Edison: Pass, Not Fail

Despite recent setbacks, it's still adding schools to its roster

Judging from recent headlines, it might seem that Edison Schools Inc. (EDSN ), the nation's largest for-profit manager of public schools, is about to get expelled from class. In March, parents in New York overwhelmingly rejected its bid to run five failing city schools. In San Francisco, the school board nearly revoked its charter to run an elementary school. Then on June 19, Edison warned that it would lose $42 million in the fiscal year ending June 30, on top of the $177 million in losses it has racked up since its 1992 founding.

But while Edison hasn't yet demonstrated that running schools can be a moneymaking proposition, it's too soon to give the New York company a failing grade. Despite the humbling defeat in its hometown, Edison is still growing fast. This fall, it will be running 139 schools, with some 75,000 pupils--up from 113 schools and 57,000 kids in the school year ending now (charts). At that point, the company, which five years ago had just four schools, will be larger than the local school system in Boston or San Francisco.

Edison still has enough cash to fund its schools until 2005. By then, founder and CEO H. Christopher Whittle expects to have 250,000 pupils, enough to achieve the economies of scale required for Edison to turn its first profit. True, the stock price took a hit this year after the setbacks. But Edison has raised more than $150 million in the past year. "Edison is still a well-funded machine," says Peter J. Stokes, executive vice-president at Eduventures.com, which tracks educational companies.

RIPPLES. Indeed, Whittle is expanding his original vision to create "the nation's best-performing large system of public schools," with 1 million or more pupils by decade's end. He recently launched ambitious plans to tackle the national teacher shortage by making Edison the nation's largest operator of teachers' colleges. By 2008, he says, Edison will be training 7,000 aspiring educators on campuses in 20 cities. All will be guaranteed jobs at Edison, although they may also teach elsewhere.

Edison's success or failure will reverberate far beyond the company itself. Right now, it's the leader by every measure in the nascent business. "If Edison makes it, it will open the floodgates" to for-profit schools, says Jack Clegg, CEO of Nobel Learning Communities Inc., which runs public and private schools. But as the bellwether company, its failure would deal a crippling blow to the whole concept of private-sector school management.

Even critics give Edison's school design high marks. Its model was developed in a three-year effort by a team led by former Yale University President Benno C. Schmidt Jr., now Edison's chairman. Edison students typically spend 28% more time in class than the average child. They also get Spanish as early as kindergarten, plus art and music. Its Wintergreen Interdistrict Magnet School, a K-8 outfit in Hamden, Conn., boasts four bands, an annual musical show, and violin and cello lessons beginning in kindergarten.

Edison also makes wide use of technology, including free home computers for all its pupils above the second grade. "Edison has a very good educational program and [is] by far the best of the school-management companies," according to Heidi Steffens, senior policy analyst at the National Education Assn. (NEA), the nation's No. 1 teacher's union, which has worked with Edison locally.

Still, Edison faces stiff resistance. Some educators fear the competition, while others object on principle to profiting from education. This attitude defeated Edison in New York. Encouraged by Mayor Rudolph W. Giuliani, Whittle bid to manage five schools. But he was outmaneuvered by politicians, teacher union activists, and school officials, who thought Edison was out to profiteer from poor children. Whittle now thinks it was a mistake to go into such a political hotbed. "In retrospect, we should have just said no," he says.

To overcome such obstacles, Edison must show that it can deliver a superior education--a goal that remains unproven. Sometimes, it's execution that has been lacking. When Edison took over the Feitshans-Edison elementary school in Springfield, Ill., last fall, "most materials didn't arrive until early November," complains Mary McDonald, president of the Springfield Education Assn.

Edison's challenge is compounded by its target audience: poor, mostly minority children who are the most likely to fail. Some 55% of its students are African American, 17% are Hispanic, and 65% are from low-income households. Moreover, districts often give Edison their worst schools. For example, the school it took over in San Francisco in 1998 ranked near the bottom of city schools and had a history of violence. Not surprisingly, Edison doesn't always succeed in such environments. It has closed--or soon will close--its schools in Goldsboro, N.C., Lansing, Mich., and Sherman, Tex.

Nonetheless, it's still operating in 62 of its first 65 districts. In March, a new school board in San Francisco voted 6 to 1 to revoke Edison's charter, even though test scores were soaring and parents were converts. "My son, who has ADD [attention deficit disorder], is doing fantastically well," says Lupe Hernandez, who, along with more than 80% of the parents, signed a petition demanding that Edison stay. On June 25, the board backed down, allowing Edison to apply to have its charter controlled by the state, which is more sympathetic.

Clearly, there's still vigorous debate about Edison's effectiveness. Its schools in Baltimore, Dallas, and Detroit posted "spectacular gains" on standardized tests this year, points out John E. Chubb, Edison's chief education officer. Edison figures that 35 of 43 schools that have been open for at least two years have raised their test scores, while only eight have had mixed results. Critics say such claims are exaggerated: "While their students have made gains, their progress is about the same, if not slightly worse," than district-run schools, says Gary Miron, a Western Michigan University researcher. Edison has asked Rand Corp. to do a more rigorous study.

CLUSTERS. Meanwhile, Whittle is under pressure for profits. His plan is to slash spending on administration to just 7% of a school's budget, vs. 27% at the average public school district. Edison will plow 13 percentage points of the savings back into the classroom, leaving seven points for profit. In practice, this model works only on an enormous scale. So far, Edison has cut central-office expenses to 17.5%, and they won't hit 10% for two more years. Whittle doesn't expect a net profit until fiscal 2005, when revenues should reach $1.6 billion.

Meanwhile, to improve margins, Edison is aiming to manage clusters of schools within districts. It has already won deals to manage several schools in Dallas, Las Vegas, and Miami. Whittle is also charging into higher-margin businesses such as summer school. He expects to begin opening teachers' colleges in 2003. By 2008, he predicts they will bring in $120 million in revenue and a steady supply of teachers. First, however, Whittle must raise $22 million in startup capital.

It's a plan that requires enormous investor patience. All the bad news this year knocked the stock to 20, down from 38 in February and barely above the 18 at which Edison went public in 1999. "This is not a stock for the faint-hearted," cautions Gregory W. Cappelli of Credit Suisse First Boston, who's bullish on Edison. The question now is whether Wall Street--and local school boards--will give Whittle time to deliver on what still looks like a promising solution.

By William C. Symonds in New York

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