The recent woes of Edison Schools Inc. (EDSN ) seem to spell bad news for the emerging business of running public schools for profit. As the industry leader, Edison gave school privatization its biggest boost yet in mid-April, when a reform commission voted to give it control of 20 of Philadelphia's worst-performing schools.
But the victory was quickly eclipsed by problems, capped by the May 14 settlement of a Securities & Exchange Commission investigation into Edison's aggressive accounting, that have driven the company's stock price down by more than 90% this year, to $1.30. Shut out of the public markets, Edison now must raise up to $50 million from private investors in coming weeks. If it fails, the New York-based company could lose the Philly contract and even be forced into bankruptcy.
Still, Edison's travails hardly spell the end of the privatization movement. The reason: Most of the other companies don't try to take over troubled public schools, a daunting business that accounts for about half of Edison's $525 million revenues. Running existing schools like those in Philly means turning around some of America's worst schools. It's also a direct challenge to the jobs and authority of education officials and teachers' unions. If Edison loses the Philadelphia contract, which is far larger than any it has landed so far, this side of the privatization business could be stopped cold.
It's a much easier assignment to run charter schools or private ones--the aim of most other for-profit education companies. Charter schools usually start from scratch, using public money but operating with far more freedom than traditional schools. Half a dozen school operators now have revenues of $100 million or so, and some are already turning a profit by managing charter or private schools (table). The revenue of for-profit charter operators should hit $890 million this year, up 10% from last year, according to market researcher Eduventures Inc. "We're not trying to turn around something that's badly broken," says Peter Ruppert, president of National Heritage, which runs 28 charter schools.
Edison, on the other hand, has lost a total of some $260 million since its 1992 founding. CEO H. Christopher Whittle remains optimistic: "We'll raise the money to open the schools in Philadelphia," he insists. "There's absolutely no doubt that we'll survive." Still, Whittle concedes he needs to slow growth and cut capital spending to get to profitability, which he now hopes to reach in 2004. Excessive spending has been the rule at Edison, from the small fortune it sank into developing a curriculum to the computers it gives most students. Compared with public schools, "they pay high salaries [to executives] and have huge marketing expenses," says Henry M. Levin, director of Columbia University's National Center for the Study of Privatization in Education.
Other for-profit companies take a more modest approach. They face smaller political hurdles and their business models are less costly. Most also have grown more slowly than Edison, consuming less capital and reaching profitability faster. National Heritage has built clusters of schools in just three states so far, bringing economies of scale that helped it break into the black last year. Nobel Learning Communities Inc., the only other publicly listed school operator, has been profitable since 1992, while Mosaica Education Inc. and Chancellor-Beacon Academies Inc. say they are close to making a profit.
As long as the charter-school movement continues, the for-profits should prosper. Right now, they manage less than 15% of the country's 2,400 charter schools, a figure that will approach 3,000 this fall, according to the Center for Education Reform, a Washington privatization-advocacy group. Given the sorry state of many public schools, "parents aren't about to stop clamoring for choice," says Chancellor-Beacon CEO Octavio J. Visiedo. For all their growing pains, most of the for-profits offer one way to get it.
By William C. Symonds in Boston