What’s Happening in the Market
2U is going through a structured, voluntary Chapter 11 bankruptcy proceeded, with the support of their creditors. What emerges from the proceedings is unclear, but the underlying IP is valuable (such as edX), the company still generates revenue, and they still host courses and degrees.
Masterplace, an EU-based AI educational platform, just raised $2M seed. In a sign of the commoditization of the OPM market, Masterplace helps people create courses and content with AI (especially those without prior experience). It shows that AI startups are still able to raise money, despite the sector-wide declines in funding.
The Power Trap: Changing Dynamics
2U’s decline has been a long, painful process to watch.
The main challenge facing OPMs is the general commodification of their industry (check out our analysis on 2U, Et 2U, Brute). Two decades ago, it was fairly daunting for a large university to build, market, and deliver an online learning experience. Those universities needed to partner with 2U and Udemy, and the power dynamics played in favor of the OPMs. When products are commoditized, however, customers have their pick of the litter.
They get to shop around. Or make it themselves (especially with cheap, contingent part-time faculty at your disposal).
Which brings us to the second part of the story: When your competitive advantage diminishes in a distribution setting, the switching costs for your partners decreases.
For better or for worse
One of 2U’s first partnerships was in 2009. They hosted USC’s Master of Arts in Teaching, and it was a fairly symbiotic relationship: USC offered their brand and tuition revenue, while 2U gave USC a turnkey solution.
2U (and all OPMs) offer academic partners:
Marketing
Recruitment
Course design
Technology
In the early days, that was a really good deal for universities who didn’t want to allocate capital to the expensive upfront costs required to launch an untested online LMS (especially with limited scale).
2U was able to nab 60% of revenue share for those services.
The power trap
2U’s academic partnerships ramped up because they were one of the only OPMs in town. But by 2018, you had Coursera, edX (later to be acquired by 2U), Master Class, Udemy–heck, people could make and sell their own classes with Teachable!
By 2023, 2U had lost almost all its leverage. They announced they would be experimenting with a flat-rate model, instead of their traditional 60% rev-share agreement. Losing pricing power is the ultimate sign of commoditization.
What could 2U have done differently?
There are downsides generally to operating in the OPM industry. Competition and commoditization are the reason why 2U has never been profitable and their deficit has grown. But 2U could have, and still can, do things differently.
“Pedro Noguera, an education policy expert and dean of USC’s education school, said the leaps forward in technology made it difficult to justify the company’s [2U’s] fees.” - LA Times
Flexible revenue sharing
2U historically took 60% of revenue. OPMs typically charge 40–60%, so 2U is already at the high end. Not a great deal for universities. Spotify distributes about 75% of royalties to artists, and QSRs like McDonalds or Subway charge their franchises about 12% (anywhere from 4–8% in royalties and 4% for ad spend).
In 2022, a year after acquiring edX, 2U started implementing stackable bundles. It took about 14 years for them to implement a flexible rev share package. The onus, however, was on their academic partners to figure out what bundle they want.
Instead, 2U should have offered increased rev shares based on longevity of a program, and enrollment. That incentivizes partners, without them having to bear the cognitive load, of finding programs that scale and are popular, and incentivizes them to market the program, too.
USC split up partially because, while enrollment at their School of Social Work ballooned, the 60% revenue share was untenable, and led to a budget crisis.
Lessons for startups
60% revenue share is outrageous for a distribution partnership, especially for a commoditized product. No matter how hard it is to switch to a new OPM or build in-house, the economics still make sense when you pay 60% of tuition to a 3rd party. Instead, think about how revenue sharing agreements can incentivize the type of behavior you want, rather than as a short-term gross margin fix.
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