When For-Profit Meets Nonprofit

Educating Through the Market

Jared Bleak

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781135870744
• Edition: 1
• Topic: Education
• Subtopic: Nonprofit Organizations & Charities

This study addresses the increasing tumult over the commercialization of higher education - a battle over profit and principle, money and mission. While many issues in higher education encompass the mission and values of the university, the operation of for-profit subsidiaries by nonprofit universities provides the potential for an especially contentious clash. Some faculty have been especially vocal in this debate, claiming that the culture of the academy is being irreparably altered as traditional values are being replaced by a corporate style of management, or by some hybrid. By answering the questions of why for-profit subsidiaries of nonprofit universities were created, how they are governed and managed, and what the nature of the relationship with their nonprofit parent is, this book contributes to a better understanding of the larger controversy over whether universities have become too business-like, too market oriented, and whether they have sold their souls and values in the process. In essence, the book provides a window into whether it is possible to do business like a business - a trend afoot in the academy - and still retain allegiance to core values.

Chapter One
Going to the Market

The pursuit of market-oriented activities by colleges and universities in search of new revenue streams, increased enrollments, greater prestige, and amplified visibility for their “brand names” became common practice in the late 1990’s and the early 21^st century. Marketing and promotional campaigns to increase revenues are now commonplace. Recently, fourteen public universities contracted with the Collegiate Licensing Corporation and the Starter athletic apparel company to display their logos on a Nascar series racecar, guaranteeing each institution royalty income from sales of related Nascar promotional items, an up-front payment for participating, and the opportunity to have their logo paraded before up to 90,000 fans on race day (Frye, 2001). Some universities sell to the highest bidder the naming rights to their sports arenas—e.g., Comcast Center at the University of Maryland and Save Mart Center at California State University at Fresno—while others have even joined the cola wars by signing lucrative contracts which guarantee soft drink companies exclusive “pouring rights” on their campuses (Suggs, 2000, January 14; Van Der Werf, 1999, October 15).

Commercialization may be most dramatic in athletics, with multimillion-dollar coaching contracts, ever-lengthening seasons, and game schedules created to accommodate television, regardless of students’ academic schedules. Case in point—for two straight seasons the University of Oregon has rented space on a Manhattan skyscraper hoping to put its football program “on the national map” (Rhoden, 2002, July 25, p. Dl). Said one university official, “If you’re not located in a media center, you go to the center” (p. Dl). In 2001, Oregon spent $250,000 on a banner near Madison Square Garden and in 2002, the price tag rose to $300,000 for a huge banner overlooking Times Square, beckoning passersby to ogle the university’s star player and urging them to watch the team on television (Wojnarowski, 2002, August 9).

Following the example of the airlines, health clubs, and other industries that manage load factors and demand, the University of Oregon offered students discounts on afternoon courses, hoping to relieve some of the strain on resources during the more popular morning hours (Farrell, 2002, July 19). And, in an effort to keep students’ disposable income on campus and create an additional source of revenue, many universities have purchased nearby hotels. Not surprisingly, these market-oriented activities have not been universally admired. Said one skeptic, “A university’s core mission is not operating a hotel” (June, 2002, August 16, p. A29).

Similarly, these activities have been seen as reflecting a subtle change in how students are viewed: “Students are no longer seen as scholars,… but as profit centers” (Slaughter, 2001, p. 24). In the face of increasing competition to enroll and retain students, universities now build lavish dorm rooms with maid service, gargantuan fitness centers, and “food-courts” with gourmet menus. Driving the growth of amenities is the power students and parents have that comes with increased competition. Students act as consumers. One administrator frankly admitted, “The students say, ‘What can you offer me?’ So everybody’s building new facilities to keep up with the Joneses” (Leonard, 2002, September 3, p. Al).

Profiting from Research

The university economic engine ranks at the top of most state’s goals for higher education. Nearly a third of the nation’s governors have pressed their legislatures to increase funding for research and technology-transfer programs in public universities. Other states have eased restrictions on access to research facilities by for-profit companies (Schmidt, 2002, March 29). A leading example of the push for closer connection to business, North Carolina State University recently spent more than $250 million to create a 1,000-acre research park—Centennial Campus. Heralded by university officials as the “wave of the future of higher education,” this “marriage of private industry and academe” (Carlson, 2000a, p. A49), houses scores of fledgling companies alongside academic departments and will feature a golf course, a light-rail system, housing, and a public middle school.

About 25 percent of the country’s current non-profit business incubators (organizations formed to support the formation and growth of businesses), like those at North Carolina State, are run by universities and colleges, a trend likely to grow substantially (Carlson, 2000a; Van Der Werf & Blumenstyk, 2001). These incubators are now part of a considerable push by universities to profit from research.

“State lawmakers are no longer willing to support universities’ research simply for the sake of expanding knowledge and improving the reputations of higher education institutions” (Schmidt, 2002, March 29). Politicians’ pursuit of a return on the public’s investment in higher education—in the form of revenues generated for products developed in university labs and through the creation and growth of companies developed with university technological innovations—has driven connections to industry. These companies mean jobs, increased tax revenues, and, as every politician hopes, votes (Lynton, 1989, Sept-Oct).

These actions highlight an apparent shift in how state legislatures and governors conceive of the role and purposes of universities. No longer viewed principally as a repository and cultivator of civic values, the public university is now seen primarily as a revenue generator and economic engine (Giroux & Myrsiades, 2001; Powers, Powers, Betz, & Aslanian, 1988).

At the federal level, market-oriented activities have been nurtured by legislation aimed specifically at increasing the contributions of universities to the national economy. The Bayh-Dole Act, passed by Congress in 1980, which allowed higher education institutions to patent the results of federally sponsored research, has served to “revolutionize university—industry relations” (Press and Washburn, 2000, March, p. 41). Since Bayh-Dole, the number of patent applications by universities has soared from an average of 250 per year in 1980, to 8,534 in 2000. Universities realized more than $1 billion in patent royalties in fiscal year 2000 alone (Blumenstyk, 2002, March 22), up from $641 million in 1999 (Blumenstyk, 2000). Fourteen institutions reported earnings on royalties in excess of $20 million in 2000, compared to only eight in 1999. The University of California system realized over $260 million in combined licensing income, while Columbia University alone earned over $138 million in 2000 (Blumenstyk, 2002, March 22). These examples underscore the comments of one observer, “Universities, once wary beneficiaries of corporate largesse, have become eager co-capitalists, embracing market values as never before” (Press & Washburn, 2000, March, p. 41).

Other connections between faculty research and corporations have been decried. The deal between Novartis, a pharmaceutical company, and the University of California at Berkeley was cited as prima facie evidence of the dangerous influence of corporations on the academy (Press & Washburn, 2000, March). Under the deal, Novartis agreed to fund $25 million in departmental research in exchange for first rights to negotiate licenses on discoveries as well as first look at all research produced by faculty members in the funded departments (including that paid for by state and federal agencies and private parties). To allow time to acquire patents on new technology, Novartis could ask for a publication to be delayed for up to 90 days (Blumenstyk, 2001, June 22). Arrangements such as these add to the “queasy suspicion that the process of discovery is in some way corrupted if it is driven by profit” (Economist, 2001, February 17, p. 21).

This suspicion prompted twelve medical journals to adopt a policy to assure the independence of industry-funded research, by rejecting manuscripts submitted by researchers “who did not have control of either the data or the decision on whether to publish results” (Guterman & Werf, 2001, October 5, p. A29)¹. This action stemmed from several incidents where companies tried to silence economically disadvantageous research results. For example, a pharmaceutical company demanded up to $10 million from a researcher and his university as a result of research, published in The Journal of the American Medical Association, which concluded the company’s drugs were not effective against the HIV virus (Mangan, 2000)². Fears abound that many industry-sponsored research studies are biased in favor of the funders. A study in the New England Journal of Medicine that looked at 70 reviews of a heart drug substantiated this concern; the outcome of the review could be easily predicted by the reviewer’s relationship to the manufacturer. “Ninety-six percent of those who found the drug safe had ties; among those with no commercial connection, only 63 percent concluded it was safe” (Ahuja, 2001, May 7).

For-Profit Higher Education

By creating innovative arrangements, non-profit colleges and universities are delivering curricula through for-profit subsidiaries aimed principally at the $3.5 billion online education market—a sector projected to expand to $7 billion nationally and $25 billion worldwide by 2003 (Eklund, 2001, January 26; Goldman, 2000; Rewick, 2001, March 12). The financial commitment to create a for-profit distance education subsidiary is substantial—NYUonline nearly $25 million and Columbia’s Fathom upwards of $30 million. The intent of these investments, for some institutions, was to spawn subsidiaries that were considered more nimble, entrepreneurial, and adaptable than their comparatively staid non-profit parents (Goldstein, 2000b; Kwartler, 2000). Not surprisingly, these companies are built like businesses, where speed in decision-making and a strategic market orientation—qualities foreign to the traditional academy—are considered the sine qua non for success (Abel, 2000b; Davis & Botkin, 1994).

The impetus behind the creation of these subsidiaries has to some extent been the phenomenal growth of the for-profit higher education sector (Goldstein, 2000b; Ruch, 2001). The number of for-profit, 4-year degree-granting institutions grew over 266 percent between 1989 and 1999. Over that same period, enrollment in for-profit institutions increased by 59 percent, compared with just seven percent enrollment growth in nonprofit institutions (Kelly, 2001, July). The landscape of for-profit higher education includes DeVry, Inc., with 56,000 students and 70 campuses and centers; ITT Educational Services, Inc., with 31,000 students at its over 70 campuses nationwide; and Strayer Education, Inc., with more than 14,000 students on its 20 campuses.

Without question, however, the giant of the for-profit higher education world is the University of Phoenix. One commentator asserted that the Apollo Group, the university’s parent company, has “awakened the marketplace to the economic potential of postsecondary education” (Goldstein, 1998, July, p. 448). Founded in 1976, the University of Phoenix is the nation’s largest private, accredited university, enrolling over 125,000 students, and boasting over 116 campuses nationwide. The Apollo Group reported fiscal 2001 profits of $108 million and projected revenues of up to $1.285 billion for fiscal year 2003 (Apollo, 2002; CNN, 2002, August 29a). Over the past five years, the company’s stock price has risen over 220 percent (CNN, 2002, August 29b).

Reflecting the potential of the online education marketplace, the first year after its stock was offered to the public, the University of Phoenix Online, an Apollo Group spin-off, increased enrollments by 81 percent, revenue by 76 percent, and saw its stock price rise from $9.33 to $40.13 (Apollo, 2002). Analysts have lauded the company’s “resilience to economic weakness, consistent business model, [and] attractive growth rates” (Briefing, 2001). Phoenix Online realized $31.8 million in profits in fiscal year 2001, an 82 percent increase over the previous year, and enrolled over 29,000 students (Apollo, 2002). For fiscal year 2003, the company projected revenues of up to $495 million (CNN, 2002, August 29a).

The stand-alone for-profit university is not the only story. Traditional nonprofit universities have also partnered with for-profit companies to offer online courses. The most prominent example is UNext, a company founded with $110 million, largely provided by Michael Milkin, the junk bond king and convicted felon. UNext partnered with such higher education notables as Stanford University, Columbia University, and the University of Chicago to deliver courses created by these institutions over the Internet. Columbia was guaranteed a minimum return of $20 million and, at the time, hoped to make much more in the company’s anticipated stock offering (Keegan, 2000, December). Unfortunately, UNext’s success never materialized. Similar partnerships include the Global Education Network, which enlisted Williams and Wellesley Colleges; Allarn, which included Oxford, Stanford and Yale Universities; and Universitas 21, composed of 17 universities internationally, and recently called the “new 900-pound gorilla on the block” (Abeles, 2002, August 2).

Fueling the growth of online partnerships and consortia are the titanic numbers of students and corporations in the market for online education. According to a Merrill Lynch estimate, 2.2 million college students will take online courses in 2002, a 210 percent increase since 1998 (Konrad, 2001, March 6). The online education market was estimated to grow to $25.3 billion by 2003 from $3.6 billion in 1999 (Altschuler, 2001, August 5; Grimes, 2001). The biggest piece of this market, corporate online education, was projected to grow from $1.1 billion in 1999 to $11.4 billion in 2003—a 79 percent compound annual growth rate. Higher education’s share of the online market was expected to grow to $7 billion in 2003 from $1.2 billion in 1999. Hoping to reap the rewards of this growth, investors pumped almost $3 billion into online education companies in 1999 and 2000 alone (Grimes, 2001). However, despite the reported opportunities in online education, none of the for-profit subsidiaries created in recent years has reported a profit and several have ceased operations, citing economic and financial woes. Controversy over the lack of return on investment has brewed on many campuses as constituents have become aware of the enormous resources invested (Hafner, 2002).

Challenging Tradition

Yet, there is more at stake in the creation of for-profit subsidiaries than just economic success or return on investment. The creation (and in several cases demise) of these companies has sparked controversy, with some faculty claiming that the culture of the academy is being irreparably altered as traditional models of shared governance are being replaced by a top-down, corporate style management, or by some hybrid. These subsidiary companies, created to market and deliver online education to both student and corporate audiences, are to many the embodiment of destructive trends at work. These trends—marked by increasing connections to business and a growing proclivity for market behavior—have some “fearful that the university’s true educational mission is being compromised” (Simpson, 2001, p. 54). Others assert the growing need to “make sure that the university does not betray its educational values and objectives” (Croissant, 2001, p. 45), or worry that market-oriented activities will eventually “change the social role of higher education institutions” for the worse (Breneman, 2002, June 14, p. B7). On an even darker note, Stanley Ikenberry (2001, Spring) warned that “any serious weakening in the integrity of the [university] or any corruption of the academic culture could be its undoing” (p. 15). (See also Nelson, 1997; Slaughter, 2001; Slaughter & Leslie, 1997; Smith, 2000; Soley, 1995; Stankiewicz, 1986).

The clamor over commercialization has embroiled the academy. One professor asked, “What is the difference between Yahoo! or America Online and Columbia University? Less and less” (Katz, 2001, June 15, p. B7). A professor at Columbia worried that the university “appears to be a for-profit enterprise.” Another stewed over the long-term effects of realizing significant income from market activities, worrying that these activities “will reduce the credibility of universities and will probably reduce the willingness of society to take care of these institutions” (Arenson, 2000, August 2, p. A25).

Though these concerns have lately come to a head, the challenge to universities posed by business influence was first recognized almost one hundred years ago, when Thorstein Veblen railed against the university as a “corporation of learning” and college presidents as “captains of erudition” (as quoted in Birnbaum, 2000, p. 17). Veblen asserted that “the intrusion of business principles into the universities goes to weaken and retard the pursuit of learning, and therefore to defeat the ends for which a university is maintained” (as quoted in Birnbaum, 2000, p. 17).

Since Veblen, the debate has picked up steam, generating a battle between the classroom and the boardroom, with “students and professors on one side, and university administrators and companies … on the other” (Noble, 1998, p. 1). Some critics have questioned the quality of the courses offered by both for-profit universities and the new partnerships, and labeled any educational institution with a com in its Internet address a “potential rip-off” (Altschuler, 2001, August 5, p. 13), or “a Wal-Mart education” (Keegan, 2000, December, p. 1).

On the other side of the debate, as market forces increase, many scholars and leaders argue that the academy must adapt to new market-driven realities. One professor asserted that technology and new ways of delivering education could increase the number of students served as well as protect at-risk programs by improving the university’s financial condition (Carnevale, 1999, October 22). In a challenge to higher education leaders, Klor de Alva (2000, March/April), then president of the University of Phoenix, exhorted them to “rethink the rules that govern higher education today” (p. 36) and stressed that “many of the risk-averse, traditional rules of higher education are beginning to appear not merely quaint but irrelevant or even downright absurd” (p. 34).

For-Profit Subsidiaries

For-profit subsidiaries embody the controversy. Some faculty have charged that these subsidiaries enable trustees and administrators to circumvent the normal channels of governance (Carr, 2000a), leaving faculty “out of the [governance] loop” (Carr, 1999, p. A46), bypassed in the decision-making process (Abel, 2000b). Opponents argue that the speed and manner in which these companies have been created are antithetical to the tradition and culture of shared governance (Kezar, 2001), and that top-down, corporate style management is regrettably replacing traditional models of shared governance. As one professor commented, for-profit subsidiaries “put the standard rules of academic governance on [their] head” (Abel, 2000b, p. A21).

At Cornell University, where there was considerable furor from faculty over the creation of eCornell (the university’s for-profit subsidiary), governance was a key issue. One faculty member asserted that “the principle concern is one of control” (Carr, 2000c). Professors, worried about the influence of investors in the company on the governance and operation of the university, were cognizant of the fact that the entity cont...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Acknowledgments
• Preface
• Chapter One Going to the Market
• Chapter Two Creating the Subsidiaries
• Chapter Three Governance: Who’s in Charge?
• Chapter Four Personnel Connections: Culture Creation and Mediation in the Subsidiaries
• Chapter Five Faculty and Curriculum: The Product and the Process
• Chapter Six Integrated or Insulated: Cultural Fit in the Academy
• Appendix A Research Design and Methodology
• Appendix B Governance Structures and Processes
• Appendix C Interview Protocol
• Appendix D Roster of Current For-Profit Subsidiaries Created by Universities to Deliver and Market Online Distance Learning
• Appendix E Comparison of the Four Research Sites
• Appendix F Informants Interviewed
• Notes
• Bibliography
• Index