Why There Isn't a Dominant Aggregator in Online Education
Education is one of only two of the top 10 consumer spending categories (2% of consumer spend) not owned by an Aggregator.
In Why There Won’t Be Any New Aggregators promised to revisit why that is in a later post. This is that post.
As a refresher, let’s define two concepts: Aggregators and Natively Integrated Companies.
Aggregators are businesses who leverage their direct relationships with a critical mass of users to exert power over increasingly modularized suppliers, creating a flywheel as more demand means more supply means more demand and so on, at decreasing unit cost to the business.
Natively Integrated Companies are companies that:
Leverage technology to integrate supply, demand and operations from day 1
Build relationships with customers to build products that resonate
Take principal risk to achieve 1) and 2) and capture a larger share of profits
OK, now we’re ready to dive in and figure out why there aren’t any Aggregators in online education.
Education is a massive market
Let’s start with the stakes.
The 2% of consumer spend number cited above greatly undersells just how massive education spend is, because it does not count the money that we indirectly pay for education through our taxes. In 2015, the US government spent $649 billion on K-12 education, US colleges spent $559 billion to educate and support their students. That spend accounted for roughly 7% of US GDP in 2015. In 2018, student loan debt passed $1.5 trillion for the first time, and is only continuing to grow.
Even assuming software doesn’t eat traditional education, the opportunity for successful tech-enabled educators is huge: $107 billion is spent on online education globally, and the coding boot camp market is estimated to be $260 million. The largest US acquisition in online education was Lynda’s impressive $1.5 billion sale to LinkedIn in 2015, and the largest player in the coding bootcamp space, General Assembly, was acquired for $412 million in 2018.
Despite the huge prize, nobody has been able to build an Aggregator in education.
A very brief overview of online education
Coursera, EdX, Skillshare, Lynda (now LinkedIn Learning), Udacity and Udemy are among the most successful online education platforms. Each offers Massively Open Online Courses, or MOOCs, online courses aimed at unlimited participation and open access via the internet.
First introduced in 2006 and popularized in 2012, MOOCs consist of traditional educational materials posted online (lectures, notes, readings, problem sets) in addition to more interactive features like community support forums full of students taking the course simultaneously across the globe, quizzes with immediate feedback, and live office hours.
MOOCs come in a couple of main flavors:
a) Offer courses created by anyone on their platforms, as Skillshare has done.
b) Partner with existing educational institutions to create courses, as EdX does with Harvard, MIT and other top universities and institutions.
To confirm that none of the online education companies have become Aggregators, let’s do a couple of sniff tests:
Quick: name the biggest online education platform. If you’re like most people, nothing jumped into your mind as quickly as Uber would for ridesharing, Airbnb would for travel, or Google would for search.
Let’s look at the Alexa Rankings, which are a rough proxy for website popularity
All of the Aggregators, with the exception of Uber and Airbnb (both get a majority of their traffic from mobile apps, which is not counted by Alexa) are in the top 25 most popular websites in the world. The highest-ranked online education site, Udemy, doesn’t show up until #212, with the others falling between #627 and #3,051.
Owning demand and leveraging it against supply is the hallmark of an Aggregator, and the online education companies fall short of that standard.
Why aren't there any online education Aggregators?
Now that we understand a little bit about the online education market and have seen that none of its main players have achieved Aggregator status, let’s look at why that is.
No online education business has successfully built an Aggregator for three main reasons:
The Job To Be Done is complex
Supply is not sufficiently modularized
Success requires real effort from the user
Let’s explore each of these reasons.
1. The Job to be Done is complex
The "Jobs to be done" framework, developed by Clayton Christensen, says that customers hire products to do a certain job for them. The biggest Aggregators have very clear jobs to be done:
Uber: "I need to get from point A to point B."
Airbnb: "I need a place to stay away from home."
Netflix: "I need to be entertained."
Facebook: “I need to connect with my friends and family.”
Google: “I need to find something on the internet.”
Amazon: “I need to buy something online.”
Online education is different, because its customers have a wider range of jobs to be done than any of the Aggregators' customers.
"I need to find a job."
"I need to learn new skills for my current job."
"I need to satisfy my curiosity."
"I need keep my brain sharp."
"I need to explore new fields."
This variety of jobs to be done makes it difficult for an Aggregator to build a platform that is sufficient at solving any one of them, and therefore slices the market into a series of smaller niches instead of allowing for one dominant Aggregator.
2. Supply is not sufficiently modularized
One of the Aggregators' superpowers is modularizing supply. The easiest way to think about modularized supply is that you don't care whether a) John picks you up in a black Camry or b) Sarah picks you up in a silver Accord. As long as the car is relatively clean and gets you from point A to point B, you're happy.
Online education is very different. Do you care if a Law course you're taking is taught by a Harvard professor or a random person who has read a lot of law books? Probably. EdX certainly believes that you do.
This gives the Harvard professor power over the platform, making it harder for the platform to leverage its demand power to force him to accept its terms. If Sarah fails to conform to Uber’s rules, or holds out for a larger cut of the money, Uber can drop her from the platform and no one will be the wiser. If famous Law professor Charles Fried holds out or leaves the platform, thousands of potential students could go with him. Fried comes to the table with his own brand, and he can leave the table with it, too.
What if I told you that Professor Fried’s course only had 3 stars, though, while the random law book reader's course had 5 stars? Well, that depends.
In the book Range, David Epstein cites a study from the U.S. Air Force Academy in which students who had easier professors for introductory classes rated those professors higher than students who hard hard professors rated theirs. Makes sense.
It turns out, however, that the students who had harder professors in their introductory classes actually did better in future classes. In effect, students gave the lowest ratings to the teachers who best set them up for future success! So maybe ratings aren't a perfectly useful indicator.
The two most powerful tools that Aggregators use in modularizing supply - abstracting away suppliers’ brands and using ratings to signal quality and enforce desired behaviors - are rendered ineffective in online education.
3. Success requires real effort from the user
One more characteristic that Aggregators have in common is that their products require incredibly little effort from users. On Airbnb, I can search for, discover, and book a place to stay in 2 minutes. Uber gets you a car at the push of a button. Netflix recommends the shows it thinks I will enjoy, and then I can end up watching more content for hours literally without leaving my couch.
Online education requires real effort. Students need to 1) decide what they want or need to learn, 2) do the research to find the right course, and then 3) commit to hours and hours of lectures, quizzes, note-taking, and reading assignments, often on a set schedule that requires hiring a babysitter, or waking up early, or skipping plans with your friends.
Education is super important, so millions of people make these kinds of sacrifices for their education every day. With traditional education, you can easily argue that this sacrifice is worth it (although an increasing number of people argue that it is not). The curriculum has been designed by professional academics and guides you through your course of studies. Teachers grade you and stay on top of you to keep showing up and improving. You get to share ideas and debate with others who are learning the same things you are, in-person.
At the end - and this is important - you earn a degree, and that degree confers value on you in the eyes of future employers, your community, and even yourself.
When your education is online, however, you need to find your own courses, hold yourself accountable, and skip parties, and at the end of it all, you might end up with a little section like this on your LinkedIn profile:
As an employer, I have no idea what that means. Is a Gamification certificate from Coursera valuable? How can I be sure that the course you took was high-quality? The credential you receive for all of your hard work is confusing at best.
When you use Uber, you hit a button, stand around for a minute, and then get in a car which you are 99.9% sure will successfully get you to your destination. That’s the type of effort:return ratio that defines successful Aggregators.
Online education thus far has taken too much work for no guarantee that all that work will translate into real success in the form of a new job, a promotion, or mastery of a subject.
To recap: none of the biggest companies in the one has succeeded in building an online education Aggregator, because the Job to be Done is complex, the supply is hard-to-impossible to modularize, and success requires real effort from the user… and isn’t guaranteed.
What would a Natively Integrated Education look like?
So what to do? If online education isn't a good candidate for Aggregation, it is a perfect candidate for Native Integration. What would a Natively Integrated Education look like?
It would leverage technology to build direct relationships with a targeted group of potential employers and students, and build a relevant curriculum to create job opportunities for its graduates, from Day 1;
It would rapidly update its courses and offerings to reflect the feedback from, and needs of, future employers, graduates, and current students; and
It would take principal risk to align its own incentives with its students’, capturing upside that traditional education, and even online education, cannot or does not, only when its students succeed.
If you’ve been on Twitter in the past 6 months, the Natively Integrated Education I’m describing will sound familiar to you: Lambda School.
In Part II, Natively Integrated Education: Lambda School, we explore why Natively Integrated is the right approach for a challenger educator, how Lambda is Natively Integrated, the challenges they might face, and how they can overcome them.
If you have any thoughts on the topic, or questions on Part I, reach out to me @packyM on twitter - I would love to discuss.
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Huge thanks to Greg Hayes, Dan McCormick and my beautiful wife, Puja, for their feedback and comments!