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Thursday July 12 6:24 PM ET

U.S. Online Education Firms Run Into Trouble

By Anupama Chandrasekaran

NEW YORK (Reuters) - A few years ago, online education firms promised to transform the landscape for learning. Now many of them are facing difficulties or even bankruptcy.

Last month, Caliber Learning Network Inc. (CLBRQ.PK), an online corporate training company, cut 70 percent of its work force and filed for Chapter 11 bankruptcy protection.

It was the third online education company in the last three months to say it was going nowhere in what was once the ''anywhere, any time'' online distance education market.

Analysts say E-learning companies invested in technology and content, but failed to plan for round-the-clock student support, brand-building, degree accreditation, smaller class sizes and intellectual property rights issues with universities.

``Tough partners, low funding, huge marketing expenses are dragging the feet of e-learning companies,'' said analyst Jeffrey Silber of Gerard Klauer Mattison & Co. Nevertheless, he said, the online education niche still has the potential to be a ``sweet spot.''

Online education is still a small part of the distance education market. Education research firm Eduventures says E-learning companies have about 3 percent to 4 percent of an estimated 1.25 million students enrolled in distance learning programs in the United States.

Besides trying to get a share of the distance learning pie, online education companies are targeting 66 million working adults in the United States without an undergraduate degree.

Information technology research firm International Data expects the online corporate training market to be $4.2 billion in 2001 and expects it to grow to $11.4 billion in 2003.

TROUBLES

Caliber Learning Network (http://caliber.com/) was set up in 1996, creating course software with content, instructors and certification from schools like Johns Hopkins University and University of Pennsylvania.

It had 52 centers, equipped to receive broadcast-quality video via satellite and the Web, in the United States and Europe. Class instructors from the partnering university addressed students in the different service centers from a remote production studio.

But some potential students found it inconvenient to go to service centers, preferring to learn from home.

Problems began to brew as operating costs touched $15 million, or 75 percent of revenues, last year, said senior vice president for sales and marketing Kevin Thibodeau. Investments in satellites and real estate caused a further drain. Revenues for fiscal 2000 had declined by $6 million to $20 million.

Intellectual property rights issues arose as schools began to see an erosion of their brand value. The tie-ups came to an end a year ago and Caliber decided to concentrate only on the corporate training market.

The company closed 45 centers and filed for bankruptcy protection last month.

Online education marketing company Pensare filed for bankruptcy protection two months ago after a funding squeeze, canceling plans for an initial public offering of stock.

Duke University's Fuqua School of Business, which has a stake in the company, was hoping to earn royalties by selling its software platform through Pensare

``If the IPO had happened we would have been one of the principals. Unfortunately that did not happen,'' says Daniel Nagy, associate dean at the Fuqua School of Business.

Quisic (http://www.quisic.com/), a California-based E-learning company, also pulled out of the university segment because of a lack of funding.

ACCREDITATION, BRAND BUILDING

A brighter spot is the distance education provider University of Phoenix Online (NasdaqNM:UOPX - news) (http://online.uophx.edu/). The company has over 25,000 students and posted an 86 percent enrollment growth last quarter. Most competitors do not have more than 2,000 to 3,000 enrollments.

Revenues for fiscal 2001 are expected to be $183 million more than a 78 percent increase over 2000. University of Phoenix's online business has an operating margin of 28.5 percent against its offline counterpart's 18 percent.

University of Phoenix has a 24-hour, seven-day-a-week support office for students and a class size of 9 students per teacher against 20 to 45 students per teacher in other online universities. It has regional accreditation and has brand appeal from being in the distance education business for more than 25 years.

Most online universities face two major problems; accreditation and brand-building. ``There is no short-circuiting the long process of achieving those objectives,'' says Trace Urdan, a senior analyst with WR Hambrecht.

For example, privately held UNext.com's Cardean University (http://www.unext.com/ and http://www.cardean.edu/) works with top-notch universities like Columbia University and the London School of Economics to create content. But Cardean, which offers its own degree, has accreditation only from the Distance Education Training Council.

Geoffrey Cox, president of Cardean University, says it could be another 3 years before Cardean gets the more credible regional accreditation. The company, currently only in corporate training, is planning to target individual students next year.

``It is still very early for companies to readily accept people with online degrees,'' said Linda Natansohn, senior vice president at employment job-site Web site Monster.com.

In the current economic downturn, people will want to stay in their jobs and get degrees online rather than go to school full time, Natansohn said. But they will go through an analysis about accreditation, transferability of courses, price and the flexibility of the courseware before arriving at a decision, she said.

Linda Harasim, chief executive of Toronto, Canada-based online education company TeleLearning Network, concurs. ``The war has been won, now we have to win the peace.''

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Earlier Stories
CORRECTED: U.S. Online Education Firms Run Into Trouble (July 12)
U.S. Online Education Firms Run Into Difficulties (July 12)

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