Is the edX Acquisition a Big Deal?

I’ve been inundated with questions regarding what I think about 2U’s acquisition of edX. What do I think? I’ve been struck by how much less I care about this deal today than I would have a few years ago. That change is entirely due to my change in focus rather than external circumstances. e-Literate used to be, in part, an EdTech industry analysis site for its own sake. While I still do some EdTech industry analysis, I’m much more focused on how EdTech influences the direction of the education sector as a whole, particularly with regard to becoming more effective at sustainably helping more students. Due to that shift in perspective, the edX acquisition moves from “a huge deal” to “somewhat interesting” for me.

How much you should care about the edX acquisition depends on what you care about. So I’m going to write about that.

Who cares about the edX acquisition?

You can learn a lot about whether you, personally, should care about the acquisition by looking at who else cares and why. It’s a little early to answer this question entirely; I’m asking around at the moment. But we do have some early obvious answers.

MIT and Harvard

First of all, MIT and Harvard care. On one hand, edX was a money loser. Most EdTech companies are. They lose money for a very long time and then only become slightly profitable. Investors can be OK with this if “slightly profitable” is also “reliably profitable.” They can take a long view, in a way. I say “in a way” because many types of investors that put money into an EdTech company on its way to profitability sell their stakes long before their investments achieve their goal. As long as a critical mass of investors believe that these companies will eventually be profitable, then one investor may well be willing to buy a stake in an unprofitable company from another.

On the other hand, universities aren’t in that game in the same way. As far as I’ve been able to piece together, edX was rushed out the door to get ahead of the imminent launch of Coursera. It wasn’t a strategy. It was a reaction. It was also a money loser. According to Tech Crunch, “The institutions, of course, have thrown in a cumulative $80 million in donations into edX to keep the operation free.” That’s a surprisingly shallow and naive assessment from a publication that’s all about tech companies.1 First, edX fees to students (or lack thereof) have more or less aligned Coursera’s. Second, both edX and Coursera are two-sided markets. While edX ultimately makes its money off of student purchases, it does so via a revenue share agreement with the universities, which, once again, is not terribly different from Coursera’s revenue share agreement. The basic idea in both cases is to be the Amazon of MOOCs. Get everyone to sell everything through your storefront. Collect a small dollar amount (but a large percentage) of each transaction as your fee. Attract enough customers so that the small dollar amounts add up over time. To the degree that edX had a business plan beyond “do whatever Coursera does,” this was it. It wasn’t obvious that edX would be an asset they would ultimately sell. Their external justifications for edX were always mission-related. Since I have only been able to gather fragments of information about their internal deliberations over the year, I’ll take them at their word on that. I don’t know the degree to which they understood that their commitment entailed losing money every year for the long haul.

When 2U swooped in, that gave MIT and Harvard an opportunity to get out of that money trap, declare victory, and make a handsome return on their investment. If Tech Crunch’s numbers are right, then the two universities made 10X on their 9-year investment. Is that good? It depends on your perspective. VCs generally look to make a 10X return in five years, and I suspect that those numbers may be less ambitious in EdTech specifically. For MIT and Harvard, I suspect it was a massive unexpected windfall that got rid of some problems and created some opportunities for them.

2U

Obviously, 2U wouldn’t have forked over $800 million—in cash—if they didn’t think edX would be a big deal for them. Why? Phil Hill writes:

Coursera’s market value is roughly 18 times its annual revenue whereas 2U’s is roughly 4. These are rough numbers, but I believe 2U’s leadership believes it an command an increased value as this deal completes. Note that I am not predicting stock prices here, just showing the potential change in market perception.

Three Charts that Help Explain the 2U/edX Acquisition

But that only pushes the question back a level. Why do investors think that Coursera is so much more valuable than 2U? The short answer is that one of the most expensive parts of an OPM business—and Coursera definitely is an OPM, as this transaction demonstrates—is marketing for new students. Investors believe both Coursera’s and 2U’s claims that owning a MOOC business helps lower the marketing costs for their core OPM businesses. 2U’s public estimates are that they can save 15% on marketing costs. I’m somewhat skeptical of this claim but I’m also not a financial analyst, so I’ll take it at face value.

2U has a handful of other potential business justifications, most of which I won’t break down here because, again, it’s not the focus of my writing anymore. I’ll briefly share a few of them, not because they’re the most important but because they’re illustrative and easy to explain succinctly. First, 2U has always aspired to transform the entire education sector by bringing it online. However you may feel about that aspiration—I recognize that feelings tend to run very hot about OPMs—owning a major MOOC platform gives the company’s aspiration more depth.

Second, edX reaches a lot of students in a lot of countries. The international EdTech market has been a long time coming, but it’s finally arrived. edX greatly expands 2U’s international footprint by some measures, which once again gives them a good story to tell.

And this brings me to the final advantage I’ll point out in this post. 2U has always been about telling a compelling narrative about the future. One of Chip Paucek’s previous ventures was a company that had comedians explain educational concepts on a television show. He understands how to build a story. He knows how to hit the beats. When WeWork was at peak hype, he made a deal with WeWork. When code academies were red hot, he bought one of the hottest code academies. Given Coursera’s recent success in the markets, it makes sense that he would look to make the biggest, boldest MOOC move possible.

To be clear, I’m not saying that the CEO of this publicly traded company made these deals solely or primarily to spin a good story. I’m simply pointing out that Chip has a method for responding to market changes. If he believes that getting into a particular business is good for 2U, he will not make his move by quietly dipping his toe in the water. He’s going to jump in with both feet and make a big splash in the process. The edX acquisition fits with that method.

2U’s and edX’s university partners

While it’s too early to make pronouncements with any confidence, early reactions I’ve heard indicate that 2U’s university partners are pretty happy with the transaction while edX’s university partners are pretty unhappy. For 2U’s partners, they already decided to go with the big publicly traded corporation that, for better and worse, is heavily associated with revenue-sharing deals. Now they can do MOOCs with the same company. This deal gives them nothing but upside. On the other hand, many edX partners specifically went with edX because they did not want to deal with the for-profit Coursera. Yes, edX had its revenue-sharing agreement too, but it was a non-profit run by universities. That made it feel different for some.

2U may have to deal with some of the kind of backlash that Blackboard did when it bought other LMS companies—particularly Moodle support companies. They may lose some universities. Then again, 2U is definitely not Blackboard. Especially Blackboard circa 2012 (although, ironically, edX was formed the same year Blackboard acquired Moodlerooms). 2U built its business by winning over faculty senates. Also, while the company may lose some edX customers, it may gain some by cross-selling to its existing customer base. It’s hard to say how all this will play out, net-net. All I can say with confidence right now is that people at the edX schools I’ve talked to so far are understandably nervous.

Who doesn’t care

I doubt students will even notice. I take that as one strong indicator of how I should feel. It’s not clear to me that Coursera has done anything edX hasn’t and that would or should concern students. I could be wrong; I haven’t looked closely at this aspect. (Please correct me in the comments section if you know something I don’t.) Further, I have no reason to believe that 2U’s behavior will be worse than Coursera has been.

MOOCs strike me as a relatively low-risk corner of EdTech for heavy corporate involvement. My sense is that, if 2U sees edX primarily as a way of making marketing dollars go further, then they have a vested interest in keeping students happily engaged. Yes, they’ll use student data to target them for marketing, but if you are shocked by that, then you should maybe take a look at all free products that you use (possibly including the email service that you are reading this blog post through). As long as the MOOCs are transparent about what they’re doing, it’s probably OK in that particular market. In fact, those particular learners may want to receive targeted ads about other learning opportunities.

The ways in which I care

In and of itself, I’m indifferent to this deal. I’m not opposed to revenue-share OPMs in general or 2U in particular. (This is an outdated argument anyway since the major OPMs generally offer non-revenue-sharing arrangements of various flavors these days.) At first blush, I don’t see any big harm to students or institutions in it. (I reserve the right to change my mind in either direction as I learn more.) Since xMOOCs have not turned out to be the end of academia as we know it, either in the revolutionary sense or the armageddon sense, I’m inclined to feel mildly positive toward an arrangement that gives a major provider a sustainable path forward. MOOCs are one more arrow in the quiver as we try to offer everyone in the world the opportunity to fulfill their potential through education. I’m not going to turn my nose up at that. I like the folks I know at both edX and 2U. While I don’t always agree with them, I’d like to see them make a contribution with their new venture. I’ll wait and see and wish them well.

Beyond that, I mostly care about two aspects that I haven’t seen talked about much in any of the coverage. First, there’s the open-source code. While I frankly think the early iterations of OpenEdX were embarrassingly bad and improved over time to “surprisingly OK given how embarrassingly the foundations were,” I do think there is value in maintaining an open-source MOOC platform. I am skeptical that 2U has the DNA necessary to steward an academic open-source community. I know how good 2U can be at working with academics and I also know what it’s like to steward an academic open-source software community. These two things are not the same.

Second and more importantly, I’m worried about the loss of research. Thanks to the efforts of researchers like Justin Reich and Rene Kizilcec, edX has been one of very few public testbeds we have for conducting credible learning efficacy research at scale. 2U, in contrast, has done nothing visible in the area of learning science. They’ve started talking about it in the past year or two, but frankly, if e-Literate were still doing the cop-on-the-beat thing, I probably would have shredded them about it by now. In 2021, there is absolutely no excuse for any EdTech company of 2U’s (or Coursera’s) size and scale not to be engaging actively with academics in serious applied learning science and contributing to our collective knowledge. If 2U can spend $800 million—in cash—for a MOOC organization that loses money every year, the company can surely afford to invest one-half of one percent of that every year in a credible program to advance the state of knowledge and literacy in effective teaching practices. And now that they own a platform for conducting such research at scale, the onus on them has only increased.

The same goes for MIT and Harvard, by the way. Despite the excellent work of a few researchers, and despite the rhetoric of the institutions at the time that edX was launched, one reason we have not gotten more and better research out of edX is that the platform, incredibly, was poorly designed for educational research. How did MIT build a platform for massive-scale learning in 2012 and fail to think about what sorts of educational data and metadata they would need to facilitate research? What does that tell us about the real priorities behind the initial push to production? It’s a mystery.

I’m not particularly interested in the vague promises of two rich universities to do good in the world with their $700 million windfall from a non-profit that was supposed to educate the whole world. I’d like to see a credible plan this time, including a theory of change.