. That is why we stand on the shoulder of giants in science. What would happen if there was a patent/copyright on Newton's law or Einstein's works and a Disney-like corporation extended it over decades/centuries?! When will the copyright on Mickey Mouse end, by the way? Will I live to see it (I am in my late thirties)? How about the scientific publishers who exploit scientists? They would lock information and throw the key away if they could! These are the crooks you are being sorry about (or defending?)...

2) The idea that only a person who has a degree from an "elite or regular" university has "proper" knowledge will be obsolete in this century. These days the universities are unfortunately managed by people who are in the business of selling a piece of paper (based on the reputations built by real scientists whom they ironically abhor!). The modern university is made of crooked businessman in managerial positions, stale buraucracy, clueless students in the business of buying the piece of paper (if possible by not bothering to learn anything) to get a job, and poor scientists/teachers who are caught in the middle. It is not about knowledge/learning/science anymore in majority of the universities. I have seen the system in multiple countries, believe me I know from the experience of an insider...

In at most a few decades, the businesses and public will wake up to the scam and you are right, it will be over even for the "elite" ones. No, it won't be a bad thing that it is over. Actually, having those businessman taking their hands off universities may turn out to be a good thing for real science, in my optimistic opinion. This whole tuition/grant scam scheme was not there before first half of 20th century, I have read. I wish I was working at a university in those days when teachers were teachers, students were students, and scientists were scientists. I am pretty sure the only thing I would have missed would be technology.

The same asst. professor in a top 50 university, who does not mind finding another job in the future if it means giving his sons a chance to access knowledge without paying a fortune when they grow up!


Anonymous

Freely available is not the same as free or costless to produce.

Michael Cusumano


Peter McCombs

The author makes some good points. First is that free education is here to stay, and that it is a good thing. I'm presently enrolled in a MOOC along with about 50,000 students from around the world. It has been a good experience and there has been much in the way of collaboration. It is clear that time and effort went into the production of the course and that its costs were certainly not zero. However, the class is being leveraged as an introduction to a more in-depth, paid online course, and I believe this is going to become the model employed with an increasing number of MOOCs.

The criticisms leveled against free education are legitimate and do not simply amount to so much complaining. As with anything worth having, there is a good deal of care and craftsmanship that goes into proper education. There is much of it that can be mass-produced, it is true. While this may create education that is "good enough" for many who would otherwise not have the opportunity, it also creates a challenge when it comes to the sort of education that isn't ideal on a "massive" scale.


Melanie Jutras

I think the author and commenters agree that free education will continue to grow. The comparison with other industries being "damaged" by offering content for free raises the interesting and debatable questions at hand. Will increased access to high quality free education ultimately result in the high cost of "destroying the economic foundations of less-prominent educational institutions"? Might it even destroy the foundations of elite institutions?

Although the comparision to digital music and publishing industries raises these interesting concerns, I wonder if this is the best analogy. We do have to keep in mind the target market of a traditional college education. For the graduating high school seniors, it seems the traditional model offers an experience that has yet to be matched by online options. Also for many students seeking graduate degrees, the traditional model will be preferred. This is not to discredit collaborative possibilities of online coursework as may have been misunderstood in my previous post. The target market of a free online education is virtually anybody who wants to learn anything (including, of course, some of those graduating high school seniors and graduate students).

I think both models are here to stay for the foreseeable future. The pricing and ultimate "cost" to all involved remains to be seen.


Anonymous

"Freely available is not the same as free or costless to produce."
Michael Cusumano

OK, I have just checked the overall MIT budget http://web.mit.edu/facts/financial.html
and when it comes to the actual operation of a modern university, you are right; tuition income does not cover expenses even with zero overhead. Let's adopt this assumption.

But does this mean it has to be always this way? If we are talking about generation of information, the capital expenses have already been paid over centuries or more recently paid by governments and industries. What is the marginal cost of information dissemination when using online courses and assessment? Very very little. Suddenly, we have a very different picture.

I think a book analogy is appropriate. What is a book? Is it dead trees or words and sentences?
What is a university? Bunch of stone buildings or a "place" where the knowledge is stored and communicated?*** What if we can duplicate and communicate information with very little marginal cost (using computers and the Internet)? Do we still need the dead trees to tell a story? Do we need the stone buildings?

*** The university is actually an ideal, a culture of knowledge sustained by idealist people who are in love with knowledge (anyone who thinks the scientists are in it for money must be out of his mind). This ideal does not need stone buildings and dusty libraries and selfish businessmen when it can live in bits, in its purest form. The people who are in love with knowledge don't need any of those or even be there physically as long as they can communicate the knowledge across continents at the speed of light.
Admittedly, some investment is needed in physical infrastructure in experimental sciences. However, those will not be a significant expense item in the balance sheets, especially when the lab. infrastructure is efficiently generated, used and shared due to good communication.


Linda Polin

MOOCs don't threaten degree-granting universities. They threaten their continuing ed or extension depts. MOOCs are for folks who want a course, not a program.


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