Why For-Profit Education Fails

Why For-Profit Education Fails
Moguls’ good intentions too often betray them.
By JONATHAN A. KNEE
Nov 2016 Issue
http://www.theatlantic.com/magazine/archive/2016/11/why-for-profit-education-fails/501140/

Earlier this year, LeapFrog Enterprises, the educational-entertainment business, sold itself for $1 a share. The deal came several months after LeapFrog received a warning from the New York Stock Exchange that it would be delisted if the value of its stock did not improve, a disappointing end to the public life of a company that had the best-performing IPO of 2002.

LeapFrog was one of the very last remaining of the dozens of investments made by Michael Milken through his ambitiously named Knowledge Universe. Founded in 1996 by Milken and his brother, Lowell, with the software giant Oracle’s CEO, Larry Ellison, as a silent partner, Knowledge Universe aspired to transform education. Its founders intended it to become, in Milken’s phrase, “the pre-eminent for-profit education and training company,” serving the world’s needs “from cradle to grave.”

Investors aiming to start an education revolution have, with regularity, lost their shirts.

Knowledge Universe businesses included early-childhood learning centers, for-profit K–12 schools, online M.B.A. programs, IT-training services for working professionals, and more. Milken’s penchant for secrecy makes a comprehensive assessment impossible—most of the businesses were privately held and some were sold to private buyers for undisclosed sums. But of the companies about which there is public information, most, like LeapFrog, ended badly. Education remains untransformed.

Milken was far from alone in the belief that education could be revolutionized through radical new business models. In 2012, the media mogul Rupert Murdoch and the former New York City schools chancellor Joel Klein established the Amplify division within News Corp. At the time of his initial investment, Murdoch described K–12 education as “a $500 billion sector in the U.S. alone that is waiting desperately to be transformed.” Their idea was to overturn the way children were taught in public schools by integrating technology into the classroom. Although inspirational, the idea entailed competing with a series of multibillion-dollar global leaders in educational hardware, software, and curriculum development. After several years and more than $1 billion, with no serious prospect of ever turning a profit, Murdoch and Klein sold their venture for scrap value to Laurene Powell Jobs, Steve Jobs’s widow, last year.

Indeed, over the past couple of decades, a veritable who’s who of investors and entrepreneurs has seen an opportunity to apply market discipline or new technology to a sector that often seems to shun both on principle. Yet as attractive and intuitive as these opportunities seemed, those who pursued them have, with surprising regularity, lost their shirts. JP Morgan backed Edison Schools’ ill-conceived effort to outsource public education in the late 1990s and saw the business lose 90 percent of its value during its four years as a public company; Goldman Sachs was one of many private-equity firms that came up empty after betting on the inevitable ascendance of for-profit universities; the billionaire Ronald Perelman shut down his futuristic K–12 educational-technology company, GlobalScholar, after spending $135 million and concluding that the software was faulty and a “mirage”; by the time the hedge-fund titan John Paulson was able to sell the last of his stake in Houghton Mifflin Harcourt, in 2015, he had likely lost hundreds of millions financing the company’s misguided mission to remake textbook publishing.

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