Standards - a commercial perspective?

1. Standards - a commercial perspective? Terry Hilsberg NextEd Limited 16 December 2001

2. Background to NextEd

3. Terry Hilsberg • Trained as computer scientist and micro-economist • Worked Australian Government <1987 • Economic/industrial and education/training policy and CIO • Venture capitalist <1993 • Japan, China, USA, Philippines • Married a Chinese national • Private investing <1998 • Telecoms and internet in China • West Inquiry contribution1998 • Appendix 11 Discussion paper • Founded NextEd 1999 • Visited many Chinese universities over last 6 months

4. NextEd Limited • Hong Kong based online education solutions & infrastructure provider • Founded late 1998 • Offices in Australia, HK, Malaysia, PRC, UK & US • Investors: Fidelity Ventures, GE Equity,Whitney & Co, South China Morning Post Holdings • 36 Higher Education course supplier customers, 15 down stream distributors • Two large consortia – GUA and ACRRM

5. My family choice • Top level Chinese Uni • US$1K p.a • Good networking, social positioning • Top Level Australian Uni • US$10K p.a • Ivy League USA • >US$20K p.a • Good networking

6. Outline • HE is an industry, where china has comparative advantage • Role of standards in a commercial setting • Forces in the HE industry • Standards and the Digitisation of the industry • Impact for China

7. Higher Education is an Industry

8. Higher Education is an industry Not just a social mission • An industry which is a major international growth industry

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

10. USA HE Industry State owned sector punching below it's weight • Craft industry like nature of USA public HE system, which arises from factors such as lack of clarity as to who owns IP, remuneration policies etc. • Stuck with islands of digitization which are not linked into robust supply and customer chain extranets • Out of state tuition policies which render most US State Unis uncompetitive in world market

11. Fixed marginal costs Due to these factors, mid sector of industry is • Not scaleable, • Not replicable to multiple sites, or • Not able to generate significant free cash flow

12. Competitors Domestically and increasingly internationally can compete on • price • quality Generate significant free cash flow, which can be re-invested which compounds the problem

13. Sources of competition Loss of market growth is the major problem • Import or domestic competition • Not so significant • Only in specialized areas such as IT • Export competition • Very real • USA state universities missing in action in Asia

14. Commercial role of standards

15. Role of standards • Commercial/industry structure • Pedagological • Ideological

16. Standards – A tool Technical standards are a reflection of broader forces at work in the higher education industry • Retail Consumer • Reduction of consumer un-certainty • Grow the market • Industry organization • Disaggregate value chain • Create many sub-markets • Drive down costs and prices • Allow spatial division of labor

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

18. Standards – Reflection of Major international forces in industry • Value chain contestability • Due to the technology • Leading to deflationary forces • Souring of inputs from across space • And increased international tradability of industry • Import and export competition • Consumer orientation • Owning the customer relationship is key • From order taking to marketing

19. Market share in Asia?

20. Market size • Market • Asian H.E - Last 10yrs CAGR 5-25%p.a (according to segment) • Income elasticity of demand 1.5 • >US$50B p.a H.E sector • US$6B p.a D.E • US$2B p.a Corp training • D.E giants • Most of the world giants in D.E are in Asia • E.g CCTVRU

21. Education access still poor • Participation rates in post secondary education are low • E.g. PRC has only same rough number of university students as Australia • Demand outstrips supply • E.g. In many provinces in China less than 10% of qualified intake can obtain undergraduate education • People are willing to pay • Well meaning bureaucrats still in control in some countries, dampening demand

22. China – Demand for Offshore Education 000’ Students Source: IDP Education Australia 1999 model of Chinese market demand

23. Course price vs. volume- Asia US$1K – 1K US$0.5K – 10K <US$0.1K – 100K • Price elasticity of • demand is high • Income elasticity of • demand is high Example of dilemma: Volume vs price vs market positioning ?

24. The Growth of Giants • Real price of H.E in Asia increasing at 2-5% p.a • Suggests the “Honda” strategy • Some giants emerging concentrating upon: • Ownership of Student – via distribution • Infrastructure • Scaleable production • Lesser extent, content • Example NIIT – US$250M p.a/US$70M p.a profit • c.f say UHK SPACE US$90M p.a neg. profits

25. Some will be Chinese (Indian)………….

26. Chinese (Indian) Competitive Advantage • Basis of advantage • Strong international brands in selected communities e.g. 60M O/S Chinese • Low production costs • Advanced technology • Advanced courseware • All of which comes together in Network Education Colleges • Trends • 5 of 10 top Chinese universities have HK rep offices • 3 of top 10 have launched international courses

27. Global Players Take Off • Apollo, Strayer, DeVry, Sylvan, NIIT etc. • Revenue CAGR 20-40% typical • EBITDA 8-25% of revenue range • Better performers consistently deliver 20% Free cash flow/Revenue • Cash to invest • Price/Earnings imbalance – major issue • 20-40 USA • 8-15 Asia

28. Why are the USA public universities missing in action? • Out of state tuition policies • Lack of scalable, replicable inventory • Unwillingness to disaggregate value chain

29. Disruptive technology = value chain contestability

30. The Internet and data base Escalator Stages of technology development • Administrative Digitisation • e.g. college management systems • Content Digitisation • e.g. authoring tools • Learning content management • e.g. LMS • Knowledge management • e.g. knowledge and content management systems • Learner relationship management • e.g. HE adaptation of eCRM technology

31. Vertical Disaggregation

32. Shifts in value chain ownership Disaggregation leads to contestability of the value chain • Platform provision 10-30% < • Content 10-30% < • Student support 20-40% • Marketing and sales 10-40% > MIT Initiative may be misguided

33. Leading to intense deflationary pressures Production factor mobility……..

34. Deflationary pressures Deflation results from Cost deflation • Digitisation of transactions • Disaggregation of value chain • Contestability by nimble players • International division of labor in course production and delivery • Course production - Vietnam, India and China • Learning support - India • Technology e.g. LMS – India and China Price deflation • Competition from low cost high prestige brands • e.g. international arms of top Chinese universities

35. Quality IT Education from top ranked universities Huazhong University of Science and technology <US$1K p.a University of Melbourne <US$10K p.a MIT >US$20K p.a High quality China University On-line Undergraduate prices Top ranked Dong Nan University US$1K p.a Medium ranked rich province Fujian Normal US$750 p.a Medium ranked poor province China Normal US$300 p.a Example – Four year tuition

36. Example – courseware production Production of a course roughly equivalent to a university subject with complex multi media objects • Vietnam suppliers ? 100% • New Delhi supplier 200% • Shanghai supplier 300% • Hong Kong supplier 400% • Australian supplier 400%

37. Example – University Software

38. The Labor Cost Pyramid High cost Western labor Lower cost labor Student labor Rules based knowledge Codified IP

39. Influence of standards Standards promote: • Disaggregation of production process via interoperability of transactions, content and stages or production • Deflation by promoting disaggregation, spatial division of labour • Thus international competition

40. Market - Crossing the Chasm ?

41. Crossing the chasm Principle: New technology will always first be successfully adopted in markets where it has overwhelming competitive advantage Clayton Christiansen Geoffrey Moore

42. Students, their parents and educators often live in different worlds…

43. What is the product bundle?

44. What is valued? • Provider – Student • working nicely in niche markets e.g Theology education • driven by access • Provider – Corporate students • works in some areas e.g multiple outlet TNCs • driven by savings in staff time and travel • Provider – Distributor – Student • all education is local • taking off, by far the largest market • clicks and mortar sales and delivery

45. What works On the job skills training Generic skill training Centre based undergraduate and post-graduate HE Niche market based HE What does not work Mass market total “over the internet” electronic delivery for accredited HE Particularly for UG education What works in Asia? Early adoption is in market niches where electronic delivery has overwhelming competitive advantage

46. Geographical manifestation “Must have” factors are geographically concentrated • Smaller, geographically concentrated, rich economies in difficult position • Small size and concentration of activity, strongly entrenched public sector practices, lack of growth • China - most compelling as “must have” factors mainly present • Strong growth, numerous multiple outlet organizations, compelling economics, less entrenched resistance, good infrastructure • Australia • Geographic dispersion, good infrastructure • Some in the middle • Weak infrastructure

47. Changes in the Marketing Mix

48. Changes in the marketing mix A revolution in thinking • Product – product customisation • Access - CRM • Price – price disaggregation • Distribution • Marcoms

49. Learning Centers Work

50. Why does clicks and mortar work? • Brands are important: • Consumer buying behaviour • Delivery places are important • Nature of the product • Not just selling skill, or knowledge acquisition • Meeting many other demands • Systems now allow global scale for local delivery • Global supply, local consumption