Standards - a commercial perspective?

Terry HilsbergNextEd Limited

16 December 2001

Background to NextEd

Terry Hilsberg Trained as computer scientist and micro-economist Worked Australian Government <1987

Economic/industrial and education/training policy and CIO

Venture capitalist <1993 Japan, China, USA, Philippines

Married a Chinese national Private investing <1998

Telecoms and internet in China West Inquiry contribution1998

Appendix 11 Discussion paper Founded NextEd 1999 Visited many Chinese universities over last 6 months

NextEd Limited Hong Kong based online education solutions &

infrastructure provider Founded late 1998 Offices in Australia, HK, Malaysia, PRC, UK &

US Investors: Fidelity Ventures, GE Equity,Whitney

& Co, South China Morning Post Holdings 36 Higher Education course supplier

customers, 15 down stream distributors Two large consortia – GUA and ACRRM

My family choice Top level Chinese Uni

US$1K p.a Good networking, social positioning

Top Level Australian Uni US$10K p.a

Ivy League USA >US$20K p.a Good networking

Outline HE is an industry, where china has

comparative advantage Role of standards in a commercial

setting Forces in the HE industry Standards and the Digitisation of

the industry Impact for China

Higher Education is an Industry

Higher Education is an industry

Not just a social mission • An industry which is a major

international growth industry

China is starting to think so….

"21st Century is the era of knowledge economy and the revolution of IT is changing people's life. As the centre of knowledge economy, modern education is integrating modern IT and traditional educational methods and breaking the barriers of time and space by making use of distance educational delivery modes. Education is an industry. Distance education is the most industrialized of educational forms. The partnership between universities and commercial companies is the must-be way for distance education development.“

Pre-amble to agreement between top level Chinese universities and commercial partners

USA HE Industry

State owned sector punching below it's weight

• Craft industry like nature of USA public HE system, which arises from factors such as lack of clarity as to who owns IP, remuneration policies etc.

• Stuck with islands of digitization which are not linked into robust supply and customer chain extranets

• Out of state tuition policies which render most US State Unis uncompetitive in world market

Fixed marginal costs

Due to these factors, mid sector of industry is

Not scaleable, Not replicable to multiple sites, or Not able to generate significant

free cash flow

Competitors

Domestically and increasingly internationally can compete on

price quality Generate significant free cash flow,

which can be re-invested which compounds the problem

Sources of competition

Loss of market growth is the major problem

Import or domestic competition Not so significant Only in specialized areas such as IT

Export competition Very real USA state universities missing in action in

Asia

Commercial role of standards

Role of standards Commercial/industry structure Pedagological Ideological

Standards – A toolTechnical standards are a reflection of broader

forces at work in the higher education industry Retail Consumer

Reduction of consumer un-certainty Grow the market

Industry organization Disaggregate value chain Create many sub-markets Drive down costs and prices Allow spatial division of labor

Interest Groups Interest groups Academics T and L specialists Commercial solution sellers Partners of academic institutions

Standards – Reflection of Major international forces in industry Value chain contestability

Due to the technology Leading to deflationary forces

Souring of inputs from across space And increased international tradability

of industry Import and export competition

Consumer orientation Owning the customer relationship is key From order taking to marketing

Market share in Asia?

Market size Market

Asian H.E - Last 10yrs CAGR 5-25%p.a (according to segment)

Income elasticity of demand 1.5 >US$50B p.a H.E sector US$6B p.a D.E US$2B p.a Corp training

D.E giants Most of the world giants in D.E are in Asia E.g CCTVRU

Education access still poor Participation rates in post secondary education

are low E.g. PRC has only same rough number of university

students as Australia Demand outstrips supply

E.g. In many provinces in China less than 10% of qualified intake can obtain undergraduate education

People are willing to pay Well meaning bureaucrats still in control in

some countries, dampening demand

China – Demand for Offshore Education

0

1000

2000

3000

4000

5000

6000

7000

2000 2010 2020

75% of Intl.Price50% of Intlprice25% of Intl.Price

000’

Students

Source: IDP Education Australia 1999 model of Chinese market demand

Course price vs. volume- Asia

US$1K – 1KUS$0.5K – 10K

<US$0.1K – 100K

•Price elasticity of demand is high•Income elasticity of demand is high

Example of dilemma:Volume vs price vs market positioning

?

The Growth of Giants Real price of H.E in Asia increasing at 2-5%

p.a Suggests the “Honda” strategy

Some giants emerging concentrating upon: Ownership of Student – via distribution Infrastructure Scaleable production Lesser extent, content

Example NIIT – US$250M p.a/US$70M p.a profit

c.f say UHK SPACE US$90M p.a neg. profits

Some will be Chinese (Indian)………….

Chinese (Indian) Competitive Advantage Basis of advantage

Strong international brands in selected communities e.g. 60M O/S Chinese

Low production costs Advanced technology Advanced courseware All of which comes together in Network Education

Colleges

Trends 5 of 10 top Chinese universities have HK rep offices 3 of top 10 have launched international courses

Global Players Take Off Apollo, Strayer, DeVry, Sylvan, NIIT etc.

Revenue CAGR 20-40% typical EBITDA 8-25% of revenue range

Better performers consistently deliver 20% Free cash flow/Revenue Cash to invest

Price/Earnings imbalance – major issue 20-40 USA 8-15 Asia

Why are the USA public universities missing in action? Out of state tuition policies Lack of scalable, replicable

inventory Unwillingness to disaggregate

value chain

Disruptive technology = value chain contestability

The Internet and data base Escalator

Stages of technology development Administrative Digitisation

e.g. college management systems Content Digitisation

e.g. authoring tools Learning content management

e.g. LMS Knowledge management

e.g. knowledge and content management systems Learner relationship management

e.g. HE adaptation of eCRM technology

Vertical DisaggregationLayer Examples of Players

Student eyeball and demand aggregators

Student Advantage.com; Zapme.com; collegestudent.com; collegeclub.com; grade-it.com; collegepro.net; versity.com; studentu.com; monster.com; myinternet.com

Course aggregatorsPortals

Headlight.com; Click2 learn.com; Learn.com; University Access; smartplanet.com; newpromise.com; free-ed.net; wgu.com

Front end service providers

Zenzibar.com, Campus Pipeline.com; embark.com; fastweb.com; eStudent.com

Platform service providers

eCollege; Embanet; Convene; Eduprise; NextEd; UOL; online.edu

T and L Software providers

ULT, Blackboard; Prometheus; Lotus; WBT

Student Learning services

Smarthinking.com; tutornet.com

Course providers Onlinelearning.net; Pensare; Morningside ventures; Skillsoft.com, Digitalthink; ZDU; prosofttraining.com

Course hosting platforms

Click2learn.com, Blackboard.com

Back end Software providers

SCT, Datatel, Peoplesoft

Shifts in value chain ownership

Disaggregation leads to contestability of the value chain

Platform provision 10-30% < Content 10-30% < Student support 20-40% Marketing and sales 10-40% >MIT Initiative may be misguided

Leading to intense deflationary pressures

Production factor mobility……..

Deflationary pressuresDeflation results from Cost deflation Digitisation of transactions Disaggregation of value chain

Contestability by nimble players International division of labor in course production and

delivery Course production - Vietnam, India and China Learning support - India Technology e.g. LMS – India and China

Price deflation Competition from low cost high prestige brands

e.g. international arms of top Chinese universities

Example – Four year tuitionQuality IT Education

from top ranked universities

Huazhong University of Science and technology

<US$1K p.a University of Melbourne

<US$10K p.a MIT

>US$20K p.a

High quality China University On-line Undergraduate prices

Top ranked Dong Nan University

US$1K p.a Medium ranked rich

province Fujian Normal US$750

p.a Medium ranked poor

province China Normal US$300

p.a

Example – courseware production

Production of a course roughly equivalent to a university subject with complex multi media objects

Vietnam suppliers ? 100% New Delhi supplier 200% Shanghai supplier 300% Hong Kong supplier 400% Australian supplier 400%

Example – University Software

The Labor Cost Pyramid

High cost Western labor

Lower cost labor

Student labor

Rules based knowledge

Codified IP

Influence of standardsStandards promote: Disaggregation of production

process via interoperability of transactions, content and stages or production

Deflation by promoting disaggregation, spatial division of labour

Thus international competition

Market - Crossing the Chasm ?

Crossing the chasm

Principle:

New technology will always first be successfully adopted in markets where it has overwhelming competitive advantage

Clayton ChristiansenGeoffrey Moore

Students, their parents and educators often live in

different worlds…

What is the product bundle?

Child care Particularly a function of f2f undergraduate education. Not a function well supported by “virtual delivery”.

Social life Particularly a function of undergraduate f2f education. Some elements can be replicated in virtual communities.

Influence network A high portion of the consumer value of much post graduate education. Can be well supported by virtual delivery, particularly where international communities are valued. Add some f2f to maximise.

Jobs – Credentials/Immigration

The major proportion of consumer value in most high volume course based undergraduate and post graduate education. Delivery mode neutral

Convenience of access

A high proportion of the consumer value of ,much post graduate education. Highly valued by consumers interested in virtual delivery – time and space shift

Education Objectively “No significant difference” – however punters perceive there is a difference, which is also promoted by vested interests

What is valued?

Provider – Student working nicely in niche markets e.g Theology education driven by access

Provider – Corporate students works in some areas e.g multiple outlet TNCs driven by savings in staff time and travel

Provider – Distributor – Student all education is local taking off, by far the largest market clicks and mortar sales and delivery

What works in Asia?

What works On the job skills

training Generic skill

training Centre based

undergraduate and post-graduate HE

Niche market based HE

What does not work Mass market total

“over the internet” electronic delivery for accredited HE

Particularly for UG education

Early adoption is in market niches where electronic delivery has overwhelming competitive advantage

Geographical manifestation“Must have” factors are geographically concentrated Smaller, geographically concentrated, rich

economies in difficult position Small size and concentration of activity, strongly entrenched public

sector practices, lack of growth

China - most compelling as “must have” factors mainly present

Strong growth, numerous multiple outlet organizations, compelling economics, less entrenched resistance, good infrastructure

Australia Geographic dispersion, good infrastructure

Some in the middle Weak infrastructure

Changes in the Marketing Mix

Changes in the marketing mix

A revolution in thinking Product – product customisation Access - CRM Price – price disaggregation Distribution Marcoms

Learning Centers Work

Why does clicks and mortar work? Brands are important:

Consumer buying behaviour Delivery places are important

Nature of the product Not just selling skill, or knowledge

acquisition Meeting many other demands

Systems now allow global scale for local delivery Global supply, local consumption

Consumer behaviour All markets are local Qualified lead generation

60-70% via WOM or referral Purchase

>$US5K decision – can often take 5 visits to a “place”

Delivery F2F component to deliver non-education

components

Multiple centre roll outs Multi-centre IT training

NIIT, APTECH, Software Solutions, Informatics, STI

Multi-centre ESL/ELT ACL, WSI

Multi-centre under-graduate Academic programs Chinese Top 20, STI, Informatics, VAD, RMIT

Multi-centre post graduate Academic programs STI, KES, VAD

Example – STI 120 centres in RP, China 80,000 students

20% p.a compound growth >40,000 in 4 Year undergraduate programs

Training/UG IT Post graduate start up via buy in from GUA

Franchising framework Strong central integration Via VSAT links, central SIS and increasing electronic

delivery

Example – Mid ranked Chinese University

12,000 EFTSU Y2000 first e-learning student intake 4000

students Y2001 intake 8,000 students 3 times oversubscribed US$750 p.a full time tuition > 60 learning centers

The University as a Local node in a Global Extranet

Islands of automation to full digitisation

Stage 1 - Islands of automation Digitisation of analogue processes e.g publishing,

student information, learner management, finances etc.

Stage 2 – Some lateral links SIS talks to Finance to Resources

Stage 3 – Paper over the consumer interface Add integrated consumer touch points - CRM and

personalisation

Stage 4 – Integration with suppliers and distributors

The Global University Extranet

Global Education Extranet

LearningManagement

System

StudentInformation

System

CustomerRelationshi

pManagemen

tSystem

KnowledgeManagement

System

ServerNetwork

NextEd DeliverySystem

Students

Professional Association

s

English Language Trainers

Higher Education

Commercial Trainers

Corporates

Testing & Assessment

Job Recruitme

nt Companie

s

Cen

ter

LA

N

Cen

ter

LA

N

Center LANCenter LANCenter LANCenter LAN

Beijing 1 Server

Cisco Router

Beijing 2 Server Beijing n ServerShanghai 2 Server

Shanghai n Server

Virtual Private NetworkBeijing

Shanghai 1 Server

Cisco Router

Virtual Private NetworkShanghai

Internet

Cisco Router

Cisco RouterCisco RouterCisco Router

Cisco RouterCisco Router

Shanghai ISPBeijing ISP

Backup tape

Local nodes in global networks

Technology enables a scaleable multi site business system:

Replicability of sites Standard “franchising” package with

underlying systems Scalability at individual sites

Guide on the side for process using electronic resources

Consistent quality Able to be centrally monitored

Relative weight of consumer applications Leaner relationship management

system Publishing Student information system Underlying delivery networkToo much influence of content

related activity in standards work

NextEd and Content Standards

What are our customers and ourselves doing? GUA – university interoperability ACRRM – university interoperability USQ – GOOD RMIT – DLS Athabasca – eCRM

What are we doing Dramatic improvements in

productivity of our internal production

Print to HTML Word to XML to print and HTML

China in the Standards Game

Strengths of China going into the game Large scale of network education

providing a base Compelling need for network

education Disaggregation of production will

allow China to play at those stages of the production chain where it has comparative advantage

Weaknesses A lot of Network College

implementations are still at the “tinkering” stage – not robust

Some universities cannot decide whether they wish to jump the industrial divide

Conclusion

Lessons from the past ? Must “own” the student

Do not let the downstream partner squeeze until 4+0 becomes 0+4 with no equity

0+4 with equity, desirable Real prices increase over time International competition is inevitable Mid-level state owned universities

hobbled by lack of free cash flow

Summary HE is an industry, where China has

comparative advantage Standards in a commercial setting

are a reflection of underlying industry structure forces

Major forces in the industry = increased tradability

China well placed to be a leader

Hmm.. As families

Where should we educate our children?

As institutions Do you wish to be internationally

competitive and add directly to GDP? As a nation

Does …….. want an internationally competitive H.E industry?