Unbundling College

I, along with the rest of the universe, came across this meme the other day:

dopl3r.com - Memes - Annual Streaming Price NETFLIX $108 hulu $72 ...

Today’s post is about explaining what is wrong with this image, but also why thinking about it really, really matters. Let’s begin:

Electricity and Education: More Similar Than You’d Have Thought

This Friday, I’ll be launching a new YouTube series on India’s electricity sector. Stay tuned for further details.

The reason I bring this up right now, is because one of the points we cover in that first episode is about how the electricity sector in India became much better after generation, transmission and distribution were “unbundled”.

And thinking about that point helped me frame a question about the education sector in India. I have written about this before, but I’ll expand upon that thought in much greater detail today: unbundling college.

The Typical College Bundle

What does the typical bundle in college look like? Something like this:

A student writes the entrance exam and gets in, attends classes, makes friends, writes internal examinations, gets an internship, gets placed, writes the semester end examination, gets the degree. And next year a new batch comes in, and we rinse and repeat. That, in a nutshell, is the higher education sector, at least in urban India.

One point worth emphasizing here: when I say peer networks, it is actually much more than that. Well, at any rate, it should be much more than that. Mentors, in particular, are best discovered in college.

Horizontal and Vertical Players

Ben Thompson had a lovely write-up many years ago about understanding Google

You really should read the article in its entirety, but here’s the quick takeaway: some firms, like Apple, are vertically integrated. Everything, right from deciding which kind of screw should be used in the construction of the latest iPhone, to the OS (that is, the software), to the in-store experience – everything is controlled by Apple. Hell, they don’t let you change the number of icons in the dock! It is a vertically integrated firm.

Other firms, such as Netflix, are horizontal. You can watch Netflix on Chromecast, on the Firestick, on your laptop, on your tablet, on your phone – Netflix honestly doesn’t care where you watch it, so long as you pay them their monthly fees. In fact, they will go out of their way to make sure that you can watch Netflix no matter what device you own. Netflix is a horizontal firm.

And that’s one way in which the forward I received the other day is wrong. Every other service on that forward is a horizontal firm. But Harvard? Entirely vertical. They control who gets in and how, they control what they’re taught and how, they control who gets the degree and how. They don’t even need to control the peer network: the Harvard alumni network is one of the reasons getting into Harvard is worth the effort, so naturally the alumni themselves will work to maintain the exclusivity. Entirely vertical!

But, Pandemic!

Now, the reason that forward exists, and the reason that forward became as popular as it has, is because there is more than a grain of truth to it, especially in the year 2020.

Take a look at it again:

dopl3r.com - Memes - Annual Streaming Price NETFLIX $108 hulu $72 ...

Most students in most colleges the world over are asking a very simple question: if we are to sit at home and watch videos, why restrict ourselves to what our college professors have to say?

I’m due to teach Principles of Economics to the incoming undergraduate batch at Gokhale Institute, for example. But why should students listen to me rather than watch videos from MIT’s OCW, or Marginal Revolution University, or Coursera, or edX, or Khan Academy?

Hell, for that matter, why should I bother coming up with a teaching plan when all I have to do is point students towards all of these resources?

And as the forward asks, or at least implies: if that is indeed the case, then why pay tuition fees this year? Not just Harvard students of course – every student is asking this question.

So What’s the Answer?

Well, microeconomics 101: a good place to begin is by asking what you’re paying for when you pay those tuition fees. And as I wrote in a blog post a while ago, you’re paying for much more than classes:

Now, the problem of education: when you buy a degree from college, you’re getting all three things.
College is a bundle: education | credentialing | peer networks

https://econforeverybody.com/2020/03/12/signaling-bundling-and-college/

Harvard is not charging you money to teach you stuff you can learn elsewhere. Those guys – the people who run the place and the professors who teach there – they’re pretty good, y’know. They know you can learn that stuff elsewhere.

You are paying your local college an obscene amount of money for the other two things. Coursera might be able to give you a better econ prof than your local college, but Coursera can’t yet give you a certificate that carries as much weight as does the one from your local college. This is much more true if you sub in Harvard for your local college.

Or put another way, Coursera existed since before the pandemic. Yet enrollments happened in colleges, did they not?

Enrollments happened because people weren’t buying lectures.

They were buying access to the peer networks, and they were buying the certificate.

And Harvard – and most other colleges the world over – are effectively saying that the certificate is still as valuable in 2020 as it was in 2019. Arguably more so, and so no discounts.

OK, But What About Peer Networks? Surely A Discount There?

Um, well, no. And for two reasons.

First reason, this excellent argument from Tyler Cowen:

Perhaps the logical conclusion is that both the “social connections/dating” services of Harvard and the certification services of Harvard are strong complements. If you are certified by Harvard, but live on a desert island, or carry a contagious disease, that certification is worth much less. So it is hard to unbundle the services and sell the certification on its own, without the associated social networks. Nor is it so worthwhile to sell the social connections on their own. Harvard grads are socially connected to their dry cleaning workers as it stands, but that does not do those workers much good.

https://marginalrevolution.com/marginalrevolution/2020/07/signaling-vs-certification-at-harvard.html

Peer networks develop best when you go through intense, shared experiences. Both adjectives matter: just hanging about in a college without going through the same grind that everybody else is going through doesn’t cut it (skin in the game). And that grind must be intense, it can’t be an optional, laid-back thing.

So sure, the grind is going to be online this year, but it still is shared, and it still is intense. That’s what helps with the bonding, and that bonding is valuable enough for Harvard to get away by charging you USD 50,000.

Peer networks developed online can be an extremely valuable resource, by the way. Ask David Perell or Seth Godin, to name just two people.

Second, those peer resources stay with you for life. You develop them now, but they get even better with time than does wine! As your peer group grows and matures, the number of connections they open up increases exponentially. So even if you can’t meet your peer group in a physical sense, it still is an investment worth making.

Tyler Cowen again:

Keep also in mind that the restricted Harvard services are probably only for one year (or less), so most students will still get three years or more of “the real Harvard,” if that is what they value. And they can use intertemporal substitution to do more networking in the remaining three years. It’s like being told you don’t get to watch the first quarter of a really great NBA game. That is a value diminution to be sure, but there will still be enough people willing to buy the fancy seats. Most viewers in the arena don’t watch more than three quarters of the game to begin with.

https://marginalrevolution.com/marginalrevolution/2020/07/signaling-vs-certification-at-harvard.html

If anything, Tyler Cowen’s analogy is slightly off the mark. The people who watch the NBA game in the stadium are never going to get in touch with each other twenty years down the line, much less depend on them for jobs or references.

So no, no discounts for reduced peer network benefits in 2020, sorry.

So far, Harvard can still justifiably charge you USD 50,000 – and they will.

So What Next?

Well, think of many vertically integrated colleges, all offering more or less the same kind of services:

… and ask yourself how we could introduce horizontal services into this structure. LinkedIn and Coursera attempt two separate models:

And those two models overlap more than you’d think. LinkedIn offers learning, for example.

But the real way, if you ask me, to think about how to unbundle college is by expanding our framework a little bit more:

This is a blog post, not an academic paper, much less a book. And therefore, forgive me for using catch-all terms here. By recruiters, I mean literally anybody who will work with graduates in any capacity: colleagues in start-ups, government, think-tanks, and yes, recruiters.

But the point of the framework I shared above is this: it will help us understand where change will come from, if at all it must.

Put another way, do you think $50,000 for Harvard (or whatever amount for whichever college) is too expensive? Then you need to explain how you can get the same things (or more) that a bundled college degree gives you for a lesser price with a different model.

How to get, that is to say, credentialing, peer networks and learning (and maybe more) for less than USD 50,000. That’s the million dollar question. And even if we come up with an answer, you’ll be up against the following:

  1. Colleges will be unwilling to change for two reasons.
    1. Why change something that isn’t broken? And college isn’t broken, from the perspective of the college.
    2. Inertia
  2. Firms such as Coursera and LinkedIn will struggle to replicate the “full-stack” experience that college has right now. And a piece-meal horizontal replacement will never be as valuable.
  3. Government will be unwilling to change the way college is structured right now
    1. Because of lobbying by colleges themselves
    2. Because too radical a change is a risky move, with unpredictable upsides and more than a little chaos in the short run
  4. Parents and students will not want colleges to change far too much, because the system as it stands right now is what enables jobs to come by.
  5. And that, finally, leaves recruiters. Or as I explained above, it is us: society. Until we (society) acknowledge the fact that college as a bundle has become too sclerotic, too expensive and too rigid for its own good, we can’t begin to change it.

And so, it ultimately comes down to this: we need to prove the inefficiency, and therefore the relative expensiveness of college as it stands today to society, before we can begin to talk about reforming it.

Well then, let’s get to proving the inefficiency of college as it stands today. That’ll be next up!

Krishna Subramanian’s List of Things to Read and Learn

Krishna Subramanian, Ajinkya Jadhav’s batchmate in SCMHRD, was kind enough to message me separately on LinkedIn, and send across his list of things students might benefit by reading, along with some tips and tricks that he found to be useful.

If you have finished college and are reading this, a request: please help out students who are currently in college, and are wondering how to add to their learning. I and other faculty members can help out with syllabi and all that, but you are folks with skin in the game. What helped you in your career, what helped you learn better, what did you wish you had done when you were in college?

I’m reachable on LinkedIn and on email. Please send along your recommendations, and I’ll share them here. Thank you!

On to Krishna Subramanian’s list – thanks a ton for sending these in, kind sir 🙂

 

My own top 5 books which all MBA Streams should read
1) Basic Economics by Thomas Sowel
2) Atlas Shrugged by Ayn Rand
3) Intelligent Investor by Benjamin Graham
4) Goal by Etiyahu Go
5) Life and work priciples by Ray Dalio.
6) Linchpin by Seth Godin (Bonus)

Books for Finance professionals, Other than above:
1) Manorama Yearbook
– If you are working in India, it would surprise you how little you know about India. Keeping this handy and going through once in a while is a massive boon.
2) Security Analysis By Graham & Dodd
3) Damodaran on Valuation
4) R programming for dummies. (most underrated skill any finance professional can have)
5) Warren Buffett and the interpretation of financial statements by Mary Buffett and David clark.

This should help.

I would recommend the following technology trends
to keep an eye on:
1) Blockchain ( Blockchain Revolution by Don and Alex Tapscott is a good read )
2) Artifical Intelligence ( course by Andew Ng on Coursera and Prediction machines by Agrawal gans and goldfarb)
3) Augmented Reality (best is youtube videos, because you really need to understand visually why this will change business)

Ajinkya captured the blogs and podcasts perfectly, so I figured I would add a list of don’t dos?

1) Do not read any book only once.
2) Accounting is a mechanical process but Finance is not. Do not be close minded on how things must be done. (once you come into the world, even accounting is not mechanical)
3) Do not forget your basics. NPV, IRR, Time value of Money, P&L, Balance sheet, Cash flow statements.. these things should be absolutely solid. Its remarkable how many people still fumble with these.
4) Do not ignore Taxes./hidden charges. We always do things ” tax exclusive” but remember, taxes/ hidden charges are a massive key to anything. Eg: Read about active and passive Mutual Funds.
5) Do not call Ashish as Sir. (This is correct, and important – Ashish)

Lastly I think Ajinkya captured it best, you are the average of the 5 people you hang out with. Even if you read none of the above, bring out ruthless choice in your company.

Thank you for all the learnings,
Krishna Subramanian

 

Signaling, Bundling And College

What is bundling? It’s selling more than one thing for a single price. When you buy a cup of coffee, you’re buying a cup of coffee.

But when you’re buying a cup of coffee at Starbucks, are you just paying for the coffee, or are you paying also for the air-conditioning, the Wi-Fi, the chairs and the overall ambiance? In fact, for quite a few folks who choose to work out of Starbucks, the coffee might end up being the least important of the things they’re paying for. That’s bundling.

Here’s an MRU video about the topic:

 


 

What’s signaling?

This thought experiment is borrowed from Bryan Caplan, author of the book The Case Against Education:

Take your pick: a world class education while you were/are in college, from the very best in the world in your chosen field. You get to pick your dream educators, your dream college, you get access to absolutely world class faculty, libraries, whatever. The works. But: no degree. You will never be able to show or prove your credentials to anybody. World class learning, but no proof that it took place.

OR

A certificate from whichever college and course you pick in the world. Harvard PhD? Here you go. B.Tech from the IIT of your choice? Check. But: no learning. You will never be able to attend classes and learn in that college. You’ll get the degree, but sans learning.

If you chose the latter option (I would and I do), you know what signaling is.

Here’s Wikipedia:

In contract theory, signalling (or signaling; see spelling differences) is the idea that one party (termed the agent) credibly conveys some information about itself to another party (the principal). Although signalling theory was initially developed by Michael Spence based on observed knowledge gaps between organisations and prospective employees, its intuitive nature led it to be adapted to many other domains, such as Human Resource Management, business, and financial markets.

In Michael Spence’s job-market signaling model, (potential) employees send a signal about their ability level to the employer by acquiring education credentials. The informational value of the credential comes from the fact that the employer believes the credential is positively correlated with having the greater ability and difficulty for low ability employees to obtain. Thus the credential enables the employer to reliably distinguish low ability workers from high ability workers.


 

There’s many variants of the Caplan question that are possible. For example, would you prefer to wear an original Nike T-shirt without the logo, or a fake Nike T-shirt with the logo?

If I may be permitted to veer into slightly dark territory: would you prefer to be in a happy relationship, or show that your relationship is happy?

We are, all of us, signaling all the time. Modern society wouldn’t be possible without signaling, because the cost of communicating in a world without signaling would be too high.

But education? It doth signal too much, methinks.


 

Let’s go back to bundling, and think about education. What are you buying when you enroll in a college?

If you are an optimistic sort of person (more cynical folks would call you naive), you might say you’re buying an education. If Michael Spence has made an impression on you, you might say that you’re buying the credential.

By the way, if you’ve ever asked the following question in a classroom – or even been tempted to – you’re buying the credential, not the education:

“Is this a part of the syllabus?”

And I’ve yet to meet a student (to be clear, myself included) who hasn’t asked that question.

But hey, it’s Econ101. If you’ve asked the question, you are minimizing learning. You are learning, but only to get on the path to maximize marks. Marks, I would argue, are more about credentials than they are about learning.

You’ve chosen, through your actions, signaling over learning.


 


 

The LinkedIn, Starbucks and Coursera Problem

 

  1. What is LinkedIn’s business? It’s a professional network, and as an economist, I’d argue that one of the things that it does is that it reduces the asymmetry of information. When LinkedIn allows you to “endorse” a person for a particular skill, or it allows you to post results of a test it has enabled you to take, it is allowing you to signal that you are good.
    To whom are you sending this signal? To anybody who views your profile on LinkedIn! LinkedIn is like a degree certificate from your college: you’re signaling that you know.
  2. What is Coursera’s business? It is an online service that gives you access to recorded lectures that you can listen/see on your own time. These lectures are recorded by world-class faculty, so the learning is as good as it can get. Coursera is like a classroom (but arguably a much better one) from your college: you’re learning.
  3. What is Starbuck’s business? Selling coffee? Sure, you could argue that, but it’s more than that. Remember, you’re buying a bundle at Starbucks! Starbucks’ business is providing an environment that allows people to work in a social setting. To work, to network, to relax, to converse – but what it sells you is comfortable environs where you can do what you want to. Starbucks is like the setting in the college but outside the classroom: it’s your peer environment where you can get work done.

 

Now, the problem of education: when you buy a degree from college, you’re getting all three things.

College is a bundle: education | credentialing | peer networks

 


 

LinkedIn Starbucks Coursera
All logos belong to the firm in question

 

And the reason colleges haven’t gone away yet – and won’t, anytime soon – is because there is no business that I am aware of that sits at the center of that triangle as comfortably as college does.

 


 

Nowadays, it is almost platitudinous to say that the educational system is broken. Why, Peter Thiel cites it as an example of thinking that is not contrarian in his book, From Zero to One.

But here’s the thing:

College isn’t broken.

A Coursera course isn’t enough to land you a job these days: fact.

Most of us value, and almost always will value, the friends we make in college: fact.

The college still is the best place to go to to get both of these things together at the most reasonable price.

But:

Learning is broken in colleges today: fact.

 


If you want to go up against college as a business, you need to sell the same thing that college is selling. And the college sells you a bundle.

A business that seeks to do better than college must do better on all three counts, not just on learning. All of the online learning businesses – Coursera is just one very good example – aren’t able to fill all of the three vertices just yet.

And that’s why education hasn’t been truly shaken down by the internet just yet:

Because college today is more about signaling than it is about learning, and because when you pay money to a college, you are getting a bundle.

So what to do? How to solve this problem?

In the next post in this series, we’ll see what other folks who’ve chosen to battle this beast are trying to achieve.