Business schools face a challenging future

Tuition-based universities are doing something counterintuitive: competing with each other to deliver their content online and for free. Last year Stanford University offered free courses on machine learning, database systems and artificial intelligence to more than 100,000 students. Many other professors are also making their material available online.

Indeed, some universities offer courses where the class preparation requires watching the lecture online and the synchronous part of the class – whether face-to-face or online – is devoted to problem-solving and discussion. Technology is disrupting the traditional lecture-based model and many believe this new paradigm of instruction is superior in important ways. Consumers can view the online lecture multiple times at their own pace until the concepts are clear and the instructor’s time can be used more creatively than in the traditional lecture format. And of course, the real kicker for the consumer is that it is all virtually free.

Why are brand-name universities giving away intellectual property online for free? These institutions are in the early stages of executing a global strategy to capture new markets, and plan in the future to apply the “freemium” model to make money from their IP. In a freemium model – which companies commonly use after creating a sizeable user base on the internet by offering a free product – the free part ultimately becomes bare-bones relative to the premium parts, for which people are eventually required to pay. However, this new “knowledge market” model is not without risk.

We know that brand-name universities have a good product, refined over decades of research and innovation in teaching. They are moving quickly to establish a first-mover advantage. It is logical to expect that once they do so, they could start charging for the product in the expectation that people will pay for their brand. However, the internet is lowering barriers to entry, making it easy for newer, lesser-known players to establish a large user base quickly and at low cost if they make a desirable platform available for free. As a result scores of providers in other countries, including India, China and Russia, are scrambling to mimic the content of brand-name schools.

Technology is creating a new market and, with it, new competition. Top-branded universities may soon find themselves competing on price with lower-tier brands and potentially losing the battle. Brand-name universities have reason to worry over the long run. Their edge has been solid reputations and knowledge, honed over decades, which have not “travelled” freely until now. IT has changed that forever, making the previously scarce human resource available as a high-quality digital commodity in plentiful supply. Information is fluid and malleable. Once it is separated from its source, it is easily copied, modified and even improved.

IT will continue to improve the ability for universities to certify their degree programmes. Highly motivated imitators will mimic the brand-name schools extremely well and will slowly but surely build reputation. These imitators may not be as good as top-ranked schools but they will be good enough and at much lower cost. Once these newer actors are established as brands, they will find it easier to move up the value chain, as has played out in other industries.

While top-branded universities will face tough competition, they will still offer a competitive advantage because their brand carries weight among consumers. If they can expand the online market and combine it with a high-touch offering through their bricks and mortar, they can create solid niches for themselves. For example, they may adopt a hybrid model by selecting their online programme participants and still provide some of the networking benefits and physical contact with professors associated with traditional education.

Some believe there is no substitute for the classroom experience, that people will still want discussion and hand-holding. This could be wishful thinking and ignores the fact that, until now, people have not had access to high-quality content created by the very best people or have not had such high-quality interaction with instructors and cohort networks. Why would someone select a university in the hinterland with an unknown brand when they have access to the best brand-name schools virtually free? The odds seem to be stacked in favour of universities located in dynamic urban centres whose strategy could be to capture global market share rapidly and enable their students to experience at least some of the high touch and networking associated with traditional education. The future for non-brand name institutions seems bleak unless they can craft an appealing niche strategy or establish partnerships with the brand-name universities.

People forget that many of the innovators of new technologies have disappeared into the dust. Will motivated private actors and educational institutions in lower-cost regions of the world similarly disrupt the current brand-name heavyweights over the next few decades? Or will the existing brands set out to capture the global knowledge marketplace before that happens? If history is any guide, the future will be a challenging one for universities.

Vasant Dhar is a professor at NYU Stern School of Business and is co-director of the Center For Business Analytics.