Eric Sizemore: Project Portfolio: For Profit Education Industry

FOR-PROFIT EDUCATION INDUSTRY
US 1987 SIC: 8221 - Colleges and Universities
US 1987 SIC: 8229 - Schools and Educational Services
Industry: Schools

Featured Companies:
Apollo Group, Inc.
Career Education Corporation
Corinthian Colleges, Inc.
Strayer Education, Inc.
Sylvan Learning Systems, Inc.

Channon Arteman
Meg Burger
Carissa Holler
Eric Sizemore

________________________________________________________________________________________________________________________

The For-Profit Education industry ("For-Profit") is one of the most rapidly growing industries. It is an industry that, as a whole, has seen significant, and in individual cases astronomical profit margins in the past three years and whose future holds financial promise. Schools types include vocational, technical and traditional degree programs. Apollo Group, Inc. ("Apollo"), Career Education Corporation ("Career Education"), Corinthian Colleges, Inc. ("Corinthian"), Strayer Education, Inc. ("Strayer") and Sylvan Learning Systems, Inc. ("Sylvan") are among the industries top participants. Their business structures vary greatly from a combination of online and brick-and-mortar schools to purely one or the other. Likewise, their curricula vary greatly, offering undergraduate, graduate and doctoral programs in the health sciences, business Administration, Technical Professions and traditional disciplines. "[P]ostsecondary education is an approximately $31.5 billion industry in the U.S., with approximately 15.6 million students obtaining some form of postsecondary education." According to the Department of Education, "the number of students within the postsecondary education industry is expected to grow by 15%-23% to approximately 17.7-18.8 million students by 2013" [NCES]. While the for-profit education industry only comprises less than 2% of this burgeoning market, the potential for growth is phenomenal. Market analysts project that once all of the 2003 earnings reports are filed, the average profit margin for the for-profit sector will be 20%. Most analysts are basing this on U.S. market alone; the international market and opportunities are even greater. This market has flourished not necessarily in spite of, but in some ways because of the sluggish economy and unemployment. Many workers who lost their jobs in the 1990's needed to retrain to market themselves. At the same time older Baby Boomers are entering retirement and creating professional job openings faster than the traditional institutions can graduate a backfill. The younger Baby Boomers' "echo-boom" children are also reaching college age. Minorities and first-generation Americans are realizing that post-secondary education is fundamental to financial security. The for-profit market has specifically focused on these needs. Most institutions provide training and education that is specifically aligned with the skills and education needed in the current business environment.

FEATURED COMPANIES

Apollo Group, Inc. (NASD: APOL)
4615 East Elwood Street
Phoenix, AZ 85040
800-990-APOL | 480-966-5394
480-379-3503 Fax

Apollo Group is the largest for-profit education company in the industry. It enrolls approximately 200,100 students and owns 191 physical campuses in addition to its online "campus." It conducts its education business through four subsidiaries: University of Phoenix (including University of Phoenix Online), Institute for Professional Development, College for Financial Planning, and Western International University. In addition, Western International University is preparing to launch Axia College, a college designed to target the 18-24 year old market. Apollo was founded in 1973 and University of Phoenix in 1976. University of Phoenix was created in response to a growing need for alternative education for working adults. Apollo, in addition to most recently being named #48 in BusinessWeek's Top 50 companies of the S&P 500, lays claim to a score of other accomplishments.

www.apollogrp.com

Career Education Corporation (NASD: CECO)
2895 Greenspoint Parkway
Suite 600
Hoffman Estates, IL 60195
847-781-3600
847-781-3610 FAX

Career Education was founded in 1994 and operates 78 campuses in the United States, Canada, France, the UK, and the United Arab Emirates. Among degrees offered are doctoral, masters, bachelors, associates, and diploma degrees. Career Education operates under two different structures: Universities Group and Online Education Group. Their curricula are diverse in nature, offering students degrees in business studies, culinary arts, information technology, and visual communications and design technologies. Its student population tops 83,000 and its revenue has grown an average of over 30% a year since its inception.

Corinthian Colleges, Inc. (NASD: COCO)
6 Hutton Centre Drive
Suite 400
Santa Ana, CA 92702
(717) 427-3000
(717) 427-5111 FAX

Corinthian Colleges, Inc. was founded in 1995 and went public in 1999. It operates its training centers and universities in 21 states and 7 Canadian provinces serving over 52,000 students. Its degree programs stretch from masters to diploma programs in a wide variety of fields such as healthcare, business, and information technology. In addition to its 133 campuses and 17 training centers, Corinthian provides the opportunity to receive any of their degrees via their online campus. Corinthian has been actively expanding their physical presence, adding an average of 8 new campuses per year.

Strayer Education (NASD: STRA)
1100 Wilson Boulevard
Suite 2500
Arlington, VA 22209
703-247-2500

Strayer, while smaller in size to many of the other featured companies, has a large foothold in the east coast. It owns 27 campuses in Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. in addition to its courses online. Students are able to receive their undergraduate or graduate degree in all of the traditional disciplines or gain specialized knowledge in a 6- to 12-course certificate or diploma program. Strayer's history dates back to 1892 with the inception of Strayer Business College of Baltimore City. Since 1973 it has been accredited by numerous accrediting agencies and states and offered its first online course in 1996. It enrolls over 20,000 students throughout its 27 campuses and online learning centers, of which 91% claim full time employment immediately after graduation.

Sylvan Learning Systems (NASD: SLVN)
1001 Fleet Street
Baltimore, MD 21202
Baltimore City County
410-843-8000
410-843-8717 FAX

Sylvan offers education programs through two separate business segments: Campus-Based and Online Higher Education. Founded in 1979 in Portland, OR, it now lays claim to locations throughout the United States, Europe, South America and Central America. Its 115,000 students have the opportunity to earn bachelors, masters, and doctoral degrees in business, law, education, engineering, information technology, healthcare, hospitality and a plethora of other traditional programs. Offering education services through on-campus options and its innovative online portals, its annual compounded growth rate over the past three years has exceeded 60%.

THREAT OF NEW ENTRANTS
Overall Assessment: A medium force. The growth rate over the past 3 years has been phenomenal and offsets any debt incurred in start-up costs.

Government Regulation
Each school must be accredited by the United States Department of Education; additional state-level accreditation is necessary but few barriers have existed in gaining such accreditation. The for-profit industry strongly supports H.R. 3311 Affordability in Higher Education Act of 2003, Title III-Transfer of Credit. This legislation will ensure that any higher education institute accredited by the U.S. Department of Education will allow transfer of student credits received to other accredited universities. (www.congress.com). Due to less than favorable opinions of many for-profit institutes held by non-profit universities, H.R. 3311 is paramount for for-profit reputation, which directly influences enrollment and thus profits.

Online Education
Online degree programs have grown rapidly, in some cases, as with Strayer, online students increased from 2003 to 2004 by 29.2% while the company saw a decrease of over 7% in their on-campus student enrollment [Bisbee-Lehman, 2004]. Such programs are low in cost and high in revenue return thus allowing new competitors a low risk, low capital investment in exchange for high returns. The number of students choosing online degree programs is directly proportional to longer, more intense, high demand work weeks and schedules that U.S. companies are placing on their employees. "The Department of Education (DOE) estimates that the number of degree-seeking students taking online courses will grow at a compound rate of 33% per year during the next several years." According to a recent DOE study of online education, during the 2000-2001 academic year, enrollment in college-level, credit-granting, distance education courses totaled 2.9 million. Due to high returns in this segment of the industry, companies are pouring large amounts of capital into improvements of these systems in order to sustain and grow their enrollment rates. For example, Sylvan's "Online Higher Education" (OHE) "has spent considerable time automating and streamlining much of the infrastructure and systems that underlie [its] programs, but especially those at Walden and NTU. This should provide opportunities for better enrollment marketing and management, better (and cheaper) course delivery, tighter controls and satisfied students (better retention)" [Credit Suisse First Boston].

The National Economy
Poor nationwide economic conditions are favorable for existing companies and provide open doors for new entrants. "Over the past three decades enrollment growth in post-secondary institutions in the US has been directly related to changes in unemployment rate" [Merwitz-MSDW, 2003].

International Market
The international market is by far one of the widest doors open. While schools like Sylvan and Career Education have begun to permeate this market by concentrating their acquisition focus in Europe and Central America in what was once termed "a fuzzy strategy" by analysts at Think Equity, the focus those companies have taken has proven more than fruitful. In fact "Sylvan generates approximately 50% of its revenue from its campuses in Chile and Mexico, and as the company integrates its recent acquisition of UNAB (a Chilean university), we expect that total to rise to closer to 60% [MSDW, 11/6/03]. Morgan Stanley analysts go further to outline the international conditions and demographics that will fuel this exciting market growth opportunity. "We expect the schools in these regions to benefit from the growing size of the college aged population cohort...both Chile and Mexico teenage populations are much larger than their populations aged 20-24" [MSDW, 11/6/03].

Government Financing
While government accreditation and regulation provides a large amount of money to for-profit education corporations through financial aid programs such as FEFEL (the Federal Family Education Loan), FDL (the William D. Ford Federal Direct Loan program), PELL (the Federal Pell Grant program), FSEOG (the Federal Supplemental Educational Opportunity Grant program), PERKINS (the Federal Perkins Loan), and FWS (the Federal Work-Study program), the regulation process to ensure the opportunity for their students to receive such aid is complicated.

"To participate in the Title IV Programs (programs listed above), an institution must be authorized to offer its programs of instruction by the relevant agencies of the state in which it is located, accredited by an accrediting agency recognized by the DOE (Department of Education) and certified as eligible by the DOE. The DOE will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the provisions of the Higher Education Act and the DOE's extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis...The substantial amount of federal funds disbursed through the Title IV Programs, the large numbers of students and institutions participating in those programs, and instances of fraud, waste, and abuse by some schools and students in the past have caused the U.S. Congress to require the DOE to increase its level of regulatory oversight" [Career Education 10K].

In addition, the U.S. Congress must review and reauthorize the Higher Education Act every six years, a process that ultimately changes the face of the legislation, often reducing or increasing regulation that can be either positive or negative for the growth strategy and overall revenues of for-profit companies. As a result, new entering companies must assess the risk that relying on funds from the U.S. government, via their students, entails. "Regulations adopted in recent years have tightened standards for educational content, established strict standards for student loan default rates, required intensified scrutiny by state education agencies and accrediting agencies, and created more stringent standards for the evaluation of an institution's financial responsibility and administrative capability. As a result, some career-oriented schools have been forced to close because they lacked sufficient quality or financial resources or could not manage the increased regulatory burden" [Career Education 10K].

Non-Profit Higher Education
For-profits are competing with the community colleges and not-for-profit schools for the 2.8 million new prospective postsecondary students who are emerging out of U.S. high schools [Career Education 10K]. Such competition can be looked at in two ways. First, competition within the marketplace is good. Competition supports and encourages new growth strategy and balances a multitude of financial forces within in the industry that keep profits stable and increasing at a comfortable rate. Second, while this competition does exist, the for-profit industry has a unique curriculum and structure position to target and market to the demographic groups unable to participate in the traditional classroom.

In addition, many of these companies offer curricula in the highest growing market professions such as healthcare, business administration, and technical programs. Corinthian Colleges, for example, has positioned itself as a leading healthcare program institution. Two out of Corinthian's five school divisions are primarily focused on the healthcare professions. Corinthian offers diploma programs in allied health through Corinthian Schools, Inc. Likewise, Rhodes Colleges, Inc. (another division of Corinthian) specializes in "business, allied health, information technology and criminal justice" [www.cci.edu]. Career Education Corporation offers "doctoral degree, master's degree, bachelor's degree, associate degree and diploma programs in the career-oriented disciplines of visual communication and design technologies, information technology, business studies, culinary arts and health education" [www.careered.com], disciplines traditional universities and even traditional community colleges either offer little in the way of or do not offer at all.

A study done by the Hudson Institute and published in its comprehensive report, "Workforce 2020," found that "[c]olleges are largely inflexible in responding to labor market demands because of funding mechanisms and tenure systems. This lack of responsiveness to market conditions could account for the growth in enrollment in proprietary post-secondary schools such as ITT and DeVry...A growing proprietary sector and programs and degrees from a small group of colleges offered through the Internet show promise of expanding education options" [Hudson Institute, p. 139].

Future Outlook
While many of the outlined conditions demonstrate a market wide open to prospective entrants and investors, it is also likely, given the overall outlandish growth rate in the industry, that this market could go dry in the next 5-10 years. With new entrants, particularly in the online segment of the market, growing rapidly, the market may become flooded. The industry has positioned itself such that any emerging company only needs to establish themselves as "specialists" in a particular area of education in order to become relatively successful. But the education market is expansive, ever growing and always in need, and with for-profits only comprising a total of 2% of the market thus far, the next 5-10 years will be interesting and lucrative.

BARGAINING POWER OF SUPPLIERS
Overall assessment: A medium force. For-profit schools have thus far been able to control their supplies of teaching labor, materials, and technology. However low barriers to entry in this industry mean that today's suppliers may become tomorrow's competitors.

Labor
The for-profit education sector has applied cost savings learned from the business sector to reduce expenses related to education labor. Most instructors are not paid to program their own classes. At Apollo Group's University of Phoenix (UOP) a small group of faculty members standardize the school's curriculum, then distribute the online courseware throughout the University [Yung, 2004]. Apollo Group's faculty members usually teach 20 to 24 hours per course instead of the typical 40 because UOP students spend many hours on group projects without faculty supervision [Yung, 2004]. These two practices taken together result in less work required from most instructors and much lower labor costs, which results in much higher profits for the company. According to University of Virginia researcher David Breneman "If the typical class enrolls 20 students at $800 tuition each, revenue equals $16,000. If the faculty member is paid $1,600 to $2,000, that leaves at least $14,000 to cover all other costs plus profit. So long as demand remains strong, UOP is a veritable money machine" [Yung, 2004]. This supply of instructors, uninterested in publishing, and willing to accept lower pay for teaching, results in a low threat from labor suppliers with no foreseeable change in the near future.

So far there have been no successful large-scale labor actions, lawsuits or attempts at unionizing the for-profit post-secondary education industry. Among occupational groups, education, training, and library occupations had the highest unionization rates in 2003 (37.7%). Nearly two-fifths of workers in education, training, and library occupations and in protective service occupations were union members in 2003. Compare this overall group assessment to a less-than-6% unionization rate for employees in private education according to the U.S. Bureau of Labor Statistics [BLS, 2004]. For-profit post-secondary educators have shown few signs of forming collective bargaining units or joining existing educators unions such as the Service Employees International Union (SEIU) or American Federation of Teachers (AFT), as their public sector counterparts have.

Textbooks
The for-profit post-secondary education industry is attempting to reduce its reliance on textbook publishers, and is finding alternative learning materials with better production efficiencies. "We contract authors and experts to create course materials exactly to our specs. That lets us bypass textbook publishers," according to a spokesman for Apollo Group's University of Phoenix [Breen, 2003]. Apollo Group's brand of materials, "rEsource," is "superior to textbooks because they include simulations, training courses and other study aids [Yung, 2004]. "It's a beautiful, beautiful thing," says Mark DeFusco, CEO of Vatterott College in St. Louis and a former Apollo vice president. "rEsource is pure bottom line. Publishers should be scared" [Yung, 2004].

In response, textbook companies are pursuing development of online courseware. This potential threat is serious, but without state accreditation (which would require substantial changes in current law), this is not an immediate threat to the for-profit post-secondary industry. Unfortunately, as noted in the Threat of New Entrants discussion above, the economics exemplified by the for-profit education model present very low barriers to entry into this market. Education services stripped bare of physical campuses, libraries and textbooks could be easily replicated by a company with core competencies in software or content delivery. One corporation's accredited online course may soon be an easy substitute for another. The future commoditization of education, as in other commodities markets, may make brand names the chief differentiator (see Rivalry Among Existing Competitors discussion below).

Education Software
Software manufacturers subcontracted to provide online classes may have the core competencies to distribute teaching. "A big part of why for-profit education can be successful is economies of scale," says Sean Gallagher, an analyst at Eduventures Inc. in Boston [Heresniak, 2002]. Online programs are a low-cost way to generate more cash because courses, while requiring more upfront cash outlays, provide lower ongoing costs than classroom instruction, explained UmassOnline CEO David Gray [Qualters, 2003]. As noted above, Apollo produces its own online curriculum materials in a product called rEsource, which standardizes curriculum between different faculty and adds a great deal of revenue compared with using traditional text books [Heresniak, 2002]. "Once it's converted, you're dealing largely with updates," Gray said. "It's a very productive medium for us to make use of in terms of revenue" [Qualters, 2003].

Course-Management Systems
About 80% of all universities have a course-management system in place, according to a 2003 survey by the California based Campus Computing Project. Licensing fee revenues have quadrupled revenue since 2000, to $141.1 million in 2003. Sales are projected to increase another 30% this year [Davis, 2004]. The online courseware industry, according to Eduventures' 2003 market report [Davis 2004] is dominated by: Blackboard, WebCT, and eCollege. These three suppliers may be the source of future competition for the for-profit post-secondary industry, since they have built up considerable experience distributing online courseware and managing online classrooms. Another unique advantage that these companies have is an easy path to content creation. Blackboard actually retains the copyrights to all materials developed and implemented using their services [Blackboard, Terms of Agreement]. This represents an enormous pool of classroom materials that could be used to develop educational content in the future. As noted earlier, these courses can constitute an enormous profit center for the companies, especially if they can enter into joint ventures where they can further share in the profits of distribution. With so much profit to be made, and such low barriers to entry in this market, the threat to the for-profit industry is palpable in the medium- to long-term.

Other Potential Education Suppliers
As stated earlier, the for-profit education model exemplified by Apollo Group's bare bones services present low barriers to entry in this market. The standard economic model of production predicts that the strongest producers will displace local or subsistence production to exclusively produce goods for trade. There is no guarantee that the strongest education producers today will be able to differentiate their services from up-and-comers in the future. This "blind spot analysis" in online education content industry shows that it is entirely possible that strong software producers such as Microsoft could team up with high value brand name content providers, such as Harvard or MIT (see Competitor List, Appendix), to release online products like Anthropology 300 or "Arthur Miller on disc" [O'Meara, 2001]. To carry this scenario out even further, companies could lobby for state legislation to ease accreditation, allowing degrees to be granted online through even further centralized and automated networks. This scenario is by no means imminent but this, or some similar venture, is possible in the longer-term.

BARGAINING POWER OF BUYERS
Overall assessment: A weak force. The large pool of current and potential "buyers" (students) limits the power that any one of them could wield against the for-profit industry.

Differentiation
For-profit schools attempt to differentiate themselves from not-for-profit schools in at least three key ways: in the types of students that they target, in the courses they offer, and in the convenience and accommodations they extend to their students.

Target students - As noted in the Apollo Group 10K, "Traditional universities and colleges were designed to fulfill the educational needs of conventional, full-time students ages 18 to 24, who remain the primary focus of these universities and colleges." In contrast, for-profit schools focus largely on "working adults" in age ranges beyond that. Strayer reported that the majority of its students are "working adults pursuing their first college degree to improve their job skills and advance their careers," with approximately 59% of them being age 31 or older [Strayer 10K]. Apollo reported that the age distribution of its University of Phoenix students in the first half of 2003 was as follows: "25 and under (16.6%); 26 to 33 (37.8%); 34 to 45 (33.5%); 46 and over (12.1%)" [Apollo 10K], which shows a definite high proportion of students over age 26. For its Online Higher Education business, Sylvan explicitly targets "adult working professionals who are over 25 years old" [Sylvan 10K]. Overall among people who earned a bachelors degree in 1999-2000, private for-profit schools were the degree-granting institutions for the largest percentage of those who received the degree at age 25-29 (19.8%), age 30-39 (26.4%), or age 40 or older (32.0%) [A Descriptive Summary…].

Curriculum - In contrast to traditional not-for-profit institutions, for-profit institutions focus largely on providing education opportunities to improve the employability of their student-customers. Corinthian [10K], Sylvan [10K], and Career Education [10K] maintain relationships with members of the business community, sometimes as formal advisory boards, to ensure that their course offerings change to reflect the current expectations of potential employers. Apollo even utilizes input from current employers of its students, and incorporates employer issues in class projects [Apollo 10K].

Convenience - In contrast to traditional not-for-profit institutions, for-profits generally maintain several campuses, and offer courses in the evenings, on weekends, and online both synchronously or asynchronously (on-demand), to accommodate their "working adult" target markets. Strayer operated 27 campuses as of December 31, 2003, and noted in its 10K that approximately 90% of the courses available through the school were offered on nights and weekends [Strayer 10K]. At its June 30, 2003 fiscal end, Corinthian operated 125 campuses and 17 training centers year-round, with courses available throughout the day, including nights and weekends [Corinthian 10K]. Apollo and Career Education also maintain a substantial number of physical campuses (71 campuses and 121 learning centers at August 31, 2003 and 78 campuses at December 31, 2003, respectively) [Apollo 10K] [Career Education 10K]. With regard to online offerings, Strayer reported that 53% of its students enrolled in Fall 2003 had taken at least one course online through the school [Strayer 10K]. Corinthian offers online "all of the courses necessary to complete an associate's and bachelor's degrees in business, accounting, and criminal justice" [Corinthian 10K].

Concentration and Importance of "Buyers"
There are many "buyers" (students) in the market for post-secondary education, so no one buyer represents a substantial portion of "sales" made by for-profit education institutions. Strayer [10K], Corinthian [10K], Apollo [10K], and Career Education [10K] have all seen steady increases in enrollment every year from 1999 through 2003, with total enrollments now ranging from a low of approximately 20,000 for Strayer to over 200,000 for Apollo. Looking ahead, the U.S. Department of Education projects that the total number of high school graduates will increase 11% between the 2000-01 and 2012-13 academic years, and that total enrollment in degree-granting institutions will increase between 2000 and 2013, by anywhere from 15% to 23%, to totals ranging from 17.7 million to 18.8 million people [NCES]. This indicates that there will continue to be a large pool of potential buyers in the future, and no threat that significant influence may be concentrated in the hands of only a few.

Tuition and Price Sensitivity
For-profit institutions do not represent the "low-cost" education option, and therefore will likely not gain students based on tuition alone. In 2003, full-time attendance in pursuit of a bachelors degree at Strayer would cost approximately $11,000 per year [Strayer 10K]. At Corinthian, the same degree would average $7,800 per year, while a masters degree would cost on average $9,500 per year [Corinthian 10K]. At Career Education, total cost for a completed degree could range from $12,600 for the lowest-cost associate degree to $98,100 for the highest-cost bachelors degree [Career Education 10K]. "Online group study" through Apollo's University of Phoenix Online costs $440 per undergraduate credit hour, $545 per graduate credit hour, and $620 per doctoral credit hour [UOPX-tuition]. Finally, tuition for Sylvan schools is very complex and varies from subsidiary to subsidiary and from country to country, but generally ranges from an annual "low" of $1,400 for attendance at an international "full-service" institution to a high of $65,000 for completion of certain degrees through Sylvan's Walden subsidiary [Sylvan 10K].

Overall, for the period 2002-03, private for-profit institutions offering less than a 4-year degree had average annual tuition costs of $10,321, higher than either public or private not-for-profit institutions with similar offerings. During the same period, private for-profit institutions offering at least a 4-year degree had average annual tuition costs of $11,439, second only to private not-for-profits. Private for-profits had the highest tuition increases between the periods 1997-98 and 2002-03: 40.6% for those offering less than a 4-year degree and 35.3% for those offering at least a 4-year degree [Postsecondary Institutions in the United States…]. These examples demonstrate that for-profit institutions cannot compete with not-for-profits on the basis of "low-cost," and therefore must compete on program offerings and convenience.

Perceptions of Quality
To compensate for higher tuition costs, for-profit institutions must demonstrate the quality of education provided, which generally translates into placement in new or "better" (higher salary) employment. There seems to be strong statistical evidence to support this "quality" argument: people who earned a bachelors degree in 1999-2000 from a private for-profit institution went on to earn higher salaries than people who received their bachelors degree from any public or private not-for-profit institution (on average, $45,668 per year for the for-profit attendees). Further, 29.9% of the for-profit attendees were earning $60,000 or more in the year after graduation; in contrast, only 8.1% of those who received their bachelors degree from a doctorate-granting private not-for-profit were earning that amount; all other types of institutions produced even smaller percentages of graduates earning that amount [A Descriptive Summary…].

Beyond salary issues, there also seems to be some evidence that those who attend for-profit institutions end up working in their chosen fields, which may be a measure of job satisfaction. Eighty-four percent of people who earned a bachelors degree in 1999-2000 from a private for-profit institution went on to work in jobs that were "somewhat related" or "closely related" to their degree; this is a higher percent than for any type of not-for-profit institution. In addition, 29.6% reported that they were continuing in their existing career with their new bachelors degree; no not-for-profit institution type had similar high marks in this area. Finally, graduates from all not-for-profit institution types more frequently reported that the job they obtained after graduation was just to "pay the bills"; only 23.4% (the lowest percent) of graduates from for-profit institutions reported this result [A Descriptive Summary…].

For-profit institutions manifest this aspect of quality by focusing on placement, thereby providing a return on their students' investments and creating a competitive advantage over not-for-profit institutions. Corinthian provided a specific example of placement success by reporting that "approximately 82% of [its] graduates in calendar year 2002 who were 'available for placement'…were placed in a job for which they were trained within six months after graduation" [Corinthian 10K]. Career Education was seemingly even more successful; it reported that "as of December 31, 2003, approximately 93% of [its] Colleges, Schools and Universities segment graduates and 97% of [its] Online Education Group segment graduates who were available for employment for the academic year beginning July 1, 2002 and ended June 30, 2003, had found employment in their fields of study, or related fields of study" [Career Education 10K].

Marketing and Advertising
As noted in the Apollo Group 10K, "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" [Apollo 10K]. In contrast, for-profit institutions invest substantial resources in marketing and advertising, which serves to bias the amount of information available about post-secondary education options in favor of for-profit institutions versus their not-for-profit competitors. Corinthian reported that "for the year ended June 30, 2003, approximately 41% of [its] new student enrollments were generated through television, newspaper and yellow pages advertising, 30% were generated through referrals, 6% were generated through direct mail, 10% were generated from the Internet, and 13% were generated through a variety of other methods" [Corinthian 10K]. Career Education has divided its recruiting efforts into five areas "Local market; High school; Out-of-area; International; and Internet"; as an example, efforts in the "high school" recruiting area include presentations by Career Education representatives in local secondary schools and formation of direct relationships with high school counselors and faculty [Career Education 10K]. Sylvan approaches advertising uniquely for each of its subsidiaries; for example, the company "markets its Canter division primarily through cooperative programs with participating institutions and advertising aimed towards teachers" [Sylvan 10K]. Overall, not-for-profit institutions do not have the financial support or personnel to execute sophisticated marketing plans on the scale that the for-profit institutions have achieved.

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES
Overall assessment: A medium force. For-profits have demonstrated significant strengths, but have not usurped not-for-profit institutions in all areas.

Cost Versus Benefit
As noted in the "Bargaining Power of Buyers" discussion, for-profit institutions do not have a competitive advantage over not-for-profit institutions on the basis of "price" (tuition cost) alone. To counter any negative perception of high cost, for-profits have been forced to demonstrate the uniqueness and quality of their offerings relative to those of not-for-profit institutions. First, by targeting "working adults," for-profits have been able to craft curricula and services around the needs of that demographic, securing a niche for themselves that has not been addressed by traditional not-for-profits. Prospective students are therefore presented with a trade-off between the generally higher tuition costs charged by the for-profits and the convenience available in their service offerings. Also as demonstrated through available statistical evidence, attending a for-profit institution generally results in a higher salary and higher overall correspondence between the degree received and subsequent employment obtained than does attendance at any type of not-for-profit institution. This too is another area for consideration when prospective students weigh the merits of education at a for-profit institution against the cost of attendance.

There is also the possibility that a person would choose to forego post-secondary education and enter into the work force directly from high school; however, that option is becoming increasingly less attractive as data about the long-range success of such people becomes known. As Career Education reported in its 10K, data from the U.S. Department of Commerce indicates that by obtaining an associate degree, a high school graduate can increase his or her earnings by 25%; by obtaining a bachelors degree, earnings increase by 65% [Career Education 10K].

Student Retention
For any post-secondary institution, there is a threat that a student will leave to continue his or her education elsewhere. According to the Chronicle for Higher Education, "about 60 percent of college students attend more than one institution before they graduate." The switching cost for students is primarily the loss of credits that do not transfer to the new institution. Currently, the difficulty in transferring credits among the for-profits and the not-for-profits acts against the for-profits. As previously mentioned, legislation is currently being proposed in accordance with the Higher Education Act to make higher education credits more uniform and transferable among all accredited institutions. Another potential barrier to switching is any inconvenience associated with location or schedule with a different institution, which could also act as an incentive, particularly as online and asynchronous courses become more available.

Similar to their marketing efforts, for-profit institutions have invested considerable financial and personnel resources in retaining their students. Corinthian has implemented orientation, tutoring, advising, ride-sharing and referral programs in an effort to improve student retention [Corinthian 10K]. As noted in the Career Education 10K "We recognize that our ability to retain students until graduation is an important indicator of our success and that modest improvements in retention rates can result in meaningful increases in school revenue and profitability" [Career Education 10K].

No Financial Threat
Not-for-profit institutions are no competition for for-profit institutions in terms of income generated per student. Based on information found in the latest 10Ks, in the years 2001-2003, Strayer, Career Education, Corinthian, Apollo, and Sylvan each showed positive operating income per student; with the exception of Strayer, each company saw increases year-over-year. In contrast, not-for-profit institutions must rely on appropriations and fund-raising to supplement their tuition revenues; considering only tuition revenues, not-for-profit institutions show negative operating income per student (based on 2001 data, the only year available) [Enrollment in Postsecondary Institutions…].

RIVALRY AMONG EXISTING COMPETITORS
Overall assessment: A medium force. High market growth currently offsets competition within the industry, but sensitivity to changes in the job market may affect this balance.

Market growth
Overall the market growth is so significant that the for-profits currently compete for the new market share more than they compete for each other's share. Since increased revenue for one company does not displace the growth of competitors, the intensity of the rivalry is reduced. However, in some markets, such as Los Angeles where nine of the largest ten for-profits exist, education industry analyst Jeffrey M. Silber indicates that there is a slowdown in growth, and thus the competition for market share is more intense.

The strategies that the for-profits are using to gain incremental market share will set the stage for when that growth declines and internal rivalry intensifies. In terms of the investors and industry analysts, the for-profit education industry is hot; five for-profit education institutions (including Apollo, Career Ed., Corinthian, and Strayer) were listed as BusinessWeek's Top 25 Hot Growth Companies in 2003. These institutions strive to produce bottom line numbers that appeal to stockholders:

Diversity and Differentiation
Many of the larger for-profits have acquired the attractive smaller companies in the past few years and expanded their campus locations and programs offered, leaving fewer smaller companies and nine or ten larger companies that share 45% of the for-profit market. The five that we analyzed differentiate themselves by curricula, degree-levels offered, geographic locations of campuses and online presence. Online presence is beginning to minimize the importance of geographic campus presence.

Apollo Group - Differentiators: Size, online curriculum, Canadian presence
Apollo is the largest of all of the for-profits, with a 2003 enrollment of 200,000 students, and according to the analysts, has a strong brand presence. It has 191 campuses in the 28 U.S. states, Canada, and Puerto Rico, and is growing at a rate of 7-9 campuses per year through acquisitions and expansion. Apollo established a partnership in 2003 with the Canadian Institute of Business and Technology to provide educational opportunities in China. U.S. campuses are in metropolitan areas, with no presence in the northern or northeastern states. Apollo schools, most notably the University of Phoenix (UOP) and UOP-Online, offer bachelors, masters and doctoral degrees in business, education, healthcare, and information technology through both its campus and online programs.

Sylvan Learning Systems - Differentiators: International presence, advanced engineering training, English language training
Sylvan divested its K-12 segment in June 2003 in order to focus almost exclusively on the international postsecondary education market. Nearly 90% of its current enrollment is outside of the U.S., in Mexico, Panama, Chile, France, Switzerland and Spain. Sylvan cites international enrollment in post-secondary education as growing at a rate three times that of U.S. enrollment. Analysts see a pronounced need in Asia for higher education in the next 20 years, and they see Sylvan as well-positioned to meet these needs with physical campuses and online programs. Sylvan's U.S. campuses offer bachelors, masters, and doctoral degrees as well as professional development courses in education, health services, psychology, engineering and technology, business and management. Wall Street Institute offers online English language training targeted at international students. National Technical University (NTU) offers professional training for engineers, partnering with both engineering schools and corporate customers that employ engineers.

Corinthian Colleges - Differentiators: Technology trades, allied health, metro locations serving minorities, consolidation
Corinthian offers diplomas, associates, bachelors and masters degrees, as well as continuing professional education, focusing on healthcare, business, automotive repair, criminal justice and information technology. Corinthian's campus locations in 21 U.S. states focus on fast-growing metro areas (in states such as California and Texas) that position it to serve minorities and the lower-middle class. Fifty-five percent of Corinthian's 2002 enrollment belonged to a racial minority (22% Hispanic and 29% Black), with an even higher percentage represented in the allied health fields [ThinkEquity]. Its 2003 acquisitions of CDI in Canada and Career Choices in the Pacific Northwest (U.S.) demonstrate and reinforce its ability to acquire and improve existing institutions. Corinthian's online/distance learning is limited at this time through the FMU (Florida Metropolitan University) and LTU (Learning Tree University) branches, which are expected to have significant growth potential for Corinthian.

Strayer Education - Differentiators: Online flexibility, corporate alliances
Strayer offers associates and bachelors degrees in business and information technology fields, and masters degrees in education, business, health services, public administration and information technology fields. Strayer offers synchronous and asynchronous online classes for its entire curriculum, maximizing scheduling flexibility for its students. Strayer's campus growth, online growth and corporate alliance program growth have all been strong and analysts expect this growth to continue [Credit Suisse].

Career Education - Differentiators: International presence, culinary arts, graphic arts, graduate placement
Career Education offers diploma, certificate, associates, bachelors and masters level degrees in visual communication and design technologies, information technology, business studies, culinary arts and healthcare. There are 78 campus locations in the U.S., Canada, U.K., France and United Arab Emirates. Career Education offers online programs in information technology, business administration, visual communication, and education through its AIU (American Intercontinental University) and CTU (Colorado Technical University) branches. Career Education prides itself on its job placement and programs that help students focus on career goals and placement from the time that they enroll. In 2003, 93% of their graduates found employment in their field within six months of graduation. (www.careered.com)

Cost structure
Online education has very low fixed costs and offsets the high fixed costs of bricks-and-mortar. Thus, the institutions with a higher ratio of online classes to on-campus classes (assuming equal class size) will have lower fixed costs. In terms of profits, the five companies we assessed ranged from 10-23% profit margins in 2003, based on income that is almost exclusively on tuition. For-profits increase tuition an average of 5-6% annually, not based on increased costs, but based on what the market allows. This revenue is used for expansion, acquisitions or as dividends to the shareholders. Tuition is also an area in which institutions have room to be more cost competitive if the market changes. On the flip side, many of these institutions' students, and thus the institutions themselves, are dependent on financial aid. The institutions are limited to a maximum percentage of tuition they can receive as financial aid, as well as a maximum student loan default rate. Many institutions, notably UOP, make extensive efforts to help their students graduate, get employed and pay their loans in order to meet this requirement.

Intellectual Property
Higher education is not active in developing intellectual capital, with the exception of Sylvan Learning Systems. While traditional institutions have patents primarily on their research, Sylvan's patents relate to education technology, online learning systems, and security systems that protect the integrity of online examinations. Sylvan has nine patents filed with the U.S. Patent and Trademark Office, with additional international filings on these same inventions. Four of the nine are granted patents and five are pending. There are two main patent families within this group, and each of these two foundation patents has been cited several times (11 and 14 citations) by patents from companies such as Sony, GTE, and IBM (mostly for interface-related innovations) and competitors such as eCollege.com and Alverno College [www.uspto.gov]. A market with high internal rivalry would likely evidence this through heavily patented products and processes, established patent estates, and cross-citations.

Emerging Institutions and Niches - Concord Law School/Kaplan
In 1998, Concord Law School enrolled the first class of 33 students in a completely online law school. Four years later, it graduated its first class of ten with juris doctor degrees and the following year, 2003, it graduated twenty-six. Currently, Concord, a division of Kaplan, which is a wholly owned subsidiary of Washington Post Co., has over 1500 students enrolled in its Juris Doctor and Executive JDSM programs. Concord faces many of the same issues as other online schools in terms of accreditation and their perceived ability to provide a "complete" education compared to traditional institutions. While neither the American Bar Association nor the California Committee of Bar Examiners (CCBE) will accredit Concord, the CCBE allows Concord to register as a correspondence school, which in turn permits Concord graduates to sit for the California Bar Exam. Some states' reciprocity agreements allow students who pass the California Bar Exam to sit for their bar exam, and after passing, to be admitted to that state's bar association. It is an indirect route, but a path to "legitimacy" for Concord graduates wishing to practice outside of California.

Kaplan has been well known for its testing preparation materials and services for over 65 years. Prior to Concord, it had ventured into "lifelong learning" with its SCORE! tutoring program, professional development programs and National Institute for Paralegal Arts and Sciences (NIPAS), providing degrees and certificates in paralegal studies and legal nurse consulting. Building on this legal training foundation and LSAT (law school entrance examination) preparatory materials and classes, it launched Concord Law School in 1998. In 2000, it continued its expansion into the higher education market with the acquisition of Quest, now Kaplan College, and provides diploma- through bachelor degree-level education on 56 campuses and in online programs such as healthcare, business, information technology, fashion and design, financial planning and criminal justice. Kaplan's educational experience, breadth of curricula, and willingness to venture into uncharted territory (online law school), combined with the resources of Washington Post Co., make Kaplan's six years in post-secondary education an emerging threat to the key players of for-profit higher education.

Overall For-Profit Education Outlook
Market growth will continue to be the most significant factor in this sector through the 2013 forecast. Higher education is forecasted to grow by 15%-23% to approximately 17.7-18.8 million students by 2013. The U.S. Department of Labor identifies the fields of business, criminal justice, technology, education and health as having high job growth. The following areas will contribute to this growth:
-Penetration of the U.S. market through acquisitions and expansion of both campus and online programs, with careful consideration of the costs and risks of acquisition vs. expansion.

-International growth that will continue to be significant, primarily in Asia.

-Maximizing profit margins by leading students to four-year degrees (e.g. nursing) from or instead of two-year degrees and diplomas, by offering more classes and programs online and reducing the fixed-cost percentage, and by increasing the average class size.

-Identifying and developing new student markets as part of the market growth, including corporate alliances, military education and high school recruiting.

-Expanding health care training. The Department of Labor forecasts that nearly "one in six newly created jobs between 2002 and 2012 will be in health care and more than half of those jobs require less than a two-year degree" [Bank of America Securities].

-Increasing brand equity. Analysts are already identifying brand strength in the Apollo/University of Phoenix and Corinthian brand names. As the transferability of credits becomes more equitable with traditional institutions and more graduates of for-profit schools integrate into the marketplace, the value of the for-profit sector education will increase. This will be a threat not only to new entrants in the field, but also an increasing threat to traditional institutions as competition for the same students increases.