If you spend some time browsing the Google News search results for ‘OPM “revenue share”‘, you’ll find one industry figure who seems nearly ubiquitous, particularly in pieces by general audience news outlets: John Katzman. Mr. Katzman, currently the founding CEO of OPM company Noodle Partners, is one of those rare individuals who has been extremely successful as a serial entrepreneur in education. He founded both Princeton Review and 2U before going on to start Noodle. In his current incarnation as Noodle Partners CEO, Katzman is waging a publicity war against the OPM revenue share model that companies like his last one—2U—are built on. Josh Kim’s recent interview with him in Inside Higher Ed is quite revealing and tells us a lot about the real debate surrounding OPM revenue sharing.
Josh starts the interview by quoting a two-year-old opinion piece Katzman wrote for the Hechinger Report:
In three years, no one will be able to explain why it was that colleges and universities continued to hand more than half of their tuition to companies marketing and supporting their online programs — the online program managers. It will be even more challenging to explain why some agreed to contractually share their tuition for the next 10 or 15 years.
In that same piece, Katzman referred to traditional OPM revenue sharing agreements as “payday loans” and wrote,
I’m suggesting the time for the ‘share the bounty’ approach to online education is over. This approach is driving up education costs (and student debt) and fueling a marketing race as schools and online program managers spend more and more to recruit and retain online students.
That online program managers continue to sell their outdated and misaligned tuition-sharing model fuels the suspicion and mistrust educators have for for-profit education companies. Those of us who believe for-profit investment and innovation can improve the quality and accessibility of education are obligated to raise our voices when things go off the rails or become ineffective or outdated – as the revenue sharing model has….
Few, if any, institutions can afford to share their tuition and none can afford the all-out marketing war that outside companies will be all too happy to wage for a cut of the action.
The good news is that the market knows a change is coming. Tuition-sharing percentages are trending down and contracts are getting shorter. More colleges are investing in in-house solutions to recruit and manage their online offerings. And fee-for-service management options like the one my company offers are also becoming more abundant. That’s progress.
Pretty harsh words, especially from a guy who founded one of the most successful OPMs in the industry. Has Katzman softened his stance in the last two years?
Nope.
Here’s what he says in response to Josh’s question about whether the OPM industry should form an association:
My job is to decimate the OPM industry, which is driving up higher ed tuition. So … perhaps, but doubt they’d want me in it.
Clearly, Katzman is on a mission to kill revenue sharing agreements. Here’s what he says in response to Josh’s question about how universities can manage the up-front costs of building an online program without revenue-sharing agreements:
Some traditional OPMs are trying to position us as fee for service, but Noodle also offers a temporary revenue-share option in which we fund a program and take on all risk. The school pays a share of revenue, but only until we have recouped our out-of-pocket expenses for its programs, after which it pays for actual services. This is the best of both worlds, and about half our schools take advantage of it.
Wait. What?
Noodle Partners’ position gets flattened into “revenue sharing bad,” partly because it makes good headlines, partly because Mr. Katzman knows it makes good headlines, and partly because Noodle Partners’ position has evolved. According to the Wayback Machine, Noodle Partners’ 2016 version of their web site said the following about financing:
Choosing to work with Noodle Partners is the most affordable route to great, quality online programming. While there is an up-front investment necessary to launch your programming, Noodle Partners can work with you to get outside capital from a trusted, low-interest financing partner.
In the IHE interview—and on the 2018 Noodle Partners web site—the positioning regarding revenue sharing is more nuanced.
But if revenue sharing isn’t the core problem that Noodle Partners is intended to rectify (anymore?), then what is? Is it the bundling? Here’s what Mr. Katzman says to Josh on that point:
[U]nbundling isn’t exactly what we’re doing. A program needs instructional design, marketing, recruiting, funding, technology and support services; we’re just comfortable with helping a school build capacity rather than use outside providers exclusively. Any way our competitors follow us, though, they will leave Noodle as the leader in the next-generation OPM space.
In my last two posts, I talked about OPMs being long-term partners in the ongoing management of online programs. I also argued that unbundling of services opens up a world of possibilities for solving different problems, and that we therefore need an umbrella product category called “Digital Enablement Solutions” with other (emerging) subcategories that could live along side Online Program Management. Noodle Partners isn’t unbundling services but is rejecting the model of the long-term full-service management of online programs by the company.
So what does that make them?
I would call the service that Katzman describes “Online Program Enablement (OPE).” In this model, the vendor may offer revenue sharing or some other form of financing designed to cover the up-front costs of full-service support for the program launch, but then unbundles those services to some extent and allows customers to pay for them as needed on a fee-for-service basis. That shift in models after the program launch is what distinguishes an OPE from an OPM.
Katzman characterizes the shift as “next-generation OPM,” but the resulting service really solves a different problem than an OPM does. If you think your institution is best served by focusing on its current core competencies and outsourcing the lion’s share of online program management work to a specialist on an ongoing basis, then an OPM service is what you want. If, on the other hand, you want full-service support (and financing) to launch your program but want to take over management of significant portions of it once it is up and running, then an OPE service is really what you want.
How much OPM and OPE services are ultimately going to compete or just co-exist is an open question. At the moment, we don’t see a lot of evidence that OPE growth is coming at the expense of OPM growth. There is likely a Venn diagram of potential customers between the two product categories, but we won’t know the size of the overlap for a while. In fact, we have very little visibility into OPE growth, in part because many service providers are offering multiple pricing options these days. There’s still a lot of improvisation going on without a lot of thought about how tinkering with the pricing model changes the offering enough to put it into a different product category.
The main point, once again, is that many significantly different offerings are getting crammed into the OPM product category because it’s the only product category that we have. This obscures the fact that some of these services are different enough from each other that they solve different problems from each other. And the differences that tip an offering into a different product category are not always obvious.
Hi Michael: I appreciate your note, but perhaps we have not made our model clear enough. Noodle can and does provide a full suite of services to launch and scale an online program. We do so with transparency, flexibility, and much much less expense than a traditional OPM, and we’ll use our Temporary Revenue Share program to allow schools to launch without cash or risk. Hence my belief that we’re a next-generation OPM.
If a university has internal strengths (for instance, in instructional design), we will support, rather than supplant, its team. That would, I guess, make us an OPE in your book, but I believe this is a distinction without a difference.
Glad to discuss anytime!
Thanks for the comment, John.
You have made your model clear enough; I’m just not persuaded by your characterization of it, either in theory or in practice.
In theory, outsourcing is well-trodden ground outside of academia. Organizations of all shapes and sizes make decisions all the time about which capabilities they feel is core to their mission or differentiation and therefore must be owned by the organization and which ones are best handled by outside specialists. Different organizations of the same type in the same sector will make different decisions based on their respective capabilities, limitations, and aspirations. There have been pendulum swings between “outsourcing” and “insourcing” in various industries. The fashions come and go, leaving the clear lesson that, in many cases, one size doesn’t fit all. So it very much can be a distinction with a difference.
In practice, there is a question in higher education about which services that universities need to start up online programs will also be services that a substantial portion of them will want to continue to externally source. That is the crux of “next-generation” versus “solves a different problem” question. By calling your service “next-generation,” you are making an empirical claim that the percentage of the market that will continue with long-term, full-service, revenue-sharing arrangements is going to be small because it doesn’t make sense for most organizations. We don’t yet see evidence of a stampede to your model, and I personally don’t think we will see a clear signal one way or the other for quite a while in this still-immature and chaotic market.
That said, we’re always open to persuasion by the evidence.
As you note, Michael, the crux is the outlook for “long-term, full-service, revenue-sharing” arrangements, and Noodle’s differentiation. Let’s take one at a time:
Long term contracts generally favor the vendor, but they make sense given high investment by the vendor, and are OK by me. Our universities may choose a term from 3-20 years.
Full-service is fine too, and for most of our schools, we handle everything that traditional OPMs handle. But some schools are building internal capacity in areas like instructional design. And more importantly, forward-leaning schools are looking to blend their online and on-campus programs (do you really want two marketing groups competing with one another for keywords?). We simply offer flexibility.
Traditional OPM revenue shares are both too opaque and too expensive. When I started 2U, it cost $15mm to launch and scale a program, and there was high risk; the cost is now $2.5mm and the risk is far lower. A 50-70% revenue share in 2018 usually means that $15-30,000 of a student’s tuition is Wall Street profit. The temporary revenue share is a bridge to an inexpensive, transparent, agile, well-aligned partnership.
I admit it’s not yet a stampede, but Noodle is growing *far* faster than any other OPM. And it’s none too soon–aren’t you *glad* that we’re moving past an expensive transitional moment, or would you prefer a future in which universities routinely spent two thirds of tuition for some marketing and tech services?
John, much of your response here is Noodle Partners’ sale pitch. I don’t mean that in a derogatory sense; I simply mean that you’re providing your company’s argument as to why your offering is superior to that of your competitors. By itself, it doesn’t tell us anything about the views or behavior of the growing swath of the higher education sector that makes up the prospective OPM customer base. My analysis is based on the latter type of information. It’s based on what we see happening in the market and what we hear when we talk to universities, both as analysts and as consultants who facilitate OPM needs assessment and procurement processes for some of our university clients.
At the moment, we are seeing a market with dozens of vendors. The number of vendors in the market is still growing. Many of the more established vendors offer multiple service bundles and financing models, while many of the newer vendors are experimenting with novel combinations and chasing different specialty niches. A significant number of these vendors appear to be growing. Universities are watching these developments with interest but are confused about how to think about the profusion of very different options that are being offered to them.
All of this suggests to us that the OPM market is still in the process of forming. The cement isn’t dry yet. We don’t yet know in practice which models will be successful in the long term. (I’m quite sure there will be more than one successful model.)
At this stage of market development, one of our roles as analysts is to help clarify the differences among the options so that customers can identify the combinations of vendor services and requirements that best fit their particular problem. In my post, I characterized the details of Noodle Partners’ offering as objectively as I can, based on your interview and your company’s web site. And I provided e-Literate academic readers with a perspective on how those details might be relevant to the way that they are thinking about the challenges that they are facing at their own institutions. But we don’t make “better” or “worse” judgments lightly on this publication. And right now, no vendor argument is likely to persuade us on “better” or “worse” for OPM and OPM-like models. We are going to watch (1) which solutions universities choose, and (2) how well the universities do with their chosen solutions.