Computing Applications Economic and business dimensions

Money Models For MOOCs

Considering new business models for massive open online courses.
  1. Introduction
  2. States
  3. Students
  4. Employers
  5. Sponsors
  6. Other Platforms
  7. References
  8. Authors
  9. Footnotes
  10. Tables
Money Models for MOOCs, illustration

Despite the massive media ink spilled over massive open online courses, the ink spilled by MOOCs themselves remains red. MOOCs lose money. Most are free.3 Universities and venture capitalists subsidize them while searching for the class of the future. This cannot continue but their future, we believe, is bright.

Education is only the latest industry to face digital disruption. Music, movies, news, travel and real estate already traveled this path. Conventional business models—charging customers directly for products and services—are often ineffective online. Media companies painfully discovered that free alternatives such as YouTube videos, news blogs, independent fiction, Wikipedia pages, and the ease of piracy place limits on charging for content. Travel agencies discovered, equally painfully, that free alternatives and consumer ratings place limits on charging for bookings and advice.

After years of trying to replicate old business models online, companies, or their competitors, built platforms that offer free service and information as bait to attract users and their activity. These platforms monetize eyeballs, comments, referrals, and relationships based on two key ideas:

  • Charge for complements, including analytics and value-adding activities performed by users.2 Red Hat Linux offers Linux software for free and charges for consulting and technical support. Tumblr offers blogging and social networking for free and charges for analytics. From a MOOC’s perspective, teaching a man to fish allows us to sell him a boat. We can also sell the fish he caught while learning.
  • Charge a different group with interdependent demand.6,7 TripAdvisor offers free advice to travelers and charges airlines and hotels. LinkedIn offers many free services to job seekers and charges recruiters. Teaching a man to fish, we can charge fleet captains who hire him.

The first idea defines what one pays for, which can be content or complement; the second idea specifies who pays. We used these ideas to create a matrix of possible business models, shown in the accompanying table, and identified a number of plausible money models for MOOCs.a We organize our discussion by who pays.

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State Subsidies. Most countries subsidize education as a key state function. The case for subsidizing education based on socially interdependent demand could hardly be stronger. People who complete high school pay more taxes, vote more often, volunteer more often, have higher savings rates that stimulate more investment; commit fewer violent crimes, live longer, use less health care, and consume fewer welfare services.1 MOOCs could be as defensible as Pell grants. This is already happening. Based on San Jose State University’s experiments with edX and Udacity, the state of California plans to expand use of MOOCs to other state campuses.4

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Tuition. We believe education is better positioned than media to generate direct revenue from content. In contrast to music, film, and books, piracy is less likely to limit MOOC charging ability. Digital courses are interactive services whose completion often requires live coordination with other students, graders, and server-based staff. One could watch pirated lectures and work through pirated problems, but it takes the participation of others to answer questions, grade assignments, and ultimately verify completion. Each of these represents a control point ensuring the platform receives payment.b Given pricing power, charges can vary with business and pleasure: degree classes cost more, avocational classes cost less.

In addition to tuition models, MOOCs can also charge based on a variety of freemium models, meaning a business logic where basic course content is free and students pay for complements as with the following examples:

Certification signals to others that a student has mastered course content. Coursera is already experimenting with the idea of making MOOCs available for free but charging for credentialing. One level could certify completion and another could certify skill. The University of Washington, a Coursera partner, is testing a hybrid model of a free MOOC offered simultaneously with more academically rigorous credit-bearing version that includes a fee. Udacity is partnering with Pearson’s extensive network of testing centers to offer similar, fee-based, certification services.

Diagnostics. MOOC platforms can use rich data generated from online interaction to offer personalized diagnostic analytics that identify student strengths and weaknesses and adjust pace of delivery to match. These capabilities can be offered as value-adding fee-based services or extra-credit practice.

Tutoring and Peer Assistance. When students flounder, the MOOC can offer online “genius bars” staffed by faculty experts and accredited students from previous classes, for a fee.c Tutors and peers can answer questions while helping push students to higher achievement.

Collaborative Group Learning. MOOCs have atrocious attrition rates. One solution is to charge students for recommended study groups to help find compatible peers. Another option borrows from “Grameen Banking” where people apply for loans as a team (see http://en.wikipedia.org/wiki/Grameen_Bank). MOOC groups could self-organize and commit to learning like the teams that take out loans together. Study groups solve both the adverse selection problem (bad risk loans/un-committed students) and the moral hazard problem (ex post monitoring/letting your peers down). Pricing in such schemes can be a simple up-front payment with a rebate for completing with one’s peers.

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Recruiting services. To compete on talent, companies can either hire more talented workers or improve the talent they have. MOOC funding models thus have opportunities both pre- and post-employment. To help employers tap into new talent, MOOC analytics can provide information on student qualifications and improve the hiring process. Digital learning platforms generate substantially more detailed insights into prospective employee behaviors than transcripts. Firms can also recruit the best students before they enter the job market.

Udacity has been running a recruiters program using its database of students to identify candidates who would be good matches for openings at partner companies like Google, Amazon, and Facebook among others. The MOOC platform, matching interdependent student and employer profiles, can mediate access for a fee.

MOOCs could be as defensible as Pell grants.

Custom courses. Despite high youth unemployment, many businesses complain of a skills shortage in key areas and of a mismatch between what companies need and what academic institutions produce.5 Businesses can commission MOOCs or specific courses tailored to their requirements. These subsidies can serve both marketing and recruiting purposes. For example, Google could commission a “branded” MOOC on software engineering, with very challenging assignments and exams, carrying a promise that top performers automatically receive internships.

Continuing education. Giving existing workers new skills can be cheaper than hiring new workers. Many Fortune 500 companies support workers’ interests in pursuing additional training via matching funds, time off, and tuition rebates. The low cost and scheduling flexibility of MOOCs makes them very strong candidates for support.

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Sponsored courses. Having attracted vast numbers of “edsumers,”d advertising is an obvious option. Google, Amazon, LinkedIn and professional societies are well positioned to offer or cross-subsidize education. Traditional advertising, however, can distract from learning and classier mechanisms can succeed. Georgia Institute of Technology and AT&T have launched the first online, university certified, degree in computer science. Not only does AT&T gain access to well-trained programmers but online education also increases demand for complementary telecommunications infrastructure. Broadband replaces traditional capital stock.

Access to experts. Inspired by record labels, another complements business model can pursue the lucrative sales associated with star professors. Under “360” or full rights contracts, the big recording labels invest in artist promotion and up-front marketing in exchange for a percentage of artists’ concert and merchandizing revenues. Record labels have expanded their view of assets from the content they produce to the star performers they access. Although lecturers have not traditionally behaved like performers, MOOCs have the potential to create global superstars who generate revenue through speaking engagements, expert witness testimony, and consulting. MOOC platforms could thus double as speakers’ bureaus or expert agencies.

Digital learning platforms generate substantially more detailed insights into prospective employee behaviors than transcripts.

Problem-Sponsored Learning. One interesting new idea blends user-generated content with experiential learning, a business model we call Problem-Sponsored Learning. Organizations facing important challenges can sponsor student projects. As with commissioned works in Renaissance art studios, apprentices can solve problems under the guidance of expert mentors. In the context of MOOCs, tutoring can be partially automated and students can learn from each other. At the scale of thousands, the best solutions should be excellent while the inferior solutions are no longer waste but opportunities for learning. One can imagine even non-profit organizations being able to afford code, graphic design, tax preparation, advertising copy, or data analytics at affordable prices. Patronage has historically sponsored art, music, chemistry, poetry, philosophy, and more.

A modern day stepping-stone to this idea is Innocentive, which operates a platform that matches companies who have problems to people who have solutions. Innocentive organizes online contests where the sponsoring company details their problem and offers a reward. The sponsor selects the preferred solutions, the winners receive rewards, and Innocentive receives a commission. Blending the Innocentive model with experiential learning gives students the opportunity to solve concrete problems and learn new and diverse concepts, as they progress toward mastering new skills. Their final output is also socially useful.

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Other Platforms

Syndication. By 1846, the newspaper industry had discovered it makes no sense for every newspaper to write original articles for every newsworthy story. No single newspaper has the resources nor can any newspaper claim to be most qualified on all topics. The Associated Press introduced the practice of syndication as an obvious solution: member newspapers make their original content available to other members for a fee. In such associations, usually the best-qualified member produces content on a topic and everyone else licenses it, saving production costs and resulting in higher quality.

Today’s traditional universities operate like newspapers that insist on producing original articles of variable quality for all stories. In a world of rising costs and global information transparency this is unsustainable. From an economic standpoint, universities will find it too costly to hire professors for every subject students request. From a quality perspective, students will steer clear of substandard local teaching when they know a blockbuster digital course is available.

We foresee digital course syndication emerging in higher education.

We foresee digital course syndication emerging in higher education: Universities will form consortia (platforms) where they will each contribute their best digital courses, making them available to other members for a fee. Such courses will not necessarily be MOOCs, but, more likely, blended format courses involving local study groups at each participating university.

A startup company called 2U is already experimenting with this business model. 2U is forming a consortium of universities that are, each contributing blended online courses, to be potentially licensed and used by other consortium members. Current 2U members include Boston College, Emory, Notre Dame, Northwestern, and Washington University in St. Louis.

Student recruiting analytics. Traditional universities can become clients of MOOC analytics. As high school students vie for admission to colleges and undergraduates vie for admission to graduate programs, MOOCs can offer valuable data that identify and assess outstanding prospects. In California, for example, the college system often feeds its best students into the university system.

Academia must learn from what writer Jeff Jarvis calls “shovelware,” old products foist on consumers in new media. We are very optimistic. Digital courseware will produce new business models and enormous social value in our increasingly connected world.

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UT1 Table. A framework for organizing MOOC business models.

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    1. Alliance for Excellent Education. The high cost of high school dropouts—What the nation pays for inadequate high schools. Issue Brief, Washington, D.C., 2007.

    2. Cameron, L. and Bazelon, C. The impact of digitization on business models in copyright-driven industries: A review of the economic issues. The Brattle Group, Inc., 2013; http://brattle.com/_documents/UploadLibrary/Upload951.pdf.

    3. Cusumano, M. Are the costs of 'free' too high in online education? Commun. ACM 56, 4 (Apr. 2012).

    4. Lewin, T. and Markov, J. California to give Web courses a big trial. The New York Times (Jan. 15, 2013).

    5. Mourshed, M., Farrell, D., and Barton, D. Education to Employment: Designing a System that Works. McKinsey Center for Government, 2013.

    6. Parker, G., and Van Alstyne, M. Internetwork externalities and free information goods. In Proceedings of the 2nd ACM Conference on Electronic Commerce. ACM, 2000.

    7. Parker, G., and M. Van Alstyne. Two-sided network effects: A theory of information product design. Management Science 51, 10 (Oct. 2005), 1494–1504.

    a. We certainly do not claim our current list is complete and we invite readers to populate cells we left blank with interesting new ideas.

    b. Of course, students might acquire skills using pirated materials then obtain credentials from third-party agencies. Pricing decisions must reflect competition in the same manner that iTunes pricing has curbed music piracy. Reputation effects can also make such students unpopular with employers.

    c. We thank Jeff Jarvis for this idea.

    d. Compliments to Michael Schrage.

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