3. 7-2
Phoenix Online also garners an outsize share of the industry’s revenues—about one-third
of the total. That’s because as the market leader, it can charge higher tuition than most
rivals. Undergraduates pay a little more than $10,000 a year at Phoenix Online, while
students seeking a master’s degree pay nearly $12,500. “They’re by far the giant in this
industry,” says Eduventure market analyst Sean Gallagher. Appendix A at the end of this
case lists some of the other key players or “competitors.”
7 Is the best yet to come? Both Phoenix Online and the broader industry are still in their infancy.
“There are 70 million working adults in this country who don’t have a college degree,” says
Gallagher. Increasingly, they realize that they need a degree to get ahead. But because they
often have a family as well as a job, studying online is the most convenient solution. Howard
Block, an analyst at Banc of America Securities, predicts “dramatic enroll-ment growth” for
Phoenix Online. He expects that half of the students in post-secondary education will one day
make at least some use of the Internet to earn their degrees.
GLOBAL OUTREACH
8 Phoenix Online began to tap the international market in 2005, initially “bringing in about
500 students a month,” said Mueller. “But that’s just the tip of the iceberg.” Though
Phoenix Online started offering classes only in English, it has begun to offer courses in
Spanish and plans to introduce Mandarin soon as well. Ironically, one of the hottest tech
stocks of recent years has done all this with plain-vanilla technology. While other
companies charged into online education with dazzling digital content, Phoenix Online
offers a text-heavy format that can easily be accessed with dial-up modems.
9 This might sound like a recipe for failure. But Phoenix Online realized that interaction
with humans—the professor and other students in the class—was far more important to
suc-cess than interaction with the digital content. Thus, Phoenix Online keeps its classes
small, averaging just 12 students. And to combat the Achilles heel of distance
education—a high dropout rate—it offers its students plenty of hand-holding, including
round-the-clock tech support. The result: 65% of its students go on to graduate.
10 Some see plain technology as a potential negative for the virtual college. “At some
point, Phoenix Online will need to upgrade the sophistication of its platform,” warns
Trace Urdan, an analyst with ThinkEquity Partners, a boutique investment bank. That will
require more spending on research and development and information technology, he
warns, which could crimp margins. Still, any extra spending could be easily offset if
Phoenix Online bumped up its class size to 15 students, argues Block. Even with today’s
small classes, operating profit margins now top 30%.
THE ONLINE TREND
11 The dot-com bubble may have burst in the world of commerce, but the promise of har-
nessing the Internet for paradigm-changing growth—and even profits—still thrives in the
halls of academia. At the University of Maryland University College, enrollment in
classes offered over the Net soared to 63,000 in the past academic year, up 50% from the
year before. UMUC students can now earn some 70 degrees and certificates entirely
online. The University of Phoenix Online saw revenues jump some 76% in the fiscal year
ended Aug. 31, to $181 million, while profits grew 82%, to $32 million.
12 Since the U.S. Army began rolling out an e-learning program in 2001, annually more than
10,400 soldiers are taking classes and earning degrees online from 24 participating col-leges.
Students at eArmyU, as it’s known, receive a free laptop and printer and 100% of their tuition.
The Army enrollment hit 80,000 after it took the program Army-wide in 2006.
4. 13 Nearly seven years after the dot-com fizzle began, e-learning has emerged from the wreck-age as
one of the Internet’s most useful applications. Nearly 75% of the 4,000 major colleges and
universities in the U.S. now offer classes over the Internet or use the Web to enhance cam-pus
classes, according to market researcher International Data Corp. About 6 million students take
online classes from U.S. higher-ed institutions in 2007 according to John G. Flores, head of
the U.S. Distance Learning Assn., a nonprofit trade group outside Boston. And it’s not just a
U.S. phenomenon: students from developing countries are jumping online, too.
FIGURE 1
Corporations
Are Charging
into E-Learning
Data: International
Data Corp.
FIGURE 2
The E-Learning
Explosion
Data International
Data Corp.,
Eduventures.com.
IDC. U.S. Distance
Learning Assn.
20
Corporate spending
16 on online training
and education
12
8
4
0
1999 2000 2001 2002 2003 2004 2005
Billions of dollars
As More Colleges ...And Spend More Money
90
Offer E-learning...
12
on Technology
60 8
30 Share of post-secondary 4 Technology spending by
institutions offering post-secondary institutions
e-learning
0 0
1999 2000 2001 2002 2003 2004 2001 2002 2003 2004 2005
Percent Billions of dollars
...More Students Are ...Pushing Up
6
Taking Online Courses
6
Revenues
Enrollment in courses Online tuition and fees
offered online by earned by for-profit and
4 post-secondary 4 nonprofit post-secondary
institutions institutions
2 2
0
1998 2001 2006
0
2001 2002 2003 2004 2005
Millions Billions of dollars
5. 14 These classes are opening new horizons for the fastest-growing segment of higher
education: working adults, who often find it difficult to juggle conventional classes with
jobs and families. Adults over 25 now represent nearly half of higher-ed students; most
are employed and want more education to advance their careers.
15 E-learning is an influence in the traditional college class as well. Online classes won’t
replace the college experience for most 18- to 24-year-olds. But from the Massachusetts
Institute of Technology to Wake Forest University in North Carolina, colleges are using
the Web in on-campus classes to augment textbooks and boost communication.
16 There are still plenty of hurdles to clear before the e-learning world can take off. For
one thing, most of the success is with established universities, like UMUC, which can
leverage their brand names to reach out to working adults. The for-profit start-ups, by
contrast, have struggled with accreditation and poor name recognition. Many have fallen
by the wayside, including BigWords.com, an Amazon-like purveyor of textbooks, while
only a handful make money, like UOP Online.
MASS MARKET?
17 Quality is a problem, which is a key reason why many online students drop out. That will
force a further shakeout, eliminating mediocre players. Many colleges grapple with such
issues as how much time their faculty should devote to e-teaching. And long-established
rules make it difficult for online students to get financial aid. Even as these problems are
resolved, “online learning will never be as good as face-to-face instruction,” argues Andy
DiPaolo, director of the Stanford Center for Professional Development, which offers
online graduate classes to engineers.
18 Ultimately, the greatest e-learning market may lie in the developing world, where the
population of college-age students is exploding. Just as cell phones leapfrogged land-based
telephones in many developing countries, so may e-learning help to educate the masses in
countries that lack the colleges to meet demand—and can’t afford to build them.
ROAD WORK
19 Looking way out, as far as mid-century, e-learning could “become the environment in
which the majority of human beings are educated beyond the secondary level,” asserts
University of Melbourne President Alan Gilbert. His school, along with Canada’s McGill
University and more than a dozen other universities, is part of U21 Global, a virtual
university being created through a joint venture with textbook giant Thomson Learning. It
aims to enroll 100,000 students by the decade’s end, mostly in Asia.
20 Meanwhile, e-learning demand in the U.S. is rising, driven by higher education’s
chang-ing demographics. Take Dr. Michael Kaner, a 43-year-old dentist in suburban
Philadelphia who’s halfway through adding a law degree to his credentials. Attending a
night program at an area law school wasn’t practical, he says, since it would have
required 12 hours of com-muting a week. So in 1999, Kaner signed up for Kaplan’s
Concord law program. Although the classes require 25 to 30 hours a week, there’s no
commute and he studies when it suits him. “This is the only way I could pursue a law
degree,” says Kaner, who hopes to build a part-time legal practice in dental issues.
21 Judy Rowe, who dropped out of college in the 1960s after running out of money,
earned a bachelor’s degree in psychology from UMUC last year while working as a flight
attendant for American Airlines Inc. “I took my laptop with me and did my assignments
on the road,” says Rowe, who’s now thinking about a second career in psychology.
6. COST-EFFECTIVE
22 E-learning is a good fit with the military, where frequent transfers complicate pursuing a
degree. The U.S. Army awarded PWC Consulting a $453 million, five-year contract to
cre-ate an electronic university that allows soldiers to be anywhere and study at Kansas
State University or any of the 24 colleges involved in the program.
23 eArmyU already has changed the perspective of soldiers like Sergeant Jeremy
Dellinger, 22, who had been planning to leave the Army to go back to school when his
basic enlistment ends. Then he enrolled in eArmyU to earn his bachelor’s degree from
Troy State University in Alabama. “Now I can get my degree and still do the work I love”
as a supply sergeant, says the Fort Benning (Ga.)-based soldier. Like Dellinger, about
15% of those who have signed up so far have reenlisted or extended their commitment.
By cutting turnover, “eArmyU could almost pay for itself,” says program director Lee
Harvey, since it costs nearly $70,000 to train green recruits.
24 Corporations, too, see e-learning as a cost-effective way to get better-educated employ-ees.
Indeed, corporate spending on e-learning is expected to more than quadruple by 2005, to $18
billion, estimates IDC. At IBM, some 200,000 employees received education or training online last
year, and 75% of the company’s Basic Blue class for new managers is online. The move cut IBM’s
training bill by $350 million last year, because online classes don’t require travel.
25 Even as online higher-ed catches on, however, few private-sector providers are turning a
profit. During the boom years, venture capitalists pumped some $5 billion into e-learning
companies, says Adam Newman, a senior analyst at Eduventures.com. Roughly $1 billion
went to companies that have already flamed out, he says. Beyond Phoenix, probably only half
a dozen companies are making money now. Lack of name recognition is the biggest problem
for companies like Capella, Jones International, and Cardean, UNext’s virtual cam-pus. And
winning accreditation—crucial for attracting students—is tough going, too. It took Capella
five years to make the grade; Jones waited four years. Concord’s grads can sit for the
California Bar Exam, but the American Bar Assn. still hasn’t granted it accreditation.
CAUTIOUS ELITES
26 Phoenix Online aside, the big e-learning winners so far are the traditional nonprofit uni-
versities. They have captured nearly 95% of online enrollments, figures A. Frank
Mayadas, head of e-learning grants at the Alfred P. Sloan Foundation. Most active are
state and com-munity colleges that started with strong brand names, a faculty, and
accreditation, says Mayadas, as well as a tradition of extension programs.
27 By contrast, many elite universities have been far more cautious about diluting the
value of their name. Harvard Business School believes it would be impossible to replicate
its classroom education online. “We will never offer a Harvard MBA online,” vows
professor W. Earl Sasser, chairman of HBS Interactive, which instead develops e-learning
programs for companies. MIT faculty nixed teaching classes online, fearing “it would
detract from the residential experience,” says former faculty chair Steven Lerman.
28 That didn’t stop MIT from embracing the Internet in a different way. Over the next
five years, MIT plans to post lecture notes and reading assignments for most of its 2,000
classes on the Web for free, calling the effort “OpenClassWare.” Lerman says “it’s a
service to the world,” but he says it’s no substitute for actual teaching, so faculty aren’t
worried about a threat to classroom learning.
29 A few other top schools see profit-making opportunities. Since 1996, Duke University’s
Fuqua School of Business has been offering MBAs for working executives. In these blended
7. programs, some 65% of the work is done online and just 35% in classes held during
required residencies that consume 9 to 11 weeks over two years. Duke charges up to
$90,000 for these programs—vs. $60,000 for its traditional residential MBA. Yet they
have been so popular that by next year, “we’ll have more students in nontraditional
programs than the daytime program,” says Fuqua Dean Douglas T. Breeden. The extra
revenues are helping Fuqua to double its faculty.
The Adult Education Market
30 The adult education market is a significant and growing component of the post-secondary
education market, which is estimated by the U.S. Department of Education to be a more
than $275 billion industry. According to the U.S. Department of Education, over 6
million, or 40% of all students enrolled in higher education programs are over the age of
24. This number is projected to reach 6.7 million in 2011. The market for adult education
in the U.S. is expected to increase as working adults seek additional education and
training to update and improve their skills, to enhance their earnings potential, and to
keep pace with the rap-idly expanding knowledge-based economy.
31 Many working adults are seeking accredited degree programs that provide flexibility to
accommodate the fixed schedules and time commitments associated with their professional and
personal obligations. UOP’s format since its inception has focused on working adult stu-dents by
providing an accredited collegiate education that enables them to attend classes and complete
classwork in a schedule and manner more convenient to the constraints their work life imposes on
their ability to obtain a college or advanced degree. UOP has long felt that most colleges and
universities as well as newer emerging technology-based education and training companies do not
effectively address the unique requirements of working adult students. They often cite the following
attributes of the traditional, not-for-profit education industry:
• Traditional universities and colleges were designed to fulfill the educational needs of
conventional, full-time students aged 18 to 24, who remain the primary focus of these
universities and colleges.
• This focus has resulted in a capital-intensive teaching/learning model in typical state
and private colleges and universities that may be characterized by:
• a high percentage of full-time tenured faculty with doctoral degrees;
• fully-configured library facilities and related full-time staff;
• dormitories, student unions, and other significant plant assets to support the needs
of younger students;
• often major investment in and commitment to comprehensive sports programs;
• major administrative overhead for all the various university functions;
• politically-based funding;
• major resistance to change in any academic programs, even in the face of rapid
global change across disciplines and professions;
• an emphasis on research and the related staff and facilities; and
• faculty with PhDs and a research focus but limited practical experience, even in key
programs like business and other working-related professions.
• The majority of accredited colleges and universities continue to provide the bulk of their
educational programming from September to mid-December and from mid-January to May. As
a result, most full-time faculty members only teach during that limited period of time.
• While this structure serves the needs of the full-time 18- to 24-year-old student, it
limits the educational opportunity for working adults who must delay their education
for up to five months during these spring, summer, and winter breaks.
8. • Traditional universities and colleges are also limited in their ability to market to or
provide the necessary customer service for working adult students because it requires
the development of additional administrative and enrollment infrastructure.
THE APOLLO GROUP, INC.
32 The Apollo Group, Inc. [AGI] has provided higher education to working adults for over
30 years through its four subsidiaries listed below. They enrolled and served slightly over
275,000 students enrolled in 2005.
• The University of Phoenix [UOP]—the largest private university in the U.S. and
source of the majority of the Apollo Group’s revenue.
• Institute for Professional Development—provides adult-education program develop-
ment and management consulting services to 23 regionally accredited private colleges
and universities.
• The College for Financial Planning Institutes—one of the nation’s leading providers
of financial services education for individuals and corporations in the financial
services industry.
• Western International University—adapts the Apollo model with younger
profession-als that seek individualized instruction through campuses in Arizona, and
more recently China, India and the Netherlands.
33 Revenue during the last five fiscal years for the UOP versus the other three parts of
The Apollo Group have almost tripled with combined revenues up 140% companywide.
They were as follows the last five years [in $millions]:
FY2006 FY2005 FY2004 FY2003 FY2002
Univ. of Phx $ 2,075 $ 2,014 $ 1,697 $ 1,251 $ 931
Other 3 Schs $ 402 $ 235 $ 97 $ 87 $ 78
Corporate $ 1 $ 1 $ 4 $ 1 $ 0.2
$ 2,478 $ 2,251 $ 1,798 $ 1,339 $ 1,009.2
34 The Apollo Group network spanned 101 campuses and 165 learning centers in 39 states and
five other countries in 2007. UOP locations identified on its website were as follows in
mid-2007:
9. The University of Phoenix Strategy
35 The University of Phoenix [UOP] strategy includes six key elements.
1. Establish New University of Phoenix campuses and Learning Centers. The
Univer-sity of Phoenix [UOP] plans to continue the addition of campuses and learning
centers throughout the United States and Canada. New locations are selected based on
an analy-sis of various factors, including the population of working adults in the area,
the number of local employers and their educational reimbursement policies, and the
availability of similar programs offered by other institutions. Chairman Todd Nelson
offered this com-ment relative to establishing new locations:
Even after 30 years we are still in only 35 states. So we still have 15 states to go, including New
York and Connecticut. And in many states there are multiple markets. So we probably easily have
another 35 to 40 new markets to expand into in the U.S. Over the next ten years our plan is to have
a physical campus not only in every state but also in every major U.S. metropolitan area.
2. International Expansion. The UOP believes that the international market for UOP’s
services is a major growth opportunity. The U.S. is the most common destination for
international students studying abroad. They believe that more working adult students
would opt for a U.S. education that does not involve living in the U.S. because they
could do so without leaving their employment and incurring the high travel and living
costs and stringent visa requirements associated with studying abroad. UOP’s belief is
supported by the fact that University of Phoenix Online has students located in
approxi-mately 75 countries despite having used only limited advertising. In addition,
many U.S. residents live and work in foreign countries and would benefit from the
opportunity to continue their education while abroad. UOP plans to offer the
University of Phoenix edu-cational model at physical campuses in international
markets. The UOP now has a loca-tion in Juarez, Mexico, and expects a Mexico City
campus soon. Its Western University operation has a location in China, India, Dubai,
and the Netherlands from which AGI expects to expand into a UOP presence.
3. Enhance Existing Educational Programs. UOP’s current enrollment by college is
spread across eight core programs:
College of Undergraduate Business 41%
College of Graduate Business 18
College of Info Systems & Technology 11
College of Social & Behavioral Sciences 8
College of General & Professional Studies 8
College of Education 7
College of Health Sciences and Nursing 6
School of Advanced Studies 1
100%
President Mueller notes several strengths he believes are underpinnings of these
programs that the UOP works continuously to improve:
3a. Accredited Degree Programs. UOP currently offers 15 degree programs across
these eight core program areas that are accredited by The Higher Learning
Commis-sion or the regional accrediting associations.
3b. Experienced Faculty Resources. While substantially all of UOP’s faculty are work-
ing professionals, UOP requires each member of AGI’s faculty to possess either a
Masters or Doctoral degree and to have five years of recent professional experience
10. in a field related to the subject they teach. UOP’s classes are designed to be small,
with an average of one instructor for every fifteen students. Faculty members are
also required to be accessible to students by maintaining office hours. The UOP
now claims to have over 17,500 instructors available on a regular basis with
advanced degrees and currently working in relevant professional positions as well
as having completed rigorous instructor training and evaluation programs to ensure
the quality of their instruction content and approach.
3c. Current and Relevant Standardized Programs. UOP uses content experts selected
from AGI’s approximately 17,600 faculty to design UOP’s curriculum. This enables
UOP to offer current and relevant standardized programs to UOP’s students.
3d. Emphasize Input from Employers of UOP Students. The employers of UOP’s
students often provide input to faculty members in designing curriculum, and class
projects are typically based on issues relevant to the companies that employ AGI’s
students. AGI’s classes are taught by a practitioner faculty that emphasizes the
skills desired by employers. In addition, the time flexibility provided by AGI’s
classes further benefits employers since it avoids conflict with their employees’
work schedules. A recent survey by University of Phoenix showed that
approximately 60% of its students receive some level of tuition assistance from
their employers. Two pedagogical innovations described below were developed at
the UOP based on input from several major global companies and employers of
UOP students seek-ing improvements on the realism in business course materials
and greater options for incorporating both online and in-person learning. Pres.
Mueller offered this comment:
We consider the employers that provide tuition assistance to their employees through
tuition reimbursement plans or direct bill arrangements UOP’s secondary customers.
3e. Pedagogical Innovations. FlexNet® is one example of UOP adapting its means of
delivering course material to accommodate different learner needs. FlexNet®
com-bines online and face-to-face instruction allowing any UOP student to choose
among three approaches to receive course instruction and interaction. Virtual
Organizations represent another innovation—six composite businesses, schools,
health care and government organizations that have been developed as learning
tools by subject matter experts and professionals in those fields. These virtual
organizations allow UOP students and their instructors to immerse themselves
inside virtual real-world settings to include Internet and intranet sites to provide a
more realistic form of experiential learning than case studies and simulations while
also fostering critical thinking and resourcefulness as the students engage the
virtual organization learning experience.
3f. Small class-size with quality instructor contact. The UOP has long sought to
over-come the “diploma mill” perception long associated with non-traditional
collegiate education by structuring quality instruction into its daily approach. One
way this has steadily paid off and separated UOP from that perception has been
through having every class remain small. The UOP has recently allowed its
average online course to increase in size from 10 to 12 students. The average on-
ground class has gone from 14 students to 15 students. President Mueller offered
these recent observations on this cornerstone aspect of the UOP strategy:
Yes, we’ve taken the average class size from 10 to 12 online, and 14 to 15 on-ground. That
has actually reduced instructional costs because of our overall size. We will never have
large classes compared to other universities. A classroom environment with
11. 20 students or less, like we offer, is better than a strategy class with 50 students or a
lecture class with 200 students like most public universities offer. At the UOP we
know that a good education means students need access to their faculty, easily.
And he went on to suggest that the acid test for quality of UOP instruction versus
other non-traditional universities or even traditional universities can be measured
by students’ employers willingness to reimburse for taking UOP classes:
This is a free-market economy. If we don’t provide value, the companies that are
reimbursing students [to take UOP courses] are not going to pay. We are not seeing
any deterioration in this area. Rather, we are seeing just the opposite.
3g. Offer a Low Cost Advantage. UOP’s tuition is running about $10,000 annually,
for a full load. It is increasing at an average 4%–5% annually. The average
traditional university tuition is running about $15–$20,000 annually, and
increasing approxi-mately 10% annually. The variance is even more pronounced
for graduate programs, where an MBA, for example, costs slightly over $12,500 at
UOP versus an average $28,000 nationwide.
4. Expand Educational Programs. UOP regularly evaluates and responds to the changing
educational needs of working adults and their employers by introducing new undergradu-
ate and graduate degree programs as well as training programs. To its degree offerings,
University of Phoenix recently added the Master of Business Administration in Health Care
Management and specializations in Marketing and Human Resources Management to its
Master of Business Administration; specializations in Elementary and Secondary
Education and Adult Education and Distance Learning to its Master of Arts in Educa-tion;
and a specialization in Educational Counseling to its Master of Counseling. To its
certificate programs, University of Phoenix has recently added graduate certificates in e-
Business, Technology Management, and Global Management, as well as a certificate in
Operations and Supply Chain Management. UOP believes that expanding its program
offerings will help it improve UOP’s market position as a provider of higher education and
training for working adults.
President Mueller made this observation regarding new courses and degrees UOP may
add soon:
We always have new programs being developed. Criminal justice is a big area of
growth. Engineering is a possibility. And some new nursing programs—for registered
nurses and licensed practical nurses—are a possibility in 2007.
5. Serve a Broader Student Age Group. The UOP has built tremendous success focusing on
the working adult student population in the U.S. Based on recent surveys of incom-ing
students, the average age of University of Phoenix’s students is in the midthirties,
approximately 54% are women and 46% are men. Approximately 67% of University of
Phoenix’s students have been employed on a full-time basis for nine years or more. The
approximate age percentage distribution of incoming UOP students is:
Age Percentage of Students
25 and under 16.5%
26 to 33 38.0%
34 to 45 34.7%
46 and over 10.8%
100.0%
12. Recently, the UOP has adapted this focus and initiated a conscious effort to direct
more attention to younger students, to include targeting high school students as they
make decisions to consider college. President Mueller offered these comments about
this new emphasis at UOP on the traditional collegiate market of 18- to 22-year-old
students:
If you look at the higher education market, at least half your students are in this [18- to 22-
year-old] age group, and over the next decade, this will be the fastest area of growth. Also,
we’ve had literally tens of thousands of 18- to 22-year-olds who have shown interest. We’re
not going to add dormitories. We’re not after the traditional younger student [who goes off to
live at college]. We’re going after the younger student who is working. And they have
similar needs to [our working adult students], including the flexibility of classes that can
start any time of the day, evening or weekend.
6. Market Aggressively. The Apollo Group spent $545 million in the last fiscal year
marketing its academic programs, mostly the UOP. This is a staggering amount when
you consider that few traditional universities spend even close to $10 million in direct
marketing expenditures. Yet Apollo’s earnings almost doubled since 2003 and revenue
grew by over 90% during the same period.
Barmak Nasirian, associate director of the American Association of Collegiate
Regis-trars and Admissions Officers, warns: “This rate of growth may not be
sustainable.” His group represent traditional colleges, many of which are critical of
Apollo and the UOP. President Mueller at the Apollo Group offered this observation:
We had enrollment growth, so you would have expected marketing costs to rise
comparably. Two things are behind the increase. First, the cost of leads are more expensive.
And second, because we were having a good year financially, we felt it was wise to spend
aggressively in the marketing area.
The Apollo Group Looks to the Future
36 The Apollo Group’s reputation was sullied in late 2005 with the release of a U.S.
Education Dept. report depicting a high-pressure sales culture at the UOP that resembled
a telemar-keting boiler room more than a university admissions office. “Phoenix
recruiters soon find out that UOP bases their salaries solely on the number of students
they recruit,” the report charged. That’s prohibited by federal law. One recruiter who
started at $28,000, for instance, was bumped to $85,000 after recruiting 151 students in
six months. But another who started at $28,000 got just a $4,000 raise after signing up 79
students. Websites like www.uopsucks. com have emerged as blog-like forums for former
students and employees unhappy with or distrustful of the UOP’s offerings.
37 Ultimately, such violations could have led the government to bar Phoenix from the
fed-eral student loan program, crippling the university. Former CEO Nelson called the
report “very misleading and full of inaccuracies.’’ But he says he decided to settle rather
than wage a protracted legal fight. The Apollo Group agreed to change its compensation
system and pay a $9.8 million fine without admitting guilt. Still, Apollo’s defenders note
that the point of the law is to prevent for-profits from luring unqualified students. If the
UOP is doing that, it hasn’t showed up in student-loan default rates, which remain a low
6%—below the average for traditional colleges and universities.
38 With the regulators off its back, and with tuition growth surging 30% during the quar-
ter following the release of the report, the UOP once again focused on growth. The online
program, with approximately 150,000 students, was seen as far from saturated. And for
the first time the UOP started targeting high school graduates, who are expected to hit a
record later this decade as a ‘‘baby boomer echo” factor. Similarly, the UOP has barely
13. begun to scratch the international market, where experts see huge demand for U.S.-style
education. Phoenix opened its first Mexican campus in 2005, and has big hopes for
China, where Apollo’s Western International University now has just 50 students, and
India.
39 But the UOP will have to fill acres of classroom seats to keep up its pace—and it is
paying an ever-increasing cost to do so. The company already has over 270,000 students.
Some 90% of those are enrolled at the University of Phoenix, making it by far the
nation’s largest private university. Given that size, it had to add nearly 57,000 students—
the equivalent of another University of Texas at Austin—in 12 months just to make its
growth target. And that has proven very difficult to accomplish at Apollo since it
experienced successively lower enrollment growth for nine straight quarters through Q1,
2007. Add-ing to these problems has been an SEC investigation of stock option grant
irregularities in late 2006 that have resulted in a restatement of financial statements to be
completed in 2007.
40 “Since early 2007 we have focused on making significant changes in two major areas
of our business: marketing and retention,” said President Mueller. “Much of the work
required to launch our marketing and branding efforts is complete and we are already
seeing evi-dence of its effectiveness.” Mueller added that retention and academic
strategies take longer to implement, but that he’s confident that investments in such
improvements will benefit students and stockholders in the long run.
Acquisition Activity
41 Mueller and the Apollo Group may see other ways to grow student counts. In early 2007
Apollo announced the acquisition of Insight Schools, a company that runs online charter
schools in Washington state, for $15 million. Competitor Kaplan followed several months
later with the acquisition of Sagemont Virtual, a company that runs the University of
Miami Online High School. Apollo’s entry into high schools began in 2005 when it
formed a partnership with Orange Lutheran High School in California. It converted many
of the school’s courses so they could be delivered in an online format, a move that was
embraced by the school’s students and faculty, according to Mueller. “We became
convinced we could provide that service to high school students, and it would have the
same kind of value educa-tionally—if not greater—at the high school level than even at
the higher educational level,” said Mueller. That sounds quite familiar to the start founder
John Sperling engineered over thirty years ago.
42 About 700,000 public pre-collegiate students were enrolled in at least one online or
blended course in 2007. Online high school courses are becoming popular with states
with large rural areas and those seeking to expand both high level offerings as well as
special course offerings. Some analysts think an educational setting with 50 million high
school students might well be attractive as a growth vector when compared to a mature
higher education market, domestically, with about 15 million students.
43 And, when you consider the number of high school aged students worldwide, and the
special delivery needs in needy areas that online options may assist, you have to wonder
if this may be a major new trend. Then, too, if a high schooler gets comfortable with an
online approach, that may well feed directly into an online higher educational choice.
Meanwhile, Barbara Stein, manager of 21st century education at the National Education
Assn., is concerned that students who attend virtual high schools may be loosing out on
the benefits of a traditional high school experience. ‘‘We think those are not a great idea.
Most students do not do that well when they have no face-to-face interactions,” says
Stein. “There may be extreme situations where that is the appropriate recourse, but for
most students it is not.”
14. APPENDIX A Guide to Online Universities
As e-learning has exploded, here is a brief look at the range of providers:
1. University of Maryland University College
The largest state university provider of online classes, it moved online in the mid-90s, building on its long heritage of
offering extension classes. Last year, enrollments in its online classes hit 63,000, up 50% in one year. Students can
now earn 70 different degrees and certificates online. In addition to classes, UMUC provides a comprehensive array
of online student services, from applications to academic advising and financial aid consulting.
COST: Same as for UMUC’s traditional classroom classes. That means Maryland residents are
charged just $197 per semester hour for undergrad classes, and $301 per semester for graduate
classes. But out-of-state residents must pay over 50% more.
2. University of Phoenix Online
The nation’s largest for-profit virtual university, offering the same kind of business, education and technical classes
for working adults that have made its bricks-and-mortar counterpart, the University of Phoenix, such a success. In
business, students may earn everything from undergraduate degrees in accounting, management and marketing to
an MBA and even a Doctor of Management in Organizational Leadership. Phoenix Online provides lots of attention
to its students. Classes are kept small, and instructors insist on participation.
COST: $400 to $500 per credit; an MBA degree costs about $23,000.
3. eArmyU (The U.S. Army’s Virtual University)
Since January, eArmyU has allowed enlisted soldiers to take classes and earn degrees from 24 different
institutions, ranging from Central Texas College to Utah State. So far, 10,400 soldiers have signed up on the
three Army bases where it’s offered. The plan is to offer it Army-wide.
COST: Free to soldiers, who receive a laptop, printer, Internet connection and 100% of tuition. Civilians are
not eligible for eArmy.
4. Western Governors University
Virtual university founded by 19 western states in 1997. A pioneer in “competency-based degrees,” which
require students to demonstrate mastery of a subject, rather than complete a certain number of credit hours.
In practice, this means students are assessed when they enter a program. An individual class of study is then
developed for each student to fill the gaps in their knowledge. The result is that the length of time needed to
complete a degree varies widely, and is dependent on what the student knows. While it may sound radical,
WGU is backed by some two-dozen corporate sponsors, including IBM, AOL and Microsoft.
COST: WGU charges about $4,500 for the assessment and mentoring needed for a two-year degree.
Students must pay separately for classes, which are offered by some 40 different institutions.
5. Concord Law School
Launched by Kaplan Inc., a unit of the Washington Post Co, Concord has grown to become the nation’s largest
virtual law school, with 800 students at present. Kaplan argues that the law is ideally suited to online learning,
because it facilitates communication (via e-mail) among students and professors. While the program is not yet
accredited by the American Bar Association, students may sit for the California Bar Exam.
COST: $6,000 per year, or $24,000 for four-year law degree.
6. Duke’s Fuqua School of Business
“Blended” MBA programs for working executives, in which 65% of the work is done over the Net, and 35%
in classes that meet for 9 or 11 weeks during 20-month programs. There are two blended programs. The
“Global Executive” program is designed for executives who manage a large international business unit or a
global staff. The average global student has 14 years of professional experience. In contrast, the “Cross
Continent” program is aimed at more junior managers—with an average of six years of experience—who
have already demonstrated success at the department level.
COST: Up to $90,000 for “Global Executive” program, versus $60,000 for normal daytime MBA. The extra
costs cover the residential program, which in the case of Global Executive is held in various spots around
the world, including Europe, Asia and the Duke campus.
15. APPENDIX A Guide to Online Universities—Continued
As e-learning has exploded, here is a brief look at the range of providers:
7. Cardean University
The virtual university founded by UNext.com, one of the highest profile e-learning start-ups. UNext partnered with
some of the world’s best known universities—including Stanford, the University of Chicago and Columbia—to
develop its cutting-edge business curriculum. It is now offering classes to employees of General Motors and a
number of other companies, and will shortly begin marketing its business classes to consumers.
COST: About $25,000 for MBA.
8. Jones International University
The virtual university founded in 1993 by cable pioneer Glenn R. Jones, who earlier offered distance classes via cable TV
through his Mind Extension University. Jones offers more than 40 executive and professional education programs. Students
may earn a bachelor’s degree in business, an MBA, as well as various masters’ degrees in education.
COST: 3-credit class runs $925; MBA costs about $12,000.
9. Capella University
A for-profit virtual university that offers some 500 online classes every quarter. Students may choose
from 15 different degree programs, and some 80 different specializations. Most of the 4,000 students
study business, education or information technology.
COST: Classes (which offer 3 to 5 credits) tend to cost from $1150 to $1600. A master’s degree runs
about $20,000, and a PhD about $34,000.
10. Walden University
Originally founded in 1970 to offer graduate degrees, Walden moved online in the mid-1990s. Walden is
41% owned by Sylvan Learning Systems, which has other online education programs as well. Walden
specializes in graduate programs in business, education, psychology, public health and human services.
COST: An MBA runs about $20,000, while a PhD can cost $47,000.
11. The Electronic Campus of the Southern Regional Education Board
A sweeping smorgasbord of online classes organized by the Southern Regional Education Board, an
organization formed to promote education reform in 16 southern states. The electronic campus offers over
5,000 online classes from 325 different schools, ranging from Auburn University to West Virginia University.
COST: Tuition varies widely, since it is set by the college that actually offers a given class. As one example,
a class on American History since 1865 offered by Oklahoma State costs $365.
12. Harvard Extension School
Your best chance to take an online class from Harvard, these classes are offered by Harvard’s extension school.
While the Harvard Extension School currently offers over 500 classes in the traditional classroom setting, only about
three dozen are currently available online. However, the plan is to expand the number of online offerings. Most of the
classes available this year are computer science classes, on topics like website development and algorithms.
COST: Same as for attending a class at the extension school. The cost ranges from $275 for a class on
American Constitutional History taken without credit, to $1,750 for the class on website development.
13. UT TelecampUS
An excellent example of the expanding e-learning programs offered by state university systems, the UT
TelecampUS was launched in 1998 by the University of Texas system. Students may earn an MBA, Masters
in Computer Science, and various other online degrees from a school within the UT system. Students who
wish to earn a degree must first apply and be admitted to one of the universities in the UT system. That
campus will then serve as the student’s “home” campus, and ultimately award the degree.
COST: Texas residents pay about $300 for a 3-credit undergraduate class, and $500 for a 3-credit graduate
class. Non-residents are charged roughly twice as much.
16. APPENDIX A Guide to Online Universities—Continued
As e-learning has exploded, here is a brief look at the range of providers:
14. Stanford Center for Professional Development
One of the most challenging and prestigious online programs. The Stanford Center offers both online degrees and
non-degree classes from Stanford’s School of Engineering and affiliated departments. The center now provides over
250 online credit classes in electrical engineering, mechanical engineering, computer science, etc. These
are not watered-down classes. They are taught by the Stanford faculty, and students must be admitted, just
like on-campus students. The online classes are designed strictly for employed engineers and scientists. The
attraction is that they may keep working, while furthering their education.
COST: About $3,000 for a credit class, 40% more than it would cost to take a similar class on campus.
Typically, the companies employing the students pick up the tab.
APPENDIX B Apollo Group Financial Information
August 31,
2006 2005 2004 2003 2002
Restated(1)
Revenues:
Tuition and other, net $ 2,477,533 $ 2,251,114 $ 1,800,047 $ 1,338,982 $ 1,007,936
Costs and expenses:
Instructional costs and services 1,112,660 956,631 781,437 630,556 531,332
Selling and promotional 544,706 485,451 383,800 272,348 198,889
General and administrative 149,928 94,485 84,326 61,314 54,388
Goodwill impairment 20,205 — — — —
Share based compensation(2) — 16,895 100,283 — —
Total costs and expenses 1,827,499 1,553,462 1,349,846 964,228 784,609
Income from operations 650,034 697,652 450,201 374,754 223,327
Interest income and other, net 18,054 16,787 16,305 14,238 11,181
Income before income taxes 668,088 714,439 466,506 388,992 234,508
Provision for income taxes 253,255 286,506 186,421 153,109 99,107
Net income $ 414,833 $ 427,933 $ 280,085 $ 235,883 $ 135,401
(1) See Note 3, “Restatement of Consolidated Financial Statements” included in Item 8 of this Form 10-K.
(2) Share-based compensation in 2005 and 2004 is related to the 2004 conversion of the UPX Online stock options into Apollo Group Class A stock options. Share-based
compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative
expenses.
17. August 31,
2006 2005 2004 2003 2002
Restated(1)
Total cash, cash equivalents, restricted cash
and securities, and marketable securities $ 646,995 $ 685,748 $ 993,875 $ 1,045,802 $ 688,656
Total assets $ 1,283,005 $ 1,281,548 $ 1,487,750 $ 1,417,388 $ 1,018,659
Current liabilities $ 595,756 $ 566,745 $ 525,239 $ 384,520 $ 297,632
Long-term liabilities 82,876 80,583 67,546 48,072 44,562
Total shareholders’ equity 604,373 634,220 894,965 984,796 676,465
Total liabilities and shareholders’ equity $ 1,283,005 $ 1,281,548 $ 1,487,750 $ 1,417,388 $ 1,018,659
Operating Statistics:
Degreed enrollments at end of year(2) 282,300 271,400 238,400 189,800 144,400
Number of locations at end of year:
Campuses 99 90 82 71 65
Learning centers 163 154 137 121 111
Total number of locations 262 244 219 192 176
(1) See Note 3, “Restatement of Consolidated Financial Statements” included in Item 8 of this Form 10-K.
(2) Restated Degreed Enrollments includes only UPX and Axia College and represent individual students enrolled in our degree programs that attended a course during the
quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU). Previously, the Company used a different definition of enroll-
ment. Previously reported enrollment numbers are restated above.
The following table presents the most significant components as percentages of total tuition and other, net
revenue for the years ended August 31, 2006, 2005, and 2004:
Year Ended August 31,
2006 2005 2004
Restated(1) Restated(1)
($ in millions)
Tuition revenue $2,304.3 93.0% $2,114.1 93.9% $1,679,0 93.3%
IPD services revenue 74.4 3.0% 69.5 3.1% 62.6 3.5%
Application and related fees 33.8 1.4% 36.4 1.6% 28.7 1.6%
Online course material revenue 138.7 5.6% 104.5 4.6% 69.1 3.8%
Other revenue 31.7 1.3% 33.8 1.5% 23.0 1.3%
Tuition and other revenue, gross 2,582.9 104.3% 2,358.3 104.7% 1,862.4 103.5%
Less: Discounts (105.4) (4.3)% (107.2) (4.7)% (62.4) (3.5)%
Tuition and other revenue, net $2,477.5 100.0% $2,251.1 100.0% $1,800.0 100.0%
18. Information about our tuition and other net revenues by reportable segment on a
percentage basis is as follows:
Year Ended August 31,
2006 2005 2004
UPX 83.7% 89.5% 94.4%
Other Schools 16.2% 10.4% 5.4%
Corporate 0.1% 0.1% 0.2%
Tuition and other, net 100.0% 100.0% 100.0%
Instructional costs and services increased by 16.3% in 2006 versus 2005, and 22.4% in 2005 versus 2004. The
fol-lowing table sets forth the increases in significant components of instructional costs and services:
% of Revenues % Change
Year Ended August 31, Year Ended August 31, 2006 vs. 2005 vs.
2006 2005 2004 2006 2005 2004 2005 2004
Restated (1) Restated (1) Restated (1)
($ in millions)
Employee compensation and
related expenses $ 382.3 $343.9 $282.5 15.4% 15.3% 15.7% 11.2% 21.7%
Faculty compensation 212.3 195.1 154.2 8.6% 8.7% 8.6% 8.8% 26.5%
Classroom lease expenses and
depreciation 193.4 171.3 145.1 7.8% 7.6% 8.1% 12.9% 18.1%
Other instructional costs and services 158.2 142.0 122.3 6.4% 6.3% 6.8% 11.4% 16.1%
Bad debt expenses 101.6 57.2 31.1 4.1% 2.5% 1.7% 77.6% 83.9%
Financial aid processing costs 52.5 43.3 32.4 2.1% 1.9% 1.8% 21.2% 33.6%
Share based compensation 12.4 3.8 4.0 0.5% 0.2% 0.2% 226.3% (5.0)%
U.S. Department of Education
settlement — — 9.8 N/A N/A 0.5% N/A N/A
Instructional costs and services $1,112.7 $956.6 $781.4 44.9% 42.5% 43.4% 16.3% 22.4%
(1) See Note 3, “Retatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
19. Selling and promotional expenses increased by 12.2% in 2006 versus 2005, and 26.5% in 2005 versus 2004. The
following table sets forth the increases in significant components of selling and promotional expenses:
% of Revenues % Change
Year Ended August 31, Year Ended August 31, 2006 vs. 2005 vs.
2006 2005 2004 2006 2005 2004 2005 2004
Restated (1) Restated (1) Restated (1)
($ in millions)
Enrollment advisors’ compensation
and related expenses $ 254.3 $204.6 $155.6 10.3% 9.1% 8.6% 24.3% 31.5%
Advertising 231.6 224.0 174.6 9.3% 10.0% 9.7% 3.4% 28.3%
Other selling and promotional expenses 56.5 56.2 52.9 2.3% 2.5% 2.9% 0.5% 6.2%
Share based compensation 2.3 0.6 0.7 0.1% 0.0% 0.1% 283.3% (14.3)%
Selling and promotional expenses $544.7 $485.4 $383.8 22.0% 21.6% 21.3% 12.2% 26.5%
(1) See Note 3, “Retatement of Consolidated Financial Statement,” included in Item 8 of this Form 10-K.
Summary financial information by reportable segment is as follows:
Year Ended August 31,
2006 2005 2004
Restated Restated
($ in thousands)
Tuition and other revenue, net
UPX $ 2,074,443 $2,014,124 $1,699,005
Other Schools 402,051 235,183 96,982
Corporate 1,039 1,807 4,060
Total tuition and other revenue, net 2,477,533 $2,251,114 $1,800,047
Income from operations:
UPX 605,708 $ 636,463 $ 478,639
Other Schools 65,790 70,417 15,665
Corporate/Eliminations (21,464) (9,228) (44,103)
650,034 697,652 450,201
Reconciling items:
Interest income and other, net 18,054 16,787 16,305
Income before income taxes $ 668,088 $ 714,439 $ 466,506
![The Apollo Group, Inc. [University of Phoenix] Richard B. Robinson
1 John G. Sperling was a late bloomer as an entrepreneur. A Cambridge University PhD
who had spent most of his career teaching at San Jose State University after brief stints at
Maryland, Ohio State and Northern Illinois, he didn’t launch Apollo Group Inc.—parent
of the University of Phoenix—until 1976, when he was 55. But what Sperling lacked in
precociousness he more than made up for in ambition: His goal was nothing less than to
turn conventional higher education on its head.
2 Rather than catering to 18- to 22-year-olds looking to find themselves, Sperling focused on
the then-neglected market of working adults. And he recruited working professionals as
teachers, rather than tenured professors. Although UOP and its online campus, University of
Phoenix Online, have more than 18,000 faculties, only about 450 are full-time. Most radical of
all, while nearly all other universities are nonprofits, Sperling ran his university to make
money. Those ideas sparked overwhelming resistance from the education establish-ment,
which branded UOP a “diploma mill.” The result? “We faced failure every day for the first 10
years,” said Founder Sperling, who turned 88 in 2009.
3 From an IPO adjusted price of $0.76 to a mid-2005 high of $98, Apollo’s stock reflected a
company BusinessWeek considered among the top 50 performing companies on Wall Street.
The Phoenix-based company, whose day-to-day operations were still generating average
annual revenue growth exceeding 30% over that time, saw its revenues reach $2.5 billion in
2006 with net income exceeding $414 million. With a price-earnings ratio of 76, Apollo had
one of the richest price-earnings multiples on Wall Street at the time.
4 Tuition at Apollo averages only $10,000 a year, 55% of what a typical private college
charges. A key factor, says Sperling, is that universities for the young require student
unions, sports teams, student societies, and so on. The average age of a UOP student is
35, so UOP doesn’t have those expenses. It also saves by holding classes in leased office
spaces around the country. By 2005, over 135,000 of its 275,000 students studied at
University of Phoenix Online.
5 By 2006, Phoenix Online had become the dominant player in the online education
mar-ket that still has lots of potential for growth. The bricks-and-mortar University of
Phoenix was one of the first institutions to identify and serve the burgeoning market for
educating working adults. In the late 1980s, long before the Web debuted, the school
began to experi-ment with offering its classes online. It got off to a slow start, “and we
lost money for a number of years,” recalled Brian Mueller, Apollo’s president.
6 As a result of this head start, however, Phoenix Online was ready to capitalize on an
online-education market that began exploding in the mid-1990s. Today, about 15% of the
600,000 or so U.S. students earning a degree via the Net are enrolled at Phoenix Online.
©RCTrust, LLC., 2008. This case was developed by Dr. Richard B. Robinson based on publicly
available information from The Apollo Group, Inc., the University of Phoenix; interviews with UOP
students and professors; and selected BusinessWeek articles.
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