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Emerging Trends in Post Secondary Education – The View to 2012 Michael T. Moe, CFA

Emerging Trends in Post Secondary Education – The View to 2012 Michael T. Moe, CFA The St. Regis, Washington, D.C. December 9, 2002. The Healthcare and Education Analogy. Healthcare in 1970: Huge Market - 8% of GDP Highly Fragmented - Cottage Industry High Cost Low Technology

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Emerging Trends in Post Secondary Education – The View to 2012 Michael T. Moe, CFA

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  1. Emerging Trends in Post Secondary Education – The View to 2012 Michael T. Moe, CFA The St. Regis, Washington, D.C. December 9, 2002

  2. The Healthcare and Education Analogy • Healthcare in 1970: • Huge Market - 8% of GDP • Highly Fragmented - Cottage Industry • High Cost • Low Technology • Lack of Professional Management • Negligible Market Capitalization • Essential Human Service • Less than 2% of U.S. Capital Markets • Healthcare in 2002: • Huge Market - 14% of GDP • Segmented by Category • Consolidating • Historically Low Costs • Implementing Strong Management Controls and Accountability • $2.3 Trillion, or 23%, of U.S. Capital Markets

  3. The Education Industry in 2002 • Huge Market - 9.5% of GDP • Highly Fragmented - Cottage Industry • Essential Human Service • Very Inefficient • Low Technology • Lack of Professional Management • Total Market Capitalization: $27 Billion • Small fraction (<0.3%) of the $10 Trillion U.S. Capital Markets

  4. Major Sectors in the U.S. Domestic Economy $ Billions % of GDP Health(a) $949 14.1% Education(b) $740 9.5% Social Security $336 5.0% Defense $272 4.0% Total GDP $7,790 100% Education = $2 trillion global market! (a) Health Care Financing Review, vol. 17, no.3. (b) Defined as pre-kindergarten, post-secondary, consumer products, training/vocational and specialty service markets.

  5. Size of Global Education & Training Market • Global education & training market: $2 trillion • U.S. market: $750 billion • U.S. higher education market: $250 billion • Students: 42 million (1990); 97 million (2010); 150 million (2025) • U.S. online higher education market (2001): $4.5 billion • U.S. online higher education market (2005): $11 billion • U.S. corporate training market: $100+ billion • Corporate spending: $65 billion • Government spending: $40 billion • Global corporate & government learning market: $300 billion • Global corporate & government e-learning market: $18 billion (a) Source: ThinkEquity Partners, Eduventures.

  6. The Evolving Higher Education Marketplace • The higher education market is huge… • Globally, 84 million students and 20,000 colleges and universities; in the U.S., 15 million students and 4,100 colleges and universities • Higher education is a $250 billion market in the U.S. • …and growing • Domestic undergraduate enrollments will increase by 13+% in the next decade to 21.2 million by 2010 • Baby Boom echo generation moving into their college years • College less of a choice and more of a “must-have” • …with significant demand imbalance • U.S. only 1 of 10 countries providing a college education to 1/3 or more of their college-age populations • Group of traditional host countries for foreign students (U.S., France, and England) expanding to include Japan, Germany, Canada, and Australia (a) Source: ThinkEquity Partners, National Science Foundation.

  7. There’s Something Going On Here… Indexed Performance: March 2000 – Today +220% -75% (a) Postsecondary Index includes: APOL, CECO, COCO, DV, EDMC, ESI, STRA, UOPX, WIX.

  8. Substantial Growth of Public Education Market Public Market Value of Learning Companies CAGR: 49.4% (a) Public companies included in 1991: DV, NEWH, NLCI. (b) Public companies included in 1992: FC, SCHL, TUTR, as well as all previous companies. (c) Public companies included in 1993: BTZ, SLVN, as well as all previous companies. (d) Public companies included in 1994: APOL, ESI, as well as all previous companies. (e) Public companies included in 1995: AMIE, LTRE, SMTF, as well as all previous companies. (f) Public companies included in 1996: EDMC, STRA, VCMP, as well as all previous companies. (g) Public companies included in 1997: BFAM, POSO, RLRN, RWDT, as well as all previous companies. (h) Public companies included in 1998: CECO, CLBR, CLKS, POVT, SCHS, as well as all previous companies. (i) Public companies included in 1999: COCO, ECLG, EDSN, ELLG, SCIL, as well as all previous companies. (j) Public companies included in 2000: CTRA, DCNT, DTHK, ELOQ, LSPN, RVDP, SABA, SKIL, UOPX, WEBX, as well as all previous companies. (k) Public companies included in 2001: REVU, as well as all previous companies, with the exception of BTZ, CLBR.

  9. STRA Performance: 7/25/96 to 9/30/02 CAGR: 42.6% $1 @ IPO = $9.02 Today $1 Invested at IPO… Strayer

  10. UOPX Performance: 9/27/00 to 9/30/02 CAGR: 111.6% $1 @ IPO = $4.51 Today $1 Invested at IPO… University of Phoenix Online

  11. EDMC Performance: 10/31/96 to 9/30/02 CAGR: 35.2% $1 @ IPO = $5.98 Today $1 Invested at IPO… Education Management

  12. CECO Performance: 1/29/98 to 9/30/02 CAGR: 71.3% $1 @ IPO = $12.39 Today $1 Invested at IPO… Career Education

  13. DV Performance: 6/21/91 to 9/30/02 CAGR: 28.0% $1 @ IPO = $16.21 Today $1 Invested at IPO… DeVry

  14. APOL Performance: 12/6/94 to 9/30/02 CAGR: 68.6% $1 @ IPO = $59.57 Today $1 Invested at IPO… Apollo

  15. Our Society is Changing… • Just 13% of working American adults had a high school education in 1900 • Only 3% had college degrees Farmers as a % of the Labor Force 1800 1880 1900 2000 49% 90% 38% 2% (a) Source: Department of Labor.

  16. U.S. Economy Shifting to Service Jobs 45% 38.9% 40% 35.4% 35% 30% 25% 20% 17.7% 13.7% 15% 10% 5% 0% 1950 1960 1970 1980 1990 2000 Services Manufacturing (a) Source: Department of Labor.

  17. A Changing Paradigm Human Capital is Replacing Physical Capital as Primary Productive Asset Price/Book Ratios 12.1x 1.2x

  18. Education Counts Educational Attainment Outcomes Salary Gap between Male High School and College Graduates (a) Median earnings in 2000 dollars for all wage and salary workers ages 25-34. Source: National Center for Education Statistics.

  19. Education Counts Educational Attainment Outcomes Earning Power of a 30-Year Old Man With a High School Diploma (a) Source: Michael Milken. Data in 1995 dollars.

  20. Employment (thousands of jobs) Occupation 2000 2010 Change Education Required Computer software engineers, apps 380 760 100% Bachelor’s degree Computer support specialists 506 996 97% Bachelor’s degree Computer software engineers, systems 317 601 90% Bachelor’s degree Computer systems administrators 229 416 82% Bachelor’s degree Data communications analysts 119 211 77% Bachelor’s degree Desktop publishers 38 63 67% Long-term OTJ training Database administrators 106 176 66% Bachelor’s degree Personal and home care aides 414 672 62% Short-term OTJ training Computer systems analysts 431 689 60% Bachelor’s degree Medical assistants 329 516 57% Moderate-term OTJ training Fastest Growing Occupations (2000-2010) (a) Source: Bureau of Labor Statistics.

  21. The Need for Skilled Workers % of Jobs Requiring Skilled Workers (a) Source: ThinkEquity Partners.

  22. The Need for Skilled Workers Less Than 25% of U.S. Adults 25 and Older have a Bachelor’s or Higher Degree Adults without Bachelor’sor Higher Degree Adults with Bachelor’sor Higher Degree

  23. Global Corporations Demand for Knowledge Workers Internet-Based Employee Solutions Transformation of Knowledge E-Human Capital Solutions Testing and Assessment E-Corporate Learning Higher Ed Solutions Improved K-12 Solutions The Demand for Knowledge Workers is Fundamental 70% of Fortune 500 CEOs say finding knowledge workers is a major issue of growth

  24. “I skate to where the puck is going to be, not where it has been.” - Wayne Gretzky

  25. The New Knowledge Economy Industrial Economy Knowledge Economy Cost ROI Local Global network One-size fits all Tailored programs Just-in-time Just-in-case Virtual learning communities Isolated Forty-year degree Four-year degree

  26. ROI Bottom-Line Effects of E-Learning • Custom multimedia learning saves 20% in the first year of implementation and 50% in subsequent years • E-learning produces a 60% faster learning curve than traditional instruction • Examples: • Motorola: $1 spent on training yielded $30 in productivity gains over 5 years • IBM’s Basic Blue management training e-learning initiative: 2284% ROI • Omega Corporation: • 100% improvement in hit ratio on sales calls • Improvement of customer commitments from 33% to 93% • Achievement of 50% of yearly sales goal in quarter after training • Union Pacific Railroad: • Increase in bottom-line performance of 35%+ • Implementation of new processes 12 months earlier than with traditional training (a) Source: THINQ.

  27. Higher Education Landscape • 66+ million adults and more than 50% of all employed persons participate in some form of continuing education • 56% of the workforce, or 66 million people, is without an advanced degree • Number of corporate universities skyrocketed from 400 in 1988 to over 2,000 today, including 40% of Fortune 500 companies • More than 60% of corporate universities have alliances with institutions of higher education, increasing to 85% by 2003 • Executive education particularly salient in light of recent corporate scandals, with newfound interest in studying “good” corporate governance (a) Source: ThinkEquity Partners.

  28. The Corporate Market Opportunity • U.S. corporate business skills training market projected to reach $18.3 billion by 2006 (CAGR of 13.3%) • Worldwide IT education & training market projected to reach $28.6 billion by 2006 (CAGR of 7.1%) Number of Corporations Offering Distributed Learning Courses to Employees (a) Source: ThinkEquity Partners.

  29. The Corporate Market Opportunity Corporate Universities Up Tenfold • Over 40% of Fortune 500 companies have implemented a corporate university • As a point of reference, there are 3,700 postsecondary institutions in the U.S. (a) Source: ThinkEquity Partners.

  30. Six Megatrends Shaping Higher Education Internet Consolidation Globalization Branding Higher Education Market Demographics Outsourcing

  31. Eve-o-lution: Woman Power Women: Changing the Face of Higher Education • Women have outnumbered men on college campuses since 1979 • 60% of distance or online learning are females over the age of 25 56% Female Enrollment in Higher Education 41% (in millions) (a) Source: Business Women’s Network, Diversity Best Practices.

  32. Working for the Weekend Our Students Aren’t Getting Younger Percentage of College Students Over the Age of 25

  33. Associate Degree Programs Bachelor’s Degree Programs Level of Education Certificate Programs 54% 14% 50% Enrollment more than one year after high school 41% 18% 13% Part-time student 75% 42% 51% Also worked 1-20 hours per week 47% 28% 40% Also worked more than 20 hours per week Working for the Weekend Completion Rates for Postsecondary Education • As more adults work and attend school, the need for expanding traditional university limits has never been greater (a) Source: ThinkEquity Partners.

  34. University Tuition $ Per Year for Residents A Quality Education Is Becoming Increasingly Expensive Actual In Current $ Today University of Wisconsin - 1935 $55 $654 $3,408 UC Berkeley - 1964 $203 $1,067 $4,176 Wharton - 1975 $3,430 $9,826 $24,570 (a) Source: ThinkEquity Partners.

  35. University Enrollment University Enrollment 139,300 Community College of the Air Force Apollo Group 69,611 1 1 2 University of Minnesota – Twin Cities 51,445 2 Community College of the Air Force 69,611 Ohio State University – Main Campus 3 48,676 3 55,735 DeVry University 4 The University of Texas at Austin 47,905 4 University of Minnesota – Twin Cities 51,388 5 Miami-Dade Community College 47,060 5 Miami-Dade Community College 49,836 6 Arizona State University – Main Campus 42,040 6 Ohio State University – Main Campus 48,352 7 Texas A&M University – Main Campus 41,790 7 The University of Texas at Austin 48,008 8 Michigan State University 40,647 8 Arizona State University – Main Campus 42,463 9 Pennsylvania State University – Main Campus 39,646 9 Texas A&M University – Main Campus 41,892 10 Houston Community College System 39,541 10 Michigan State University 41,545 11 University of Florida 39,412 11 Career Education 40,800 12 University of Wisconsin – Madison 39,005 12 University of Florida 39,863 13 University of Illinois – Urbana-Champaign 38,420 13 Pennsylvania State University – Main Campus 39,855 14 Northern Virginia Community College 37,144 14 University of Wisconsin – Madison 39,289 15 University of Michigan – Ann Arbor 36,687 15 University of Illinois – Urbana-Champaign 38,841 16 Purdue University – Main Campus 36,427 16 Houston Community College System 38,493 17 University of South Florida 36,142 17 Education Management 37,658 18 New York University 35,835 18 University of Phoenix Online 37,600 19 Indiana University – Bloomington 35,063 19 Purdue University – Main Campus 36,893 20 University of Arizona 34,777 20 University of Michigan – Ann Arbor 36,525 Largest U.S. Universities by Degree Enrollments Fall 1995 Fall 2001 (a) Source: Chronicle of Higher Education.

  36. Rank Brand 2002 Brand Value ($ in billions) 2 Microsoft 64.1 5 Intel 30.9 1 Coca-Cola 69.6 4 General Electric 41.3 8 6 McDonald’s Nokia 26.4 30.0 9 Marlboro 24.2 7 Disney 29.3 3 IBM 51.2 10 Mercedes 21.0 World’s Ten Most Valuable Brands WHERE ARE THE EDUCATION COMPANIES? (a) Source: Interbrand Corp., JP Morgan Chase & Co.

  37. Brand Claim to Fame Location Liberal Arts Oxford Oxford, England Liberal Arts Sorbonne Paris, France Professional Schools Harvard Cambridge, MA Professional Schools Stanford Stanford, CA Economics LSE London, England Cordon Bleu Culinary Arts INSEAD Performing Arts MIT University of Tokyo Bolshoi Ballet School Business Technology Research, Science Juilliard Dance Paris, France Moscow, Russia Tokyo, Japan New York, NY Cambridge, MA Fontainebleu, France Liberal Arts Cambridge Cambridge, England World’s Most Valuable Higher Education Brands

  38. Former USSR 287,000 people 5.3 million students 404 faculty United States Germany China India 1,215,000 people 265,000 people 945,000 people 82,000 people 4.5 million students 2.2 million students 1.7 million students 15 million students 2,600 faculty 397 faculty 303 faculty 198 faculty Japan 126,000 people 271 faculty Global Higher Education Landscape (a) Source: ThinkEquity Partners.

  39. Global Higher Education Landscape Students Abroad Hungry for Top-Quality (U.S.-Based) Education • 500,000+ foreign students, or 3.5% of total postsecondary enrollees, study in the U.S. and spend $13 billion • America educates one-third of all foreign students • For every foreign student studying in the U.S., there are three to five students who would consume U.S. education online, if they had the access or the resources • Potential of 1.6 million international distance learning candidates • Global demand for higher education forecast to reach 160 million students in 2025 • Conservatively, 45 million users of online higher education • Assuming average annual tuition of $4,800, global market for online higher education will top $215 billion (a) Source: ThinkEquity Partners, Chronicle for Higher Education.

  40. The Global Brain Drain: Outward Bound But the Demand for a U.S. Education and Job Remains High % of Foreign Students Who Planned to Stay in the U.S. After Completing Studies (a) Source: OECD. 1997 data.

  41. Global Higher Education Landscape Access to Higher Education (18-22 Year Old Students) Projected by 2020 _______ Current % % of Students # of Students (mm) China 3% 20% 240.0 Malaysia 14% 40% 8.3 India 4% 8% 11.0 Hong Kong 15% 20% 0.1 US 42% 45% 16.1 • In Malaysia, for example, an additional 5.4 million higher education slots are needed to get to 40% • Online courses will capture at least half of this growth - $200+ billion opportunity by 2020 (a) Source: US Census Bureau, World Bank, Government of Hong Kong.

  42. The Global Education Gap By Region, Excluding High Income Countries • Less than 1/3 of adults outside the U.S. have completed high school, let alone earned a postsecondary degree Percentage of Adults Enrolled in Postsecondary Education Average Years of Schooling (a) Source: World Bank. Data as of 1999.

  43. Global Higher Education Landscape Asia Is Changing Global Demographic Changes Mirror the U.S.’:Aging Populations, Increased Postsecondary Attendance, and Need for Skilled Labor Current Projected by 2020 Over age 40 31% 40% Postsecondary graduates 93 million 141 million Skilled white collar jobs 81 million 103 million • Skilled white collar segment growing in excess of 2% per year in most Asian countries • In the next 20 years there will be 36 million additional skilled white collar workers (a) Source: Asian Demographics Ltd. Includes India, China, Japan, South Korea, Taiwan, Hong Kong, Thailand, Philippines, Malaysia, Singapore, Indonesia.

  44. Global Higher Education Landscape Asia Is Changing Untapped Potential: Growing Pool of Postsecondary Students… % of Workforce with Secondary Education or Better: 2000 vs. 2020 (a) Source: Asian Demographics Ltd. Includes India, China, Japan, South Korea, Taiwan, Hong Kong, Thailand, Philippines, Malaysia, Singapore, Indonesia.

  45. Global Higher Education Landscape Asia Is Changing Untapped Potential: …Needed to Fill a Labor Force Demanding Skills % Average Annual Growth Rate 2000 to 2020 (a) Source: Asian Demographics Ltd. Includes India, China, Japan, South Korea, Taiwan, Hong Kong, Thailand, Philippines, Malaysia, Singapore, Indonesia.

  46. The Blowing Up of a Bubble Growth & Composition of Venture Capital Investments in Nominal Dollars (1991-2000) 83% $87.7 $46.3 $ in billions 32% $17.4 $12.6 $9.8 $6.7 $5.1 $5.3 $4.9 $2.5 (a) Source: 1991-1994 Venture Economics; 1995-2000 PricewaterhouseCoopers / VentureOne Moneytree Survey.

  47. The Blowup of the Bubble (a) ThinkEquity Partners.

  48. High Hopes for e-Learning Capital Invested CompanyCapital InvestedCompany Status Blackboard $103 million Private Caliber $74 million Bankrupt / Acquired by Sylvan Campus Pipeline $91 million Acquired by SCT Group Cognitive Arts $33 million Private CollegeClub $64 million Bankrupt / Acquired by Student Advantage DigitalThink* $45 million Public: $90 million equity value Docent* $80 million Public: $45 million equity value KnowledgePlanet $67 million Private Mascot Network $22 million Out of Business Pensare $38+ million Bankrupt / Acquired by Duke University Saba Software* $50 million Public: $80 million equity value WebCT $120 million Private ZUniversity $15 million Out of Business $802 million * Money invested through pre-IPO mezzanine level.

  49. Colleges, Students, and “Average Joes” Have Embraced the Web Years to Attain 25% Market Share (a) Source: ThinkEquity Partners.

  50. Colleges, Students, and “Average Joes” Have Embraced the Web • 133 million U.S. adults – 66% of the adult population – have Internet access • IT spending on web initiatives by U.S. companies will exceed $282 billion – at 27%, more than 2x in 1999 • 84% of four-year colleges will offer distance learning courses in 2002, up from 62% in 1998 • Over 90% of college students access the Internet, with 50% accessing the Web daily • By 2004, 2.2 million degree-seeking students will be enrolled in distributed courses – CAGR of 33% (a) Source: ThinkEquity Partners.

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