The education industry has benefited from a rising tide of public concern. Discontent with the sorry state of our public schools has triggered calls in all quarters for increased government spending. And public concern, combined with the Internet's explosion and the urgent needs of the knowledge economy, has led to the creation of hundreds of new education companies. Since President-elect George W. Bush promises to make this area one of his top priorities, that trend is unlikely to peter out.
But as we enter 2001, this emerging market is learning that lofty objectives are not enough. "Education companies will now be governed by the three Rs: reality, revenues, and rationalization," says Peter Stokes, executive vice-president of Eduventures.com, a Boston research firm. The reality is a much chillier financial climate. Eduventures figures the amount of venture capital invested in education companies leveled off at around $2.5 billion in 2000, after skyrocketing from less than $500 million in 1997. "I would not be surprised if there was a decrease in 2001," warns Stokes. And with the initial public offering market all but closed, companies that can't generate revenue growth--and paint a convincing path to profitability--face rationalization, he predicts.
One example is ZapMe! Corp. (IZAP), whose well-publicized plan to provide free computer labs to schools in exchange for showing online ads to students recently collapsed amid huge losses and severe criticism. "More education dot-coms are dying every day," says Tom Greaves, vice-chairman of NetSchools Corp., which sells schools turnkey systems that provide every student with a laptop and wireless access to the Internet. Of the 50 dot-coms he's familiar with, Greaves adds, "probably 30 will disappear."
BACK TO THE BOOKS. Furthermore, "consolidation will accelerate," predicts Michael Moe, an analyst at Merrill Lynch & Co. The pace has been set by London-based Pearson PLC (PSO), a major educational publisher, which in 2000 spent some $3 billion snapping up companies. Other big publishers are now on the hunt, as is Sylvan Learning Systems Inc. (SLVN), which runs everything from tutoring centers to universities and has a $500 million pool of uninvested capital.
For all the turmoil, the underlying fundamentals remain positive. With Bush and many governors vowing to improve schools, public spending--which accounts for the vast bulk of the $800 billion spent on education--should rise at a mid-single-digit clip. Meanwhile, revenues for private-sector companies, which hit $105 billion in 2000, should grow 10% to 12%, predicts Eduventures. Companies that cater to adult students should do even better--including outfits such as Apollo Group Inc. (APOL), which operates the University of Phoenix and has a booming distance education business. "In a softer economy, a lot of adults will be running back to school," says Sylvan CEO Douglas L. Becker. He predicts his company's network of foreign universities will grow 50%. Similarly, the mounting school-choice movement will help companies such as Edison Schools (EDSN), which runs 113 schools with 57,000 students and is the nation's largest for-profit operator of publicly funded schools.
Despite the dot-com crash, the e-learning revolution is accelerating. In December, the Web-Based Education Commission, appointed by Congress, called for a "national mobilization" similar to the race to the moon to help speed use of the Internet in learning. Meanwhile, corporations increasingly viewe-learning as a way to make "learning continuously available at a far lower cost than sending someone to a class," says Keith Gay, an analyst at Thomas Weisel Partners. That's helping SmartForce, a leader in online training for business and industry, grow at a clip of better than 30%.
Don't be fooled by the rush of bad-news headlines about education dot-coms. As in any emerging industry, many of the education start-ups will die or be swallowed. "But we're still only in the first or second inning" in the great game of for-profit education, argues Moe. And for the winners, the rewards beckon like a field of dreams.