College tech deal folds

Financial concerns fail to make four high-tech firms business partners with the world's largest university system.

4 min read
A groundbreaking deal to make four high-tech heavyweights business partners with the world's largest university system has been scrapped after financial negotiations collapsed.

Microsoft and Hughes Electronics pulled out of the proposed ten-year deal with the California State University system in April. Now GTE and Fujitsu are the latest to go, marking the official end to the controversial plan to create a limited liability corporation known as the California Education Technology Initiative (CETI).

As reported earlier, CETI was proposed after CSU sought out corporate partners to help finance a $300 million technological and telecommunications retrofit for its 23 campuses by the year 2000.

In exchange for seed See related story: Microsoft college deal shaky money to start the high-tech face-lift and subsequent upgrades, CSU promised to develop revenue streams with the companies to ensure they would get a decent payback. The plan was expected to pull in an estimated $3.8 billion in revenues over the next decade.

Administrators still expect some semblance of the effort to prevail. "We're not back to square one," David Ernst, executive director of integrated technology strategy for CSU, said today.

The university system's dilemma is one that many higher-education institutions are facing--how to turn out highly skilled information technology workers and generally tech-savvy graduates with limited resources for necessary technology upgrades.

Following Microsoft's lead, GTE and Fujitsu backed out of the deal citing disagreements over how much money the companies would be expected to invest, who was to take the financial risk for the partnership's ventures, and--perhaps most importantly--how future revenues would be doled out.

"We were unable to arrive at a financial plan that was responsive to CSU and our shareholders. It was purely a financial problem," GTE spokesman Larry Cox said today.

GTE said it will continue to work with CSU, but not through a partnership like CETI.

"We are disappointed that after careful risk analysis, CSU and GTE mutually concluded that the financial plan of the proposed partnership could not meet the needs of all of the partners involved." CSU chancellor Charles Reed said in a statement. "GTE has negotiated in good faith, and I applaud the way the team has comported itself throughout this process."

When the phrase "exclusive providers" showed up in an early draft of the business plan last year, students, faculty, lawmakers, and competitors of the partners began decrying the deal on grounds that it would give the partners a privileged crack at marketing and selling new services and products to CSU's 350,000-person community.

Although CSU denied that Microsoft and the others would get a product stronghold on its campuses, opponents worried that the plan would limit technology choices. Educators feared they would be forced to use instructional and distance learning materials developed by CETI, which was a business venture proposed by the GTE team when it applied to work with CSU.

At the time, criticism was heightened by the federal probe into Microsoft's allegedly anticompetitive business practices.

GTE spearheaded the proposal, which has been on shaky ground since the state legislature held public hearings in January. The final plan was initially set to be signed that month, but then was pushed back to April 1, and then delayed once again until this fall.

When Microsoft bailed out, it also said it wasn't satisfied with how the revenue earnings and investment risk liability were being balanced between the university system and partners.

Still, the software giant has struck lucrative deals with other colleges--a signal that the CETI alliance was probably not as meaty for its partners as they first thought. For example, in March, Microsoft sealed a $6 million agreement to supply its suite of products to 100,000 students and staff at Indiana University.

For CSU's part, it now will investigate other scenarios to retrofit its campuses.

"The CSU will spend the next several weeks assessing potential new funding sources and developing new approaches with current and new industry participants," Chancellor Reed said.

One upshot is that the state's budget surplus could provide part of the needed cash infusion. But the state may not be able to support the ambitious technology plan for the long haul.

"I wish I had a magic wand and could say the legislature is going to allocate money to the CSU specifically for technology, but I can't say that," said Paul Smith, a spokesman for Rep. Ted Lempert of Palo Alto, who chairs the State Assembly's Committee of Higher Education and called the CETI hearing in January.

"Hopefully, whatever the CSU does, it will include all the players such as faculty, students, each campus administration, and the legislature," Smith added. "Whether it is a private-public partnership or something similar, my recommendation is that CSU make sure it has real consensus for what it is submitting. Clearly that did not exist with CETI."

Still, CSU isn't banking on the state to come through with enough money to finish the job by 2000.

"The job is still there to be done," CSU's Ernst added. "The one thing we will never fall back into assuming is that the state will be there to provide the entire funding. Now we have a detailed plan as to how we want to implement the network and support services."