The Chandlerian University

Had lunch yesterday with MSc thesis workers studying how online education is emerging in the United States. They brilliantly summarized their thoughts so far, coining the term ‘The Chandlerian university’. Alfred Chandler was an economic historian, perhaps most famous for his descriptions of the modern mid 20th century western corporation (e.g. GM, Du Pont, ITT Industries). The Chandlerian firm was large, vertically integrated and often diversified into a wide range of business areas. Enjoying economies of scale and scope they faced little competition for several decades. Then came containers, East Asian economies entered the scene, financial markets were deregulated, digital technology gained momentum, putting the Chandlerian firm in an awkward position from the 1980s and onwards. Wild diversification came to an end, we saw vertical disintegration, reduced entry barriers, low cost competition and ended up in today’s industrial turmoil.

Universities as we know them have been very similar to the Chandlerian firm. Diversified, vertically integrated machine bureaucracies that faced limited competition and little incentive to change. Are the same forces that destroyed the mid 20th century corporation going to upset the educational system? With everything being available online, we might see vertical disintegration, lower barriers to entry, the emergence of new players and competitive turbulence over the coming years.

Higher education is in many countries a regulated monopolies. Digital technology has torn down many government monopolies over the past three decades: gambling, TV, radio, telecommunications, financial markets, etc. Why would higher education be an exception?

The Economist Group – what can we learn from this rare digital success story?

Over the last years you’ve heard it everywhere – printed media and newspapers are collapsing, the internet is killing their business and there’s nothing they can do about it. Well think again.

We live in a world where the amount of information keeps growing at an annual rate of about 50 percent. In 2006, three million times the information available in all books ever written was created. Needless to say, this tsunami of content has imposed great challenges for newspapers all around the world. Simple microeconomics tell us that if supply increases at such a staggering rate while demand remains more or less constant, then prices will end up in the basement and profit margins decline.

The figures below illustrate the impressive financial performance of The Economist Group. In the period 2002-2012, revenues are up 59 percent while operating profit is more than seven times higher! Not even the financial crisis could stop these graphs from pointing upwards in 2008-2009. Who knows, perhaps demand increased in these years as it became obvious that very few actually understood economics.

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Turnover and Operating profit (million £) The Economist Group 2002-2012.

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Operating margin The Economist Group 2002-2012.

So what’s the secret behind such a rare and formidable success story? Further analysis is required and I will get back to this in later posts. But let me hint at one possible explanation.

The Economist is not in the information business, it’s in the knowledge business. Being bombarded with overloads of information everywhere, people struggle to prioritize and make sense of it all. While the information business is overcrowded and fiercely competitive, the knowledge business isn’t, and perhaps more importantly: the information overload has arguably increased demand for knowledge.

The value of a magazine that quickly distills and analyzes the most important contemporary events is higher today than ten years ago. Conversely, a newspaper that largely reiterates information already available online and via news agencies is in a cutthroat commodity business competing with Google and other IT giants for meager advertising revenues.