Three Charts That Help Explain the 2U / edX Acquisition

Author

Phil Hill
June 29, 2021

If Instructure wanted to pick a time where their second IPO would get pushed out of the top EdTech news, they nailed it. This 2U acquisition of edX, along with the coordinated marketing campaign, is something to behold. With that in mind, I won’t describe the announcement here but instead list preliminary media coverage and then share three charts that I think help explain why 2U would acquire the edX assets for $800 million. I’ll add some additional analysis on what this deal means for online education in a second post.

Existing Coverage

From the parties involved:

From national media:

From education media:

The following three charts provide initial context for the deal, helping to position why it happened. You’ll notice that Coursera comes up a few times by way of comparison. These references are not meant to imply to 2U is directly trying to become like or to directly compete with Coursera, but there are lessons to learn from that company’s IPO.

Cost of Acquisition

From a financial perspective, one of the biggest challenges for online programs is the large marketing spend typically required to acquire students, especially as physical location is not a constraining factor and as the number of competitive online programs increases. There are quite simply a lot of programs for students to choose from. For this reason, the cost of acquisition of a learner has always been an expensive business, particularly as the cost of Google and Facebook and other digital ads increase over time. Consider this revenue and expenses chart from 2U’s annual report.

2U’s marketing and sales expenses (primarily for acquiring students) have grown at nearly 40% per year (although last year it grew only 14%), increasing from $221m in 2018 to $390m in 2020. Of course this marketing spend is spread out over an increasing number of programs and students, but the point is that it is the largest expense category.

What edX has is a lot of learners, 39 million of them according to the media webinar this morning. These learners can be reached directly through outreach campaigns without going through Google ad words or similar. This is in addition to the millions of people that visit the edX.org website. The 2U press release financials section described the expected benefits from acquisition.

Together, 2U and edX will reach over 50 million learners globally, serve more than 230 universities and corporate partners, and offer over 3,500 digital programs on the world’s most comprehensive free-to-degree online education marketplace. The combination of 2U’s industry-leading marketing capabilities and the thriving marketplace at edX.org, which had more than 120 million visits in 2020, is expected to establish a scalable and sustainable marketing advantage and drive 10%-15% annual marketing cost efficiencies.

In Coursera’s IPO filing earlier this year, they described how their base of 77 million registered learners “enables us to efficiently upsell learners a wide range of paid offerings, including stand-alone courses, multi-course Specializations, certificate programs, and university degrees.” 2U wants the same benefits but with their own marketing platform and approach.

Filling in the Gaps

From an operational perspective, 2U has aggressively moved beyond their initial graduate degree OPM business over the past several years to offer a broader array of online education services for schools and universities. The company frequently includes the following chart in their investor presentations, showing how their various offerings fit together.

With the edX acquisition, 2U adds the bottom left component (MOOC courses) as well as edX micro-bachelors and micro-masters; stackable components of a handful of courses that can combine into a degree. In the new website, 2U has updated this chart somewhat to show the combined offerings after the acquistion, with this graphic as the first and most prominent element in the announcement.

I’ll get into this subject more in a future post, but 2U presents this vision as providing “the world’s most comprehensive free-to-degree online education marketplace.”

Market Valuation

2U is a publicly-traded company, and market valuation is crucial. Coursera has shown this year that the public financial markets see higher potential in a broad offering that goes beyond Online Program Management (OPM) for degrees. The following chart is updated from a post at the time of Coursera’s IPO, showing the contrasting ratio of market valuation / annual revenue of select EdTech companies.

Coursera’s market value is roughly 18 times its annual revenue whereas 2U’s is roughly 4. These are rough numbers, but I believe 2U’s leadership believes it an command an increased value as this deal completes. Note that I am not predicting stock prices here, just showing the potential change in market perception.

What About edX’s Chart?

Most of the above is from a 2U perspective, but what about edX – why would they (and really Harvard and MIT) agree to this deal? Here I think the answer is simple even without a chart. edX has increased its number of registered learners over the past 18 months quite significantly – by a factor of 10 according to CEO Agarwal. But they have been a distant second to Coursera throughout their history, and edX has not proven itself a self-sustaining organization. According to the WSJ article, edX had revenues of $84.7m with a loss of $17.4m as of the latest financial year-end. Those losses might work for a growing for-profit company but not for a nonprofit. Harvard and MIT leaders on the webinar said that there has been a deliberate process in place for months trying to figure out the next phase for edX. Along comes 2U with their suggestion of an acquisition, and the solution came into place.

In an EdSurge article this spring comparing Coursera and edX, Sean Gallagher and I discussed strategy (although Agarwal disagreed with our descriptions).

EdX’s strategy, meanwhile, has been “to throw spaghetti at the wall,” argues Hill. “They’ve never been very strategic. They just do more things but never focus. It’s a tale of two companies in terms of strategy.”

Sean Gallagher, executive director of Northeastern University’s Center for the Future of Higher Education and Talent Strategy and author of a book on the future of credentials, says he has also felt that edX was “much later to find a business model.” Meanwhile he has been impressed, he says “by Coursera’s execution and scaling.

2U is all about strategy and investment, however, and that company and its existing leadership will now be in charge of edX strategy. Harvard and MIT can now focus much more on their own online initiatives that are built on edX (Harvardx and MITx) while creating a nonprofit with the funds from the acquisition, all while removing a non-sustainable organizational structure. As described in the Harvard Gazette article:

In an assessment shared in the Harvard Gazette, [Harvard University provost Alan M. Garber] said that edX risked falling behind as for-profit online education providers invested in new platforms and courses. He added that 2U has the resources to carry out edX’s mission of including access to low-cost and free courses for diverse learners with continued innovation and at a greater scale than is readily attainable for a nonprofit.

With the increase in the number of registered learners on edX, the timing must have been right for Harvard and MIT. Get out while the getting is good.

There’s a lot more to digest here, and there are questions about what this means for online education moving forward. Expect more soon.