Fox News High? Why Rupert Murdoch is bullish on digital education

November 15, 2010 1:14 PM
Matt Bowman

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July 9-10, 2013
San Francisco, CA

Rupert Murdoch is media’s ultimate contrarian, with a reputation for plunging into new businesses well before others agree on their promise. So could his newfound enthusiasm for education startups give the sector a boost?

Last week, New York was abuzz with Joel Klein’s move to step down as chancellor of the country’s biggest public-school system to join Murdoch’s News Corp. empire. While some ideologues may grouse about the notion of Fox News High, the move could signal good things for technology-infused education startups.

According to New York magazine, Klein “makes clear that he believes the ‘huge transformation in the field of education’ that is coming is ‘going to be driven by private markets’—by a wave of digital-learning start-ups now swelling around the country. And that, whether through investments or acquisitions, Murdoch intends to ride this wave.”

To date, investors have been skittish about education technology. Some money has gone into test-prep services like Knewton and Grockit, and a few teaching platforms like EduFire and Udemy. EduPath, an online-education startup designed around tablets, won the MobileBeat 2010 Startup Competition. But VC portfolios are for the most part education-free.

Mark Heesen, president of the National Venture Capital Association, says the problem is that few big companies are willing to buy startups. “In K-12 education the buyer is predominately state and local governments, as well as school districts,” Heesen wrote in an email. “None of these entities are awash in money to spend on new educational technology, no matter how forward thinking they are.”

Murdoch’s move may help, but Heesen doesn’t think it counts as a tipping point. “Potential acquirers certainly help a venture capitalist decide to invest in one space over another, but there has to be several major potential acquirers to really get their attention.”

That guarded optimism is the same reaction I got from Elizabeth Corcoran, former technology editor at Forbes and founder of e-learning startup Lucere. Corcoran, who’s been studying the sector in depth for the past two years, says Klein’s move may be more a sign of his personal goals than a sign of a coming windfall for edutech startups. Corcoran said:

The number of education-technology startups percolating is clearly on the rise. […] I’d agree that Klein’s decision to move to Murdoch’s camp amounts to him voting with his feet. Whether or not investing in these companies will benefit Murdoch’s “bottom line” seems like a declaration of faith at this point. The number of education-tech ventures which have hit the classic VC gold standard of a “10x” return are shockingly small.

When I asked Bill Gurley of Benchmark Capital about the sector a few months back, he said there’s a market for education technology in places like Korea, where online tutors are treated like rock stars and take out billboard ads to boost their following. But there, parents are willing to spend their own money on supplementary education; not so in the U.S., Gurley said. Earlier this year, SoftTech VC’s Jeff Clavier likewise told me he just didn’t see the market to justify the early-stage investments his firm makes.

Still, Murdoch’s move his hard to ignore. He has an eye for undertapped revenue streams, like the underserved audience that religiously watches Fox News and the opportunity for satellite television overseas. It can’t have been lost on Murdoch, who famously watches the competition, that the Washington Post Co., whose flagship newspaper rarely sides with Fox News and with whom the News Corp.-owned Wall Street Journal is increasingly competing with in national political coverage, is minting money in the education market through its Kaplan subsidiary.

Jumping into education is a gamble, but one that could pay off, Corcoran says: “You can argue that education is one of the last huge sectors of the economy to take advantage of digital technology, and so there will be fortunes to made — but history suggests this is difficult ground to harvest.”

And News Corp. has a mixed record when it comes to harvesting difficult ground. Take its MySpace subsidiary. When Murdoch bought it for $580 million in 2005, it was hailed as a visionary purchase — and a bargain. Now it’s losing money and News Corp. executives are talking about dumping it. Klein should take a lesson: Whatever he does had better make money fast.

http://twitter.com/jonbischke Jon Bischke

I think this is one of the more interesting developments in education in 2010. Murdoch, despite not always being right, is somewhat of a contrarian. I actually remember many (most?) people saying back when he acquired MySpace that that was way too much to pay for a social network. Of course it wasn't, he just bought the wrong one. I think what's interesting is that despite the fact that there has been a slew of funded edu startups recently, education as a sector seems to receive less venture capital investment than most sectors of comparable size. Part of this is due to the fact that historically the segment has not had many winners and that many of those who have won have been funded by private equity firms (e.g., Archipelago, Bridgepoint, EDMC, Grand Canyon, etc.).That trend might be shifting and companies like 2tor and Altius are showing signs of incredible promise. Still, the sector needs more smart entrepreneurs and passionate investors and the hope is that Klein's movement to the for-profit side will help with that.
http://alwayson.goingon.com mattwbowman

Jon, I think you're right re: the shift from PE to VC at least based on 2 recent convo's with VCs: 1) On Monday, Benchmark's Mitch Lasky (their lead on the Grockit investment), said the VC historical skittishness was because selling to the balkanized educational institutions was prohibitively complicated, Now there's research to prove the effectiveness of online learning, and academic budgets are being allocated in favor of this stuff. “We’re getting to the point where a lot of these preconditions are starting to be met. We’ve gotten to kind of a tipping point and from here forward, you’ll see more interesting exits.” 2) Similarly, Phil Bronner at Novak Biddle told me yesterday the convergence of HD video streaming and collaboration tools have brought online learning to the point of parity with, if not superiority to, the in-class experience, which opens the door to a lot more VC investment. Should be an interesting couple years in VC-backed edutech.
stevenhcooper

Great write up Matt, and I also agree with Jon (for the record I usually do).

I must say I feel there is one thing missing from all the exciting Silicon Valley/Edu start ups – having an exec (one is plenty) on the team who has either worked for or done real JVs with colleges so they know how to build the business so it can play well with schools who can be the most likely acquirers. The first thing I do when I start to build a company, or get ready to acquire one, or when I happen to get involved in one that has to sell immediately, is to engage with the Giants in the space as the very first order of business (!) – before going to lunch – because as Johnson says in 'Negotiating with Giants', “Smaller players can achieve greater results by engaging the giants sooner rather than later” – he cites many examples such as “Pop Idol” and how they engaged at the beginning of the product cycle their giant – the consumers.

Ironically I see too many young eduPunks afraid to approach the giants early on as they are afraid they will steal their idea . . if you have a good idea chances are they've ALREADY thought about it but will look to you for EXECUTION – and if they haven’t thougth of it, it may not be that good of an idea (something most won’t understand because you have to understand how schools are linked to accreditation). To prove this point, look at the hottest edu startup in the space – StraighterLine – Burke had a great idea to offer college courses as a subscription for $99 a month – and who did he first go to? All the for-profits and traditional schools — Yes they could have done it themselves for super cheap and very fast, but they said go *do it* and we’ll partner – and when he hits 10,000 students he’ll see a nice eight figure exit . . . from a for-profit school! Also StraighterLine looks and feels like a school, so potential acquirers – SCHOOLS – aren’t afraid or fail to understand what he built and they can EASILY see how it integrates into their business – because he engaged the giants as the first matter of business. And when you do engage, it is paramout to first seek to understand, then to be understood.

Another key to success is having that executive on the team who knows the traditional schools and how to package things. Ex: colleges despise all the buzz – I’ll never forget the 2Tor press release when they raised money and the title said “To Go After the High End of Online Education”. ‘To go after ‘ – REALLY? That is the last things academics want to read – how about, “To *Help* the High End of Online Education”. See this type of bravado is what is killing our opportunities – and is something that anyone who has worked in academia would understand – and to futher beat this down even more – now the Department of Education has prohibited revenue sharing agreements for this very reason! – to keep capitalists as far away from edu as possible!

Finally, part of StraighterLine’s success is that Burke built and grew it from DC and Phx (under the radar screen and while only worried about one customer – online colleges – and by doing so an online school can easily acquire StraigterLine for its lead gen value and to matriculate their students into their school – and I know this first hand because I sought to acquire StraighterLine to assimilate it, and its students, into one of my online schools.

Exciting times!