Casino Capitalism in EdTech

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In John Maynard Keynes General Theory of Employment, Interest, and Money (1936), he referred to rampant speculation in the markets as “casino capitalism.” Some speculation (making an investment with a significant chance of a big loss but some chance of a big gain) is fine, but when it becomes too widespread and ignores risks, it imperils the economy.

I want to revive that term, in part because it explains to me something that we are seeing more often in EdTech, where institutions engage in the equivalent of casino capitalism in order to win big, but where the results too often are more about losses and risks that weren’t acknowledged.

What do I mean by casino capitalism?

Higher education does not move fast, and spending money tends to happen at a particularly glacial pace. I think of casino capitalism happening in EdTech when universities try to act quickly and end up investing large amounts of money on risky ventures without engaging in appropriate levels of due diligence, and where the often substantial risks are discounted with cheery pronouncements.  

We are in perilous times in education, but it does little good for institutions to make speculative, poorly-considered bets. In this post, I want to describe it and understand why it happens.

Nonprofit conversions

Recently we have seen a spate of universities such as Purdue University, the University of Arizona, and most recently the University of Idaho (among others) buying for-profit online institutions to kick start the move into online learning.

Purdue acquired Kaplan University and rebranded as Purdue Global in 2018, but they have sustained substantial losses every year except 2021. This is despite investing millions in marketing.

The University of Arizona (UA) acquired Ashford University and rebranded as UAGC in 2020, but enrollments have continued to crater, and the UA has been asked by the Department of Education (ED) to repay discharged student debt based on ED’s claims of cheating by Ashford prior to the acquisition. The university is also facing a $21 million fine by the state of California based on a lawsuit on systematically deceiving students, again prior to the acquisition.

The University of Idaho is attempting to acquire the for-profit University of Phoenix (UoP) for $685 million. The University of Phoenix had previously settled cases with ED and the Federal Trade Commission about alleged deceptive advertising recruitment processes, and importantly it remains in the crosshairs of ED regulators.

Bad OPM contracts

In many cases, it makes sense for universities to partner with an Online Program Management (OPM) company. The university may lack the expertise or capital required to start and grow online programs or they may need it to happen quickly. But in some cases, I have seen institutions sign bad contracts with OPMs, usually without looking at the market or negotiating strongly. The institution (to be honest, usually a Dean, hence the term “Deans Gone Wild”) seems more motivated by the promise of new revenue and takes at face value the OPMs assurances that starting new programs under their guidance will be a turnkey process.

University collaborations

It is not just in dealing with vendors that universities engage in casino capitalism. I have also seen it play out in university collaborations, such as with the 2014 Unizin agreement. Unizin appears to be delivering some modest value now (though substantially less than the “evolving ecosystem of digitally enabled educational systems and collaborations” promised), but this was far from certain at the start, when the eleven member universities were being asked to pony up a million dollars to buy in to the consortium. The original contracts reveal that in exchange for the $1,050 million payment, the member universities would have a right to, well, it just wasn’t clear. But university leaders knew it was important - just ask them.

The eleven original universities and the University of Florida as a subscribing member bought into this ill-defined promise and paid the membership fee despite the lack of specifics.

Spinning the roulette wheel

Expanding online and collaborating to ensure cost-savings and better student outcomes can be good moves and something that universities should be doing. One could argue that buying a for-profit, partnering with an OPM, or collaborating to create an ecosystem of digital tools controlled by higher education is a way to achieve those goals more quickly.

Those were the big payoffs that the universities were hoping to achieve. But their speculative moves qualify as casino capitalism not only because they failed to deliver, but also because they share some common characteristics.

Lack of due diligence - The people in charge of making these decisions seem to have done so without doing their due diligence.

Neither Arizona nor Idaho appears to have engaged with external parties who know online learning and how the industry is moving. Furthermore, the universities buying for-profits seem to ignore the informed opinions of internal experts. For example, staff from the University of Arizona’s School of Management referred to the deal to buy Ashford as a “lemon” and staff from the School of Education called out and criticized the lack of due diligence.

In the ill-considered OPM cases I have seen, the institutions did not engage with companies or consultants who could help them understand what was at stake, what to expect in an OPM contract, and how to negotiate better terms until after the contract had been signed, if at all. The Unizin member contract specified no actual deliverables.

Ignoring or underestimating the risks - In all three nonprofit conversion cases, universities hoped to achieve big outcomes and ignored the significant risks inherent in the investments.

• Legal action – For-profits have been the target of federal and state lawsuits for deceptive practices, and these bodies appear to want to hold the purchasing institutions liable for the actions of the for-profits prior to being sold. Universities thought they were clever enough to avoid liabilities despite internal warnings.

• Reputation – For-profits have taken a beating in the press (often justifiably so), and turning these institutions around will be a massive undertaking that will cost a lot of money. Arizona appeared to think it was a simple case of managing public relations. One of the University of Arizona officials responsible for the merger wrote just after the purchase that “the Wikipedia page on Ashford reads like a hit job ... We really do need a PR firm immediately.” 

• Enrollments - UoP is the only for-profit being acquired that has / had already turned around its enrollment decline, but the online space is increasingly crowded and difficulty to maintain or grow enrollments. Most nonprofit conversions seem to just assume that a new university logo will change these trends.

In the case of inadvisable OPM contracts, there are risks to consider.

• Investment - The online education move process is typically not turnkey and requires significant additional investment by the institution.

• Termination - What happens when programs are ill-chosen and don’t bring in the promised enrollments and revenue? Most often there are not clear exit clauses on these long-term contracts, or the clauses force the institution to create parallel non-OPM programs for a multi-year transition.

• Reputation - Witness what happened in the social work program at USC. Some of that was deserved scorn, and some of it was political targeting. But either way, there are real reputational risks.

For institutions collaborating in partnerships such as Unizin, the risks stem simply from the lack of a real contract and SOW specifying what will be delivered in exchange for the membership fee and at what cost.  This despite the fact the project emerged soon after a similarly ambitious and collaboratively funded project led by one of the central architects of Unizin had come to naught.

Despite these risks, university officials approached the projects with distinctly rose-colored spectacles, highlighting benefits and underplaying risks.

Why does this keep happening?

I think we see this kind of risky decision-making happening for several reasons.

• A concern with increasing revenue - In the face of declining enrollments and other revenue pressures universities are very keen to add new sources of revenue. A short-cut to that can seem very appealing.

• The problem of new money - Universities make different kinds of decisions about new sources of revenue than they do with more traditional flows. which I see frequently with OPM contracts. The new money is instinctively seen as extra, and they are willing to accept conditions that they typically would not.

• FOMO - The fear of missing out is a powerful force making university leadership make hurried decisions to make sure they are part of a larger trend they feel will be valuable. We saw this happen a lot when MOOCs first burst onto the scene in 2012: universities scrambled to join Coursera and EdX even though the costs of making MOOCs was substantial, and there wasn’t a proven business model or evidence that MOOCs could and would achieve the goals they were created to achieve. And Unizin . . . hoo boy, what a FOMO exercise that was initially.

• Blinders - Institutions often have a disregard for expertise in online learning, both external and internal.

• Speedy secrecy - Institutions often have an exaggerated sense of secrecy and the need for speed. You get a palpable sense of this from descriptions of the early stages of the Arizona and Idaho cases, where the deals are sometimes referred to using codenames and decisions were made quickly, often with an exaggerated sense of urgency.

Parting thoughts

The pressures on higher education are real and keenly felt. But too often we are seeing these speculative big bets as a solution to problems bedeviling higher education. As in the casino, these bets seldom pay off.

In this newsletter we have argued that higher education should be more agile and imaginative in strategies to deal with current challenges. This will involve taking risks, but doing so without real evaluation of those risks is not a good look. And patience is always in order in higher education - we should be playing the long game.

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