Why Is 2U Spending $800 Million to Buy edX?

Higher ed is trying to wrap its collective head around the announcement of 2U's $800 million acquisition of edX.

There is much to chew on regarding what this deal means for current edX and 2U partners, global learners, and the broader postsecondary ecosystem.

In our first (and admittedly raw) take on this deal, we want to focus on two questions:

Why is 2U spending $800 million to buy edX? And why is edX selling?

There are, of course, many answers to these questions. Moves like this are complicated. But if we were going to list the No. 1 reason as to why this deal is happening, it would be Coursera.

Coursera's March 31 initial public offering created a public company that is now valued at almost $6 billion. A well-capitalized online platform company like Coursera represents a potential existential threat to the traditional online program management model, at least in the medium to long term.

This is, in part, because the highest variable cost for OPM-enabled online programs is marketing and enrollment management. OPMs spend as much as 20 percent of overall revenues to bring in paying students. Coursera’s 80 million global learners allow them to spend considerably less.

At the same time, Coursera has been signaling that its future will be one of building on its platform strategy to begin to offer more bundled (OPM-like) services. It is an open question if Coursera will be able to provide a more comprehensive bundle (instructional design, project management, media, in addition to marketing), but if they did so, it would make them an even greater strategic threat to existing OPMs.

This may very well be the disruptive innovation that the late Clay Christensen was expecting.

For 2U, the thinking behind the acquisition was likely that the 39 million learners on the edX platform would ultimately enable the company to scale more rapidly. As 2U notes in their announcement, the combination of 2U and edX “will reach over 50 million learners globally, serve more than 230 partners, and offer over 3,500 digital programs.”

With a much bigger global footprint in learners and schools, 2U could accelerate its growth plans while also potentially driving down student acquisition costs. Through edX's portfolio of open noncredit courses and programs, 2U could possibly turn enough of those learners into paying customers of 2U's portfolio of noncredit and degree programs to make the acquisition worth the investment.

On the edX side, the Coursera IPO made it difficult for a nonprofit to fully compete in the platform space.

Coursera has the capital to make long-term investments and big bets. Coursera now has the luxury of focusing on building out a three-sided platform strategy (learners, universities and organizations), knowing that at a certain scale, a virtuous flywheel will ultimately spin into profits.

A nonprofit like edX was always going to have a hard time competing in a platform business dependent on scale. Without a partner like 2U, edX could not tap the public markets to get the funds it needed to grow as quickly as it would need to spin that virtuous flywheel. Nor could edX offer the bundled services that OPMs now provide.

Reaching a certain scale was always going to be more challenging for edX alone. Pairing a scaled platform (edX) with a full-service bundled OPM provider (2U) makes sense if scale is the primary motivation for its work.

In this regard, from the perspective of 2U and edX, this acquisition has a certain kind of logic and even has the potential to change the field.

More learners on the 2U and edX platforms mean that the acquisition cost per learner will go down, potentially making certificates and degrees more affordable. If certificates and degrees get more affordable, more learners might come on to the platform. As the economics of scaled online education improves, more school partners might sign up.

Then again, the online field is not one that has historically passed on these cost savings to the learners or to the schools.

As we said, there is a great deal to unpack about this deal.

We need to consider what this acquisition of a nonprofit scaled online platform by a for-profit OPM means for schools and learners.

We need to think about what the deal means for edX partner universities, the schools that build and run the online courses and programs that make up edX.

We need to think about the implications of this deal on issues like student data -- and the question of 2U's ability (or not) to market 2U-powered programs to existing and new edX learners.

And we will all want to know how MIT and Harvard will leverage their new nonprofit to further the original goals of improving educational access and advancing quality with the funds realized from the deal.

As to the question, if this deal is truly good for schools and learners, that is a question that we will all have to try to answer together.

Full disclosure: We both work at schools that partner with some combination of edX, 2U and Coursera.