Industry Analysis: On-Line Higher Education Industry

Industry Analysis: On-Line Higher Education Industry

Today's industries of Higher Education are witnessing a burgeoning interest in the use of the Internet. The rise of the Internet, by information technologies and business application, represents a large base of potential customers for e-commerce activities. Generally, it can be said that e-commerce is a highly significant way of conducting business. For that very reason, a widespread of universities and colleges actively exploit opportunities created by the growth of e-commerce by initiating on line courses and degrees to accommodate this demand. This industry analysis will capture the principal effects that e-commerce, i.e. on line courses, may have, as compared to those of conventional Higher Education Industries, as well as explore the barriers and opportunities that may face each. These issues are examined using market research, newspaper articles, and annual industry reports.

Higher Education Firms are undertaking growing numbers of e-commerce initiatives and increasingly offering on-line incentives required to participate in the growing online market. A range of on-line incentives includes expedited degrees, decreased tuition fees and minimal face-to-face time with instructors. However, to realize these gains of on-line courses and the associated incentives requires fundamental Internet knowledge and a high degree of competency with on-line universities in offering adequate resources. Higher Education institutions are producers of information concentrated products, and may face a raft of challenges when instilling these new competencies.

The Gartner Group estimates that firms creating e-commerce sites spend $1 million in the first five months, and $20 million for a place in cyberspace that sets them apart from the competition. These costs are projected to increase at a rate of over 25% per year over the next two years. An examination of the annual reports of Online Higher Education companies reflects the magnitude of these costs. South University's annual report for 2003 reveals that the firm spent $152 million on advertisement, equipment, and software, amounting to 9% of their annual revenues for the year. This figure for Capella.edu is $34 million (16% of revenue). Once these investments are in place, the costs of entry into virtual universities mainly include considerable marketing expenses. Activities such as the placement of banner ads in portal sites are $12 million (12% of revenue). Transaction and organizational costs affect every educational institution. The potential of Virtual Universities to reduce these costs is most important, because the cost affect the consumers.

Comparisons to campus education also create economic challenges to online institutions. Campus education is a normal good, and on-line courses in part are inferior. Therefore, as incomes rise people will demand more face-to-face Higher Education. Economic theory insinuates that the introduction of new on-line inducements will be associated with a short-run decline in the demand for campus education. This decline may be caused by a reduced rate of growth. Other variables affecting demand for campus education are also changing, for example, population levels, age composition, income levels and the returns to higher education. Therefore, in the long term the demand for campus education with income and might even rise as the cost of on-line education falls. In the short term there might be relatively low, or negative, growth in the demand for campus education and rapid growth from a very low base for on-line incentives.

Commentators have, among other things, heralded the arrival of a new economy and foretold the total transformation of higher education, including: the rise of the virtual university, global competition in education and the end of campus education. Despite these incentives though, e-universities still may face some challenges.

Four broad lessons for higher education can be drawn from the preceding review of the

emerging economics of e-commerce. First, and most importantly, the future of campus

education turns, in part, on whether it is a normal or inferior good. This distinction makes

it possible to address questions like, what will happen to the demand for the shared, faceto-

face, educational experience offered on thousands of different campuses across the

globe in light of the alternatives provided by on-line instruction? What initial impact will

the new delivery mode have and what will be the longer term effects as incomes rise and

the costs of on-line delivery fall?

Economic choice theory modelling suggests that the introduction of a new delivery mode

will be associated with a short-run decline in the demand for campus education. This

decline might only be in the form of a reduced rate of growth as other variables affecting

demand for campus education are also continuously changing like population levels and

age composition, income levels and the returns to higher education. As for the longer

term, there are strong grounds to see campus education as a normal good, that is demand

for campus education rises with income and might even rise as the cost of on-line

education falls. Thus in the short term there might be relatively low, or negative, growth

in the demand for campus education and rapid growth from a very low base for on-line

delivery. In the medium to longer term this seems likely to reverse with relatively strong

growth in the demand for campus education and relatively weak growth in on-line

delivery.

The second lesson follows from the far-reaching potential of e-commerce as a new way of

doing business that can reach into all aspects of our lives. This suggests a correspondingly

far-reaching integration into education and training. Information technology literacy

might become as important as numeracy in education