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2U's Next Chapter Following the Demise of Semester Online

The experiment called Semester Online will shortly close operations. Naysayers and competitors may claim that the closure dents 2U's reputation. The company sees the outcome differently.

When 2U announced shortly after the company went public that it would be closing its Semester Online program when courses were finished in August, CEO Chip Paucek refused to view it as a company failure. "Would I have wanted as a brand new public company to announce that we were disbanding the pilot program that day? No. Of course not. But that's why you do pilots. You learn from it. We don't hang our head at all. We think we learned a lot."

The idea behind Semester Online was to create a consortium of 10 institutions that would offer credit-bearing courses combining asynchronous formats — threaded discussions, reading assignments and pre-recorded video conversations — with real-time activities. Ultimately, the work of sorting out agreements among the faculty governance across all of the participating schools became an insurmountable hurdle, and the program caved in.

2u CEO Chip Paucek
2U CEO Chip Paucek

Paucek won't admit defeat. "If you look at the metrics that came out, even though it's a small number of students — 100 to 200 — they not only loved it, they performed very well; their attendance was strong; their Net Promoter scores were really good. From an outcomes perspective, we felt that it did work."

Is that attitude simply C-level spin, or does it signal something else — such as that the company took the Semester Online disbanding as a sign that it truly needs to double down on the approach it has honed so well since it launched its first online master program in 2009 at the University of Southern California?

The approach has been fairly well documented. The company contracts with leading universities to launch fully online degree programs. 2U handles all of the back office machinery such as recruitment and delivery and provides the online learning platform. The institution accepts new students, provides the faculty and curriculum and delivers the instruction. The agreements are set for 10 to 15 years; and 2U takes between 60 percent and 70 percent of the tuition revenue.

 2u classroom

Before you sputter at that amount, consider that 2U also invests between $4 million and $9 million during the first three to four years of working to develop a new program. (The high range is for programs begun at new university clients; the low range is for those programs launched at an institution where 2U already operates.) According to company CFO Cathy Graham, programs only reach "steady state scale in year six of the 10- to 15-year contract term."

And that's where the doubling down comes in.

With its initial public offering in February, which raised about $110 million, the company intends to work with a group of "very interested universities in building new programs," Paucek reported. "They're all different. But the core business model has proven out. And you're going to see us take that capital and continually roll out new programs."

This isn't a vague promise. 2U has committed to its investors that it would do no fewer than four new programs a year. As its first quarter 2014 financial results report, it's surpassing the terms of that promise:

The 2015 pipeline is also filling up nicely:

What was once a business proposition to create master-level programs that appeared to be exclusive to a single institution will now stretch in all directions — from bachelor to master to doctorate and from sole domain to multiple domains. 2U's business model has become a predictable revenue generator.

One result is that the competition is growing. Embanet, owned by Pearson, and Deltak, owned by John Wiley & Sons, are being joined by ed tech companies Blackboard and Desire2Learn, which both also are making moves to get into the academic degree program business. And why not? As Paucek boasted, " The reality is it's all about this combination of great technology and great service. When we started, a lot of people thought we were crazy. Our program has generated $540 million in tuition bookings from conception to date."

Paucek doesn't expect any single company to necessarily dominate in marketshare for this type of service. Besides, "there's plenty of room" to grow the pie bigger. "It's just not the way education works," he said. "And the overall higher ed market is $1.7 trillion worldwide. It's massive."

2U will continue building its business the best way it knows how: methodically. As the company's offerings evolve, he insisted, the mission remains the same: "We're trying to build the world's best programs." The company's recently released "Impact Report" bears out the positive news — the retention rate is 82 percent. It also contains plenty of other numbers:

  • As of December 2013, student enrollment in 2U-run programs exceeded 8,500 people;
  • 75 percent of students are female, and the average student age is 35;
  • 2,565 students have been graduated;
  • The average class size is 10.4 students;
  • The programs deliver 1,629 hours of live instruction per week.

The report is full of student and faculty profiles and testimonials regarding their fondness for the 2U slant. As one instructor put it, "I have never felt a more personal connection with students in any classroom, even in smaller seminar courses. The reason is that there's no hiding.... You see every facial twitch of everyone in the class. Everyone is right there."

Or as Paucek is fond of saying, "No back row." Unlike MOOCs with their thousands of anonymous participants or typical online courses featuring student headshots and threaded discussions, the 2U method involves cohort gatherings with everybody's moving images present and accounted for.

It doesn't hurt that Paucek himself has become a 2U student. Even though he has been a CEO three times over, he has always "wanted" his MBA. So about a year and a half ago he signed on as a student at the UNC Chapel Hill program. "I fell in love with the leadership approach. So I convinced, first, my board and, second, my wife that I wasn't insane." The 2U board limited him to a single class a term, which Chapel Hill allows, so he's been slogging through it ever since.

"It's amazing. I love it. Of course, there are some days where it's super hard, and I'm running this company," he said. Currently, because of the pressures of the IPO, he's taking off a term, but he said he expects to be back in class by July.

Paucek's cohort includes the head of ER for a hospital, a Turkish female athlete, an oil company engineer who spends half of his year on an oil rig, and a former general counsel of a professional basketball team. "Those are all people who are simply not going to pick up their lives and move to attend a top 20 B-school, but they really wanted a degree. So I think it speaks to the core of the 2U opportunity. You can really unleash the university from its physical boundaries in a very material way."

And while Paucek the CEO didn't sign on to UNC to "eat the dogfood," he acknowledged that "it certainly is useful to see the product from the inside as Paucek the student. "I send notes to our COO or our CTO all the times with some little thing I saw. The nice thing is I feel like they're little nits. Overall I think we're doing a pretty good job." 2U's learning continues.

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