Dollars And Degrees

American economists once spoofed university education as the only industry in which those who consume its product do not purchase it; those who produce it do not sell it, and those who finance it do not control it. That apt description, made in the 1970s, has been undermined since then by the emergence of the first for-profit universities in the United States. Controlled by entrepreneurs, these schools--which number about 700 and counting-- sell a practical education to career-minded students and make a good buck doing it. They are now expanding abroad, creating the first multinational corporations in a sector long suspicious of balance sheets.

The biggest is publicly traded Sylvan Learning Systems, which has purchased six schools with a total of 60,000 students in Latin America and Western Europe since 1999. Its privately held rival, Apollo International, recently opened a three-campus university in Brazil, one in India and plans a third in Mexico. "We hope to get up to a 30- to 40-campus size" in Brazil alone, says Apollo International president and CEO Jorge Klor de Alva. "Our goal is to be in the 100,000-enrollment range in 10 years."

The companies are lured by a booming market in which capitalist competition is still scarce. The number of university students is expected to double in the next 25 years to 170 million worldwide. Demand greatly exceeds supply, because the 1990s saw massive global investment in primary and secondary schools, but not in universities. The number of children enrolled in primary or secondary schools rose by 18 percent around the world--more than twice the rate of increase in any previous decade. Now these kids are often graduating from high school to find no openings in national universities, which nevertheless don't welcome for-profit competition. The Brazilian university teachers' union last year warned that foreign corporations would turn higher education into "a diploma industry." Critics raised the specter of declining quality and a loss of Brazil's "sovereign control" over education.

For-profit universities met with similar suspicion when they first opened in the United States. By the 1980s they were regularly accused of offering substandard education and had to fight for acceptance and respect. Lately, they have flourished by catering to older students who aren't looking for keg parties, just a shortcut to a better career. For-profit colleges now attract 8 percent of four-year students in the United States, up from 3 percent a decade ago. By cutting out frills, including sports teams, student centers and summer vacation, these schools can operate with profit margins of 20 to 30 percent. In a recent Wall Street conference call, a Sylvan executive noted that "one of the things that investors like the most about higher education is that, typically, people can increase prices faster than the rate of inflation. We have been very successful doing that."

As a privately held company, Apollo International takes a somewhat lower profile. It is a spinoff of the Apollo Group, which has built the University of Phoenix into America's largest private university since opening it in 1976. Phoenix has about 135,000 students--mostly adults, 42 percent of whom attend online. Only 1,100 are overseas, so far. Trace Urdan, an analyst at ThinkEquity Partners in San Francisco, says the global market for online universities has the potential to reach $216 billion per year.

In some countries, the American companies operate as they do at home. Apollo found an easy fit in Brazil, where few universities have dorms, students often take off time between high school and college, and there's no summer vacation--just two breaks in July and December. In other Latin countries, Sylvan has taken a different approach, buying traditional residential colleges like the Universidad del Valle de Mexico (UVM). It has boosted enrollment by adding and heavily advertising courses in career-track fields like business and engineering, and adding no-frills satellite campuses. Sensitive to the potential hostility against foreign buyers, Sylvan keeps original school names, adding its own brand, Sylvan International Universities, to publicity materials, and keeps tuition in line with local private schools. "We're not exporting U.S. higher education to these markets," says Steve Drake, vice president of communications at Sylvan. "Each university continues to carry its own unique culture."

Most of the schools that Sylvan has purchased were managed by for-profits to begin with, including the prestigious Les Roches Hotel Management School in Switzerland. But in general, says Urdan, Sylvan's targets "have not been run with world-class business practices. They're not distressed, but there's an opportunity for them to be better managed." When Sylvan paid $50 million for a controlling stake in UVM two years ago, the school had revenues of about $80 million and an enrollment of 32,000. For 2002, its enrollment grew to 37,000, and ThinkEquity estimates its revenues rose to $135 million due to expansion, a tuition increase of about 5 to 10 percent and savvy marketing. The success of the for-profits is nothing to be afraid of, says World Bank education expert Jamil Salmi: "I don't think they will replace traditional universities, but they can push some more traditional providers to be more innovative and more attentive to the needs of the labor market."

Schools like Columbia, Princeton and the London School of Economics have responded by creating their own international, for-profit online learning ventures aimed mostly at adults. Monash University in Australia has spun off for-profit campuses in South Africa and Malaysia, and is one of many universities now lobbying to lower tax and other barriers to their operations abroad. With high tuitions and visa difficulties keeping many students from transferring to Western universities, such efforts are likely to expand. Says Marjorie Lenn of the U.S. National Committee for International Trade in Education, "The future is the movement of education, not of students. We'll go to them rather than them coming to us."

Some students at Sylvan schools in Latin America welcome the foreign invasion. At the Universidad de las Americas in Santiago, Daniela Villagran says friends tease her for studying at "Yankeeland," but she figures Sylvan connections "will give me an edge when I go out to look for a job." At UVM, students in a class on critical thinking shoot up their hands when asked to explain whether Washington, D.C., police used deductive or inductive reasoning to solve last year's sniper shootings. This emphasis on independent thought is what separates UVM from other institutions in Mexico, says Lizbeth Flores Herrera, 23, a communications student. "In that way, it's more American." And, for better or worse, more American schools are on the way.

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