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Most of the news coverage of 2U’s quarterly earnings call Thursday focused, not surprisingly, on the fact that the online program enablement company was laying off 20 percent of its employee base and restructuring its leadership, a response both to enrollment declines that have buffeted much of higher education and to its merger last year with the education platform edX.
But at a time of continuing tumult for the online program management industry, in which 2U is the standard bearer, other changes the company announced may be more notable. Long criticized for a revenue-sharing model in which colleges pay 2U 60 percent or more of their tuition fees, and accused by some of driving up the price of online graduate programs, the company announced that it would reset its core revenue-sharing fee for degree programs to 35 percent and reduce the share of revenue it takes if its current partners lower the tuition they charge to students.
The changes may strike its critics as too modest, and they certainly do not reflect any abandonment by 2U, as the biggest and highest-profile player in the online program management industry, of the revenue-sharing model that consumer advocates and Democratic politicians have attacked. Some providers of online development and support have moved to a model where colleges pay a set fee for specific services such as marketing or instructional design, while others have created a blended model.
That’s essentially what 2U will now do, lowering the share of revenue it keeps for its core bundle of services (including program design, “organic” marketing for students through the edX platform, and student support) and charging institutions more if they want to “stack” additional services such as paid digital marketing or clinical placements.
“Our clients want the revenue share, because it aligns our interests,” Christopher (Chip) Paucek, 2U’s chief executive officer, said in an interview Thursday. “But it does not have to be one-size-fits-all. It’s evolved and we’re evolving with it.”
The 35 percent revenue-sharing model will put 2U much more in line with online program managers and competitors such as Coursera, which evolved in its own way from being a provider of massive open online courses to supporting degrees.
Like most of its rivals, 2U has historically taken such a large share of tuition revenue because of its up-front investments in building programs and the high cost of buying Google and Facebook keywords to market to students. Its purchase of edX last year was framed in part as allowing it to market directly to the platform’s tens of millions of users in a way that would allow it to lower its costs to find students. The changes in the revenue-sharing formula suggest that’s happening.
“This creates an alignment of incentives in a true partnership,” said Anant Agarwal, the former CEO of edX who was named chief platform officer in the organizational reshuffling 2U announced Thursday.
The company announced its first partner under the new arrangement: a master’s degree in business analytics with the business school at the University of Wisconsin at Madison, priced at $24,000, as well as a MicroMasters program called Fundamentals of Business.
2U has taken intense heat for the high cost of some of the graduate programs its university partners offer, with critics accusing the company and its peers of encouraging higher prices so they can “hoover up the greater share of the profits,” as Kevin Carey of New America phrased it in 2019.
Paucek and others have pushed back against that idea, saying that higher prices discourage students from enrolling. Paucek said Thursday that 2U has lobbied some of its university partners to lower their tuitions, but that it ultimately decided that there was “no better way” to signal its desire for more affordable programs “than by us lowering our revenue share … This is as much a call to our university partners as anything else,” he said.
Universities that lower the tuition prices of the 180-plus programs they currently run with 2U will share less of the tuition revenue with 2U.
Paucek said he expected some of the universities that do so to make their new tuition rates and terms public, adding, “You will be surprised how low we will go.”
