The numbers tell the story.

"Eight years ago, there were no publicly traded education firms," explained Joshua Lewis, Managing Director of E.M. Warburg Pincus, the world's largest venture equity firm.

"Today, $20 billion is in the market. To go from zero to $20 billion in seven years is remarkable."

Lewis was one of several experts in for-profit education invited to participate in a daylong conference at Teachers College earlier this year. TC's Institute on Education and Government (IEG) convened the conference.

Gaston Caperton, former governor of West Virginia and the former Director of IEG, said: "This is an all-star group of people." Participants included Dennis Keller, CEO of DeVry, Inc.; Benno C. Schmidt, Jr., Chairman of the board of the Edison Project; John Sperling, CEO of the Apollo Group, which is the parent company of the University of Phoenix; and several representatives of venture capital firms.

"Wall Street has woken up to the fact that education can be a good business," said Lewis. "It's a shadow business, but it is growing."

In general, Lewis said that the market is interested in investing in scientific learning, such as working with children who are dyslexic, and it is interested in skills learning and job training programs. Specifically, Warburg Pinus is interested in K-12 programs, postsecondary education, at-risk students, special education, and technology.

Howard Block, Vice President of BancBoston Robertson Stephens, said: "The businesses that will succeed are those who fit comfortably in the existing landscape. Currently the businesses that are thriving in education are ancillary businesses, such as food service, busing, and maintenance."
"It's clearly not a new market," said Block. "But now, we're seeing businesses more toward the core-instruction."

Among those examples of for-profit success in education are Advantage Learning Systems and Sylvan Learning Systems, he said. Advantage, which is based in Wisconsin, has developed software that encourages children to read more. It is the type of software that most schools can run now. The company also runs an institute for training teachers to use the software.

As for Sylvan, Block said: "Most people think of it as a tutoring service. In fact, tutoring is about one-fourth the size of its testing business." In addition, he said that they have a contract business in which schools and colleges hire them to serve students who are difficult to teach, such as remedial students.
(A division of Sylvan, Caliber Learning Systems is partnered with the Wharton School of Business, the Johns Hopkins University and Teachers College to provide technology mediated instruction.)

For-profit education businesses, such as the University of Phoenix and DeVry, tend to have modern equipment and smaller class sizes, said Keith Gay, Managing Director of NationsBanc Montgomery Securities. "What we're seeing is a new paradigm in higher education," he said. "Higher education needs to become more sensitive to learners needs. Learners mobility is being replaced by content mobility."

Michael Moe, Director of Global Growth Stock Research for Merrill Lynch, said education is where healthcare was 20 years ago. "I don't know if there is a more dysfunctional business than education," he said. "Businesses are looking at students who come out of our schools saying: 'They can't read. They can't write.'"

For-profits are saying they can provide education for less money, said Moe. "They are saying that they can produce better outcomes for the same money," he explained.

Schmidt said that the most difficult obstacle for businesses such as the Edison Project is overcoming the perception that "Profit and education just don't mix."

The concern, Schmidt said, is that "if you're for-profit, you're going to care more about making money than educating kids. Education has to be an altruistic enterprise."

The reality is that the Edison Project and other for-profit education companies have to do a good job to overcome that perception and to compete with public schools and other traditional education providers, he said.

"We can only make a convincing case if what we offer is of much higher quality," he said. "We offer a longer school day and a longer school year. We'll add almost 50 percent to the opportunity for learning and for the same money."

He said that once Edison agrees to manage a school, it starts investing money into the project. Edison schools pay teachers 10 to 12 percent more than the local public schools. The teachers go through six to eight weeks of training. Computers are placed in the homes of all students from the third grade up and all the computers are networked to the schools.
Edison currently operates 51 schools. In three years, he hopes to raise that number to 200.

"So far, the results on school performance are pretty gratifying," said Schmidt, who was President of Yale University before joining Edison. "The average gain is 5 percent a year." That's using nationally normed tests in schools where 60 percent of the children quality for Title I assistance.
"Edison will run operating deficits for the first 10 years," he said. "A for-profit can operate with a long term view in a way that non-profits can't."
Frank Newman, President of the Education Commission of the States, asked Schmidt if he believes competition will improve the public school system.

Schmidt responded with an emphatic yes. "When we opened our Colorado Springs school, we were the only one to have all-day kindergarten. Now, all the schools have all-day kindergarten. It just sets up a dynamic."
In a way, the University of Phoenix is having a similar impact on higher education. Its founder, John Sperling, was a faculty member at San Jose State University in California who specialized in higher education curriculum development.

The University of Phoenix has a practitioner faculty instead of a professional faculty. He created a centralized curriculum. The class sizes averaged 13 to 16 students. He integrated the curriculum with the students work life.
"You might imagine the response from traditional institutions was negative," he said. "The first thing the regents of the University of Arizona system did was to denounce the University of Phoenix."

But enrollment figures are proof of Sperling's success. Enrollment has climbed from 10,000 in 1990 to 57,000 in 1998. Some 4,000 students take all their classes online.

Dennis Keller, Chairman of DeVry, which offers postsecondary degrees in business and technology, said: "I think the impact (of for-profit education on non-profit education) has been positive. I call it friendly competition. In higher education, we've always had competition and choice."

For-profit educators have an advantage, he said. "Nobody cares like an owner. When it's everybody's money, it's nobody's money."

But Newman maintained that it is not a case of one method being better than the other.

"There is a tremendous opportunity for us. The task is to figure out a system that will use these parts," Newman said. "It's not an issue of what's better public or private, non-profit or for-profit."

Published Tuesday, Sep. 18, 2001