The Market for Online Education

Traditional education is designed around face-to-face communication in a physical classroom. Educational institutions are required to pay for costly inputs, the costs of which are spread out over a limited number of students. It is no surprise then that this education delivery model has produced a 550% increase in the cost of tuition at U.S. universities since 1985 (Vella, 2012). In addition to this, most universities are run by non-profit trusts or governments, where there is little pressure to innovate and fully utilize the physical and intellectual resources of the institution. With this backdrop, online courses are offering low-cost learning alternatives, which are customized for needs of customers, and are available without regard to space and time for different groups of customers worldwide. Over time, attitudes of students and employers towards online education are also improving. Finally, new private companies are coming up to offer customized solutions often backed by cloud computing platforms, though they still lack the brand recognition of traditional universities.
This paper will examine the limitations of traditional educational methods and explore sources of demand and supply of online education with a view towards how innovative business models such as crowdsourcing and technology infrastructures such as cloud computing are creating change in online education (Weld et al., 2012).

Evolution of Online Education
Traditional education delivery in thousands of universities globally is designed around transfer of knowledge from teachers to students via face-to-face, lecture based interaction in physical classrooms. At the outset, this imposes the limit of physical capacity of the classroom on the number of individuals who can enrol in the class. In comparison, recent advances in information and communication technologies have enabled alternative online education delivery mechanisms, which can optimize educational delivery in a cost-efficient manner for a large number of users. Online education can be defined as a new social process which utilizes digital technology to partially or fully substitute traditional classroom learning methods, optimized for learners without the barriers of a traditional educational setup (Hiltz & Turoff, 2006). Allen and Seaman (2013) define online education to include courses where at least 80% of the course content is delivered online. These courses are delivered over the Internet and include significant use of digital media, data storage and communication technologies such as computer-assisted instruction, group communications, use of immersive simulations, gaming and asynchronous learning networks, collaborative knowledge systems and use of wireless and handheld devices.
Online education offers different sets of opportunities to different organisations and individuals. For existing educational institutions, it offers a way to increase enrolment or reach a different type of audience such as corporate training. For start-ups looking to shake up the education ‘industry’, it offers the opportunity to compete with traditional universities on different bases of competition, such as price, program duration or class timing. For others, it offers the opportunity for lifelong learning or the opportunity to learn from professors of top universities.
Surveys show that the number of students taking online learning courses is on the rise. Allen and Seaman (2013) report that the total number of students in the U.S. taking at least 1 online course during 2012 has increased to 6.7 million, representing 32% of the total student population of 21 million students. In an endorsement of the online learning platform, 77% of academic leaders believe that online learning leads to better learning outcomes than face-to-face instruction. On the major obstacles that are holding back the growth of online education, the authors believe that most faculty members still do not have a positive view about online learning. 40% believe employers have reservations about online degrees.
Product Offerings
Online education is influencing different tiers of the market in different ways. Firstly, in traditional universities, more and more fully online classes are being developed, and technology is finding its way into more traditional classes as well. Many universities now offer online only classes for their students. In addition, universities such as Georgia Tech are creating tailor made degrees for corporations such as AT&T. This setup benefits the university which gets an extra revenue stream and also AT&T which gets high-end skills training for its employees on the job (Kitroeff, 2014). In addition, some new, non-traditional universities have also been set up. These online universities, such as the University of Phoenix, replicate the existing university model but without a physical campus, utilizing online content delivery.
A different model has also been developed by some traditional universities such as MIT and Stanford. In partnership with private start-up companies such as Coursera and EdX, these institutions are putting together free classes open to global masses known as massive open online courses (MOOC). These courses are available to all the students in the world who have Internet access and some of these classes boast registrations in hundreds of thousands. Currently, nearly 3% of institutions of higher education in the US are offering MOOCs while another 10% are in the planning process of offering MOOCs (Allen & Seaman, 2013). Coursera is also expanding into China with its more than 1 million online learners (Larson, 2014). However, it is not clear how MOOC offerings will be financed (Anderson, 2012). The author points out that giving away content for free usually never turns out to be good business model. Suggestions for revenue generation include subscription and charging employers who want to hire successful students. Another issue is how to ascertain the identity and actual completion of work by a given individual. Udacity, another start-up has devised a solution by offering physical testing facilities in different countries where students can take certification exams in a supervised environment.
While they are becoming increasingly popular, MOOCs offer limited customization. In comparison, some start-up education companies are exploring the idea of customized learning enabled by ‘crowdsourcing’. Crowdsourcing is a term which defines the development of an online community whose physically dispersed members may be called upon to provide results online to a given problem. One limitation of MOOCs is that grading assignments of hundreds of thousands of students requires using automated software, which can only grade multiple choice problems. This solution does not work very well in the humanities and social sciences. A crowdsourcing-based solution is to use peer evaluation for this purpose.
These learning environments also deploy other technology enabled learning techniques such as using software to analyse common mistakes made by large groups with the highest frequency. Significant insights can be gained into human learning from observing such errors and analyzing their causes. Other automated software agents can crawl the web for useful resources pertaining to the course and collect it on a new website. Additional functionalities that can be offered by machine learning systems include services that link students with particular needs with tutors with skills suitable for teaching those subjects.
Role of technology in the online education ecosystem
Central to this paradigm shift in education is the Internet and technology revolution. A key enabling innovation in this regard is the development of a low-cost services model known as cloud computing. Cloud computing is an umbrella terms which describes how computers, servers, and applications and processes on those servers can be networked together in a distributed computing platform to create scalable infrastructure which enables users to connect from anywhere and using any device. Cloud computing may be considered an extension of Service Oriented Architecture (SOA), which is a software design which makes it easy for computers on a network to cooperate. An institution or group of institutions that gets together to develop a cloud computing based platform needs to develop content and services that can reside inside the cloud since not all applications are cloud enabled (Mircea & Andreescu, 2011).
Cloud computing is a way of designing a network in blocks, not all of which need to be owned or operated by one university. Instead some components of infrastructure, or the platform or the software or even the computing power itself may be owned and managed by service providers who allow the university to pay for them on an ongoing, pay-per-use basis (Matthew, 2012). Cloud enabled service delivery enables access to educational content by anyone, anywhere on a pay-per-use basis, thus enabling deployment of scalable educational services. If a substantial number of users exist, the cost per user and thus the fee charged to the user can be lowered substantially compared to traditional educational institutions (Moore, 2011). This can have several other advantages for institutions as well. For example, institutions can combine resources with others to share a cloud, and then focus on content creation to focus on their strength and outsourcing the IT services to a large degree.
The new business models will begin with market need identification, and then deploying a solution to meet that need, offering a high return on investment (ROI). A major university offering a global MOOC would need a very different platform than a commercial service offering English as Second Language in China and cloud computing would allow each to have the right cost and infrastructure for the size of the opportunity. A lot of effort is going into the development of each of the elements of online education. These include digital books, grading software, intelligent software agents, cloud computing infrastructure and tablets. Amazon is also selling more digital books than paper books and it is now even possible for students taking online classes to rent their textbooks for limited time (Schuetze, 2011).
Through its success, online education seems to be substituting traditional education (Mehaffy, 2012). This phenomenon has been labelled by Christensen & Eyring (2011) as the process of ‘disruption’. ‘Disruptive technologies’ are championed by new companies which do not compete with the incumbents along the existing bases of competition, but offer new and often low-cost product to a previously underserved group of consumers. Once successful in their niches, they increase volume, improve product quality and unseat incumbents in the high end of the market. Alternatively, disruption forces incumbents to change their business models.
One of the reasons the education market seems ripe for disruption is the high cost of university education which makes the high-end of the market out of reach for many students. Some of the new business models in online education offer lower cost alternatives for those average students. In response, several mainstream universities are already considering lowering the residency requirement of their degrees to lower the total cost of earning them, while considering how to improve their online courses. While it may be too early to predict how successful they will be, for now the online education market seems set to grow globally.
In conclusion, it can be said that online education is a powerful business model because it can service large underserved segments of the education market at low average cost (Gaytan, 2007). It is a solution for those who could previously not afford the high cost of education or may only need to develop certain job related skills or they may be lifelong learners. Deployment of digital content and software over a cloud enabled distributed computing network is the first step towards infrastructure development required for online learning platforms. More high-quality content is required together with ingenious business models to take online education to the next level of success.
While they do not face any immediate threats, existing educational institutions will need to adapt their business models in order to not become obsolete. At a minimum, they should consider ways of reducing their cost without diluting the experience. Traditional universities have a strong competitive advantage – they offer a period of residence in an academic community. This is difficult to replicate for online institutions.
Online universities should consider partnerships for revenue and content sharing with traditional institutions in order to build their brands quicker. Without brand acceptance, they will never be able to compete with traditional universities.
Start-ups should focus on helping develop those innovations that increase the return on investment in new business models for educational service providers to encourage innovation and investment in technology supporting online education.
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