E-learning companies look smart even in a down market

Stock in many education companies is hovering near 52-week highs, and analysts are lavishing praise on the small but growing industry. Although investors dismissed the for-profit education industry in the mid-1990s as dull and risk-averse, it has roared back into favor and is enjoying the spotlight as a reliable, recession-proof haven for those who have grown weary of technology stocks' hair-raising volatility.

But it's hard to predict how long the online-learning industry's Wall Street honeymoon will last. Although some of the companies predate the popularization of the Internet, they are expanding heavily into Web-based e-commerce, spending lavishly on marketing and leaving themselves exposed to the same variables that have ravaged the broader technology industry.

The breathless enthusiasm among online-learning executives is similar to investors' fascination with technology stocks in the late '90s.

Business degrees and technical training are among the most common programs offered online, but experts say there are few limits for online education in general. Ministry schools are even entering the field, and the Association of Theological Schools is developing procedures and standards for accrediting distance-education programs.

"Right now this industry is so very young it's hard to see a logical limit," said Chris Montgomery, executive vice president at privately owned iLearning. "There has been a slowdown in fresh capital into the space because of the downturn, but it's such a fragmented market with so much opportunity that even small companies are likely to prosper for a while."

A growing acceptance
In December, Baltimore-based iLearning received an investment of $7.5 million from Sylvan Ventures, the e-learning venture capital arm of Sylvan Learning Systems. The funding is part of an initial round of investment totaling $19 million. Sylvan stock trades at $20, up 35.02 percent since the beginning of the year.

Phoenix-based Apollo Group--the most high-profile education company--launched last year a major marketing blitz for its University of Phoenix Online program, which allows adults to get graduate degrees in business administration entirely by way of the Web. A segment earlier this year on TV news magazine "60 Minutes" named the nation's largest for-profit learning company the leader in online education.

The University of Phoenix, which has 19,000 online students and a total of 75,000 students at more than 100 physical campuses, spun out its online division as a separate company in an IPO in September. The shares, offered at $14, trade at $28.13, for a market capitalization of nearly $1.5 billion. Apollo Group trades at $36.44, up a respectable 11.13 percent since the beginning of the year.

The buoyant stock prices of many educational companies reflect a growing need for online education as employers increasingly require workers to take training courses and people try to keep computer programming and other skills fresh. It also reflects a growing acceptance of the quality of online learning, said Trace Urdan, education analyst for San Francisco-based investment bank WR Hambrecht.

"For a while people would roll their eyes at the University of Phoenix, but among corporations and middle-level managers, it has gained a lot of credibility," Urdan said. "They've indicated spending heavily in the next several quarters to grow the brand, but when all is said and done it's a known model with profits in the past they can show investors. It's really a nice model."

Forecasters' growth curves for online learning are also fueling popularity in all online-education stocks. According to recent research from Merrill Lynch, more than 2.2 million college students will be taking courses online by 2002, a 210 percent jump from 710,000 in 1998.

Students can already pick from more than 6,000 accredited college courses on the Web, and 84 percent of four-year colleges will be offering online courses in the next two years.

Technology advancing fast
According to a Market Data Retrieval survey, 48 percent of traditional two- and four-year institutions offered online courses in 1998, and 70 percent offered them in 2000. Two universities--Jones International University of Englewood, Colo., and Capella University of Minneapolis--are entirely Web-based.

Executives at online-learning companies say the technology behind the industry is advancing rapidly, helping to create sites that are easier to use and that virtually anyone with Web access can tap into. In January, University of Phoenix Online announced that it had struck a partnership with Sausalito, Calif.-based AudioBase to create what it billed as the first-ever audio-enabled online-university Web presence.

AudioBase CEO David Haynes said his company's streaming-audio software, which now powers a human voice introduction on the University of Phoenix site, addresses a common criticism--"that higher learning Web sites can be intimidating and difficult to navigate."

But navigation is only one of the obstacles for online learning. Cost is among the biggest challenges.

Top-rated online courses involve hours of video footage, interactive presentations from faculty and students, laboratory simulations, and asynchronous communication. The most time-consuming and expensive courses take as long as 18 months and $1 million to create, according to Eduventures.com. By contrast, development costs for most distance-education courses average less than $10,000.

The University of Phoenix Online charges $495 per unit, and a master's degree in business administration requires the completion of 51 units. That's a total of $25,245--roughly half the cost of tuition, room, board and living expenses required by top-tier MBA programs at Harvard, Stanford or the University of Pennsylvania.

But...McEducation?
Perhaps the most formidable issue for online learning is improving the brand identity and reputations of the institutions that provide the service--scorned by many students and professors at four-year universities as "McEducation."

"There is considerable debate over whether job candidates with online degrees are as qualified as those who lug briefcases full of books across a real campus," according to a critical editorial in the February issue of Workforce magazine. "Competencies that online graduates typically demonstrate are technical skills, discipline, motivation, good writing skills, the ability to work independently, and a high degree of comfort with the Internet. But in today's highly collaborative workplace, where joint decisions have to be made quickly, the best-prepared applicants might still be those who have acquired their abilities through traditional classroom programs."

The University of Phoenix is particularly controversial. Its professors never get tenure. Students attend class just once a week. The library is entirely virtual--no hallowed halls or quiet study nooks to foster deep thought. Most classes run four hours, one night a week for five weeks--roughly half the time that students usually must spend in front of a professor for each course.

Still, online learning has devoted fans. Advocates question whether lecture halls packed with 1,000 or more college freshman are beneficial at all, let alone more valuable than a multimedia experience in which a videocast professor conducts an intimate chat via instant messenger with 10 students from around the world.

Thomas Russell of North Carolina State University outlined the differences between online and traditional learning in his 1999 book, "The No Significant Difference Phenomenon." He determined that online students work harder to achieve degrees and are often more motivated during post-degree employment than traditional students.

John Skubiak, executive vice president for Oakbrook Terrace, Ill.-based DeVry, said that online institutions shouldn't be penalized for taking risks that the nation's older educational institutions wouldn't dare take. He noted that DeVry maintains high standards by requiring all students to take proctored final exams at verified sites every tenth week of the course.

DeVry operates the DeVry Institute of Technology, the Keller Graduate School of Management and the Becker Conviser Professional Review, all of which offer courses online. DeVry stock trades at $35.80, down 5 percent since the beginning of the year but up 89 percent since March 2000.

"I think by and large what the good education companies are doing is responding to market needs, effectively," Skubiak said. "The traditional educators...still haven't approached it that way. I don't want to bad-mouth the traditionalists, but there's still a sense of protecting the status quo without responding to evolving needs. One big need is the need for lifelong learning and adult education. It used to be you go to college and you're done. These days, it's lifelong...and people simply can't go back to campus for that."