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Video Streaming and Its Lessons for Higher Education: Michael Smith on TPI’s Two Think Minimum

Video Streaming and Its Lessons for Higher Education: Michael Smith on TPI’s Two Think Minimum

Scott (00:00):

Hi and welcome back to Two Think Minimum, the podcast of the Technology Policy Institute. It’s Thursday, September 29th, 2022, and I’m Scott Wallsten, President and Senior Fellow at TPI. Today we are honored to have Michael Smith with us. Michael is a professor of Information Technology and Marketing at Carnegie Mellon University. He studies business and consumer behavior in online markets, specifically markets for digital information and digital media products. His research has been published in leading management science, economics, and marketing journals and covered by professional journals, including the Harvard Business Review and the Sloan Management Review and press outlets, including the Economist, Wall Street Journal, New York Times, Wired, and Business Week. He’s received a large number of prestigious teaching and research awards. Too many to list here. And before he received his PhD at the MIT Sloan School of Management and became a professor, he actually held real jobs. He worked in the IT industry, including at GTE in their labs, telecommunications, and satellite business units. He even patented research applying fuzzy logic and AI to telecom networks. Michael, thanks for being with us today.

Michael (01:04):

Scott, thanks for having me. What a generous introduction.

Scott (01:06):

<Laugh> Well it’s all true, I hope.

Michael:

<Laugh> As far as you know.

Scott:

A lot of your work has been on streaming, streaming markets, and there’s been a lot going on in that recently. Netflix has finally had subscriber declines, and…tell us a little bit about what you’ve studied in streaming, video streaming, and how it sort of relates to what you see in the market today.

Michael (01:29):

Video streaming has been fascinating, primarily because the studios originally didn’t see the threat. So we had a senior executive in one of the Big Six studios come to our classroom in 2015 just to talk to our students about how technology was changing the business. And one of the things he said was when my colleague asked him, “Do Amazon, Netflix, and Google pose a threat to you?” What he said was, “You know what? My business is different. The same six studios have dominated my business for the last hundred years. There’s a reason for that and by implication, that’s not going to change.” And I use that in class and the students get all angry, and then you can come back and say, “But here’s the thing that’s important for you to realize. What he’s saying is historically one hundred percent accurate— the same six studios dominated the motion picture business for a hundred years. And it’s not like the Internet was the first technological shift they’ve faced. So the interesting question is…, at least in 2015, why is today any different, where Netflix, Amazon, and Google might change things in a way that none of the other technological shifts they’ve seen over the last a hundred years did?

Scott (02:45):

In terms of their dealing with studios, there was the shift to streaming and they had to deal with new methods of distribution. But it does seem like, in terms of production, that is newer. In 2015 until maybe 2000—I don’t know what, some number of years after that—he was still right. Except until Amazon, Apple, and Netflix all started to become producers too, right?

Michael (03:07):

Yeah. I think that was the real game changer. There were a lot of people in Hollywood saying that Best Buy has never made original content. You know, none of our other distributors have ever made original content. Why would Netflix and Amazon be successful here? And to be honest with you, I think it was a real surprise to a lot of people in the industry when Netflix and Amazon started taking home awards from the Golden Globes and all the other big events. I think that was kind of a wakeup call for everybody, that “Crap, these new tech firms are not stumbling. In fact, they’re [making] really great stuff. What do we need to do to respond?”

Scott (03:45):

Well actually, so let’s come back to what they need to do to respond in a second. But what do you think is happening now? So we have Netflix losing subscribers, Disney Plus doing pretty well, but there seems to be a big shakeout in streaming coming, but at the same time they, if anything, continue to produce content. Are some of the streamers becoming more content producers than streamers? What’s going to happen here? 

Michael (04:09):

It’s going to be fascinating to watch, right? So the first thing is, yeah, for a long time Netflix was the only player in the sandbox. So they were building big sand castles. Now they’re having to share that sandbox with a bunch of really well-funded, very sophisticated rivals, including nice people like Disney Plus and HBO Max, and also other tech firms like Amazon and Apple. So it’s not surprising Netflix has taken a little bit of a hit just because they really are now facing some serious competitors. To me, the interesting question is, which of these various folks are going to come out on top, right? You’ve got Netflix, which is kind of a pure play. And then you’ve got Apple and Amazon who have their own businesses that can back them up. And then you’ve got the Disney Pluses and the HBO Maxes and Paramount and Peacock et al. who are taking a big catalog of content and putting it online. Who wins this game? I have no idea.

Scott (05:07):

Well, a few years ago, I remember you were talking about the algorithms that Netflix would use, well not the algorithms because nobody knows what they are, but they had all this information on consumers that would help them predict what was going to be popular and what wasn’t. Did that turn out to not be correct, because you know, it didn’t work out or the other companies are better at it? Or is it that catalogs matter more? 

Michael (05:28):

I think it’s all of those things, right? I think Netflix has a strategic advantage because they already have the deep rich data about customer behavior and the algorithms that help them promote that. The studios have really strong content libraries that they can bring to the table and they’re playing catch up a little bit on the data side and the algorithm side. Who wins that race? I think that is a fascinating thing to watch.

Scott (05:54):

So how are the studios responding? I mean, some of it’s with data like you just said, but what’s their strategy?

Michael (06:00):

Well, to me, I think the most interesting thing about what the studios did, right? So if you think about this as a case study in disruption, the end of any good disruption case study is, “and the incumbent died,” right? You know, Kodak died, Blockbuster died, right? What I find so fascinating is the studios are doing just fine. Disney Plus, HBO Max, Peacock, Paramount—you know, a lot of innovative stuff going on there. And I think if you look at what allowed them to do that—I really think it was, I would argue—that they rediscovered their mission. That early in this disruption, they looked at technology and said, technology poses a threat to our way of doing business. And they were right. I think at some point when they started to see Netflix and Amazon taking home awards, they realized, “My mission isn’t selling shiny plastic discs for 20 bucks a pop. My mission is creating great entertainment and getting that entertainment in front of the audience. And if I can use technology to fulfill my mission, I’m willing to do that, even if it means radically changing my business model.” I think that’s a huge shift that they made and they deserve full marks for making it.

Scott (07:11):

So if we have, you know, lots of new companies entering producing content and the studios, the traditional studios responding and continuing to produce good or even better content, either somebody’s losing, or the pie has expanded, that people are spending more time with this kind of content. Or maybe it’s crowding out bad content. Who’s spending their extra time on this? All of this new content?

Michael (07:32):

It’s entirely possible that consumers are spending more time on content. But I think it’s also possible that the losers right now are cable channels, where it used to be that if you wanted to get entertained, your only option was primetime television. Now we’ve got a whole bunch of new options. I think it’s also possible consumers are spending more time-consuming entertainment than they did 15 years ago.

Scott (07:56):

In particular, when everyone’s at home pretending to work.

Michael (08:00):

Exactly. Yeah. I see this. I suspect many of the laptops that are open in my class are not taking copious notes on my material.

Scott (08:11):

<Laugh> Right. Class time is now Netflix time. All of these fast changes and unexpected changes does segue into issues that you’re working on today. And I know you’re excited about it and you have big predictions for what’s going to happen. So talk a little bit about your work on higher ed in tech.

Michael (08:26):

When we looked at the entertainment industry, right? So how do you answer this question of, “Why is today any different?” And my colleague Telang and I wrote a book that tried to unpack it and say, okay, the reason the studios had been successful for the last hundred years is they were able to control scarce resources. Scarce resources in how you create content, how you distribute content, and how you consume content. And technology made those scarce resources abundant. Early in the pandemic, I heard the then president of Ohio State University get asked almost the same question we asked the executive who came to our class. So he was asked, “Do new technologies and new education platforms pose a threat to higher education?” And his answer was, and I’m paraphrasing here, his answer was, “You know what? The same institutions of higher education have dominated my business for the last 500 years. There’s a reason for that and that’s not going to change.” And again, I think just like the studio executive, he’s absolutely right. Historically.

Scott (09:28):

Maybe he said that just because he knew that everybody would need a great quote for other case studies to be sure. <Laugh>.

Michael (09:34):

Yeah. If so, thank you, thank you, thank you. To me, it’s a really interesting question. Will technology change an industry that’s been incredibly stable for 500 years? Not only in terms of power, but also in terms of how content, if you will, is delivered. I’m giving the same lecture-based [delivery, where] there’s an expert up front. You guys listen to me and take notes. This is a medium that has persisted for 500 years. Why would today be any different? That’s the question I’m trying to play around with right now. Will technology pose a threat to higher education in the same way technology changed the entertainment industry?

Scott (10:12):

What are the different ways this might play out? What does it mean for that quote about having the same 500 institutions running higher ed? What does it mean for students?

Michael (10:24):

The argument I’m trying to make in the book that I’m writing right now is, number one, our current system of higher education is financially unsustainable. Number two, our current system of higher education is morally unsustainable. Number three, the problems are systemic, which means it’s going to be very hard for us to change them by tweaking the existing system. And number four, I think technology gives us an opportunity to create a new system that could be radically lower priced and radically more inclusive and accessible than the system we have today.

Scott (11:00):

And do you see evidence that that’s happening, or is the evidence that the technology’s there and they’re ignoring it at their own peril?

Michael (11:08):

I think there’s evidence that the technology’s there. What’s interesting is in the days of the MOOC hype, that back in 2012 there were a whole bunch of predictions that were made that, “Oh, online education is going to change everything. Half of all the world’s universities are going to be out of business in the next 10 years, blah, blah, blah.” And clearly those things haven’t come true. What I’m arguing in the book, what I’m trying to argue in the book, is that if you look at the sources of power in higher education, I would argue it’s because we control scarcity in access to the classroom. We control scarcity in access to the faculty experts and we control scarcity in the credentials that you need to signal mastery to the job market. And MOOCs only changed the first two. But MOOCs haven’t yet changed the third one, which is credentials. So…

Scott (12:02):

For people who don’t know, [MOOC means] massive open online courses.

Michael (12:04):

Oh, I’m sorry, yeah. Inside baseball, excuse me. Yeah. Massive open online courses, which are… Daphne Koller at Stanford, and Anant Agarwal at MIT—took their classes, put them online. Hundreds of thousands of people from around the world took the classes. And the argument was, well, this is going to be a game changer. No longer do you have to be one of the 1200 people who gets admitted to Stanford now to learn from Daphne Koller. Anyone can learn from Daphne Koller. What I would argue hasn’t happened yet is we haven’t replaced the university credential, or we haven’t given students another pathway to replace that university credential. You can take as many Coursera classes as you want. It’s still going to be hard to compete with a Stanford graduate who has that very valuable credential. “Could that change?” is the interesting question.

Scott (12:55):

What is a potential alternative to that? What would be the alternative in this world, this future that you’re imagining?

Michael (13:02):

So I was scratching my head about this, seriously, scratching my head about this one day saying, you know, Stanford, MIT, Carnegie Mellon, those are brand names. Brand names just don’t go away. They’re these enduring, long lasting things. What could possibly change the brand value of these institutions? And later on that day, I was buying a really expensive scanner from a manufacturer I’d never heard of before, solely because it had great star ratings on Amazon and a bunch of good reviews. And there was this, you know, aha moment of “Oh, that’s how you change brand name.” You add in information. [When there is limited information about the quality of the product], the brand is kind of a proxy for missing information. If you can add in information, people rely on that information and it’ll reduce the value of the brand relative to that information. So think about, [today] we [are willing to stay in] complete strangers houses because they had a good rating on Airbnb, where you would’ve otherwise had to say, no, I’m going to stay at the Hilton because I know that’s a reliable brand. Now what might that look like in the context of higher ed is a really interesting question. 

Scott (14:11):

But part of the brand, though, is also just exclusivity, right? And if it’s not exclusive anymore, then maybe five stars doesn’t matter.

Michael (14:21):

So two thoughts on that, right? The first is, yeah, part of the brand is exclusivity, but that’s a real problem for people who care about diversity and equity.

Scott (14:28):

Oh yeah, no, it goes right to your second point about morally unsustainable.

Michael (14:32):

It’s something that’s necessary for us to maintain, if we want to maintain our power in the industry, and yet it’s something we ought to feel really bad about, that we measure our success based on not the number of people we include, but the number of people we exclude. That’s bad. 

Scott (14:49):

But that doesn’t help the argument as to why it’s a concern for the universities. Just because something is bad doesn’t mean there is any force to change it.

Michael (14:59):

Right. So you have to have some force to change this. And I think it has to be the technology, if it’s going to change. And that’s still a big if. It’s it has to be a) [that] the technology gives employers new ways to evaluate talent independent from, “Do you have a four-year degree from an exclusive university?” And, do they want to start adopting those new systems? And I sort of think both things are starting to happen.

Scott (15:28):

You know, that’s really interesting because—now this is some self-promotion. Last week we had on the podcast, Michael Rosenbaum, who started these companies Catalyte and [Arena Analytics] that use AI and other methods of finding people whom traditional methods would overlook. So you know, it doesn’t look at who the institution that you got your four-year degree from. It finds these other things that are much better predictors of how successful they’ll be.

Michael (15:51):

That’s the one that’s interesting, right? 

Scott: 

Mm-hmm. <Affirmative> 

Michael:

It’s, “Can we use data to find people who higher education has overlooked because they don’t fit the traditional mold of high SAT scores, elite prep school, degree, lots of expensive extracurricular activities, blah, blah, blah?” One of the things we talk about in the book is that Raj Chetty at Harvard—an economist at Harvard—has a really nice study that shows that if you’re born into the top 1% of family income, you have a 1 in 4 chance of going to a highly selective university. If you’re born into the bottom 20% of income, you have a 1 in 300 chance of going to the same university.

Scott (16:33):

Yeah. That was a very disturbing study.

Michael (16:35):

Well, and what I say—and please hear this as provocative, not declarative—but what I say when I talk about this is, hey, I’m an economist. I believe in the efficient allocation of scarce resources. If we in higher education genuinely believe that rich kids just happen to be 77 times more likely to deserve an elite education, then we’re doing great. But if we don’t believe that there’s a strong correlation, [between family wealth and intellectual talent] then this is a terrible system because we’re leaving out hundreds of thousands of students who could benefit from our education. We’re leaving them out solely because they grew up in the wrong zip code. How do we find those people is the interesting question. And I think we’re starting to see evidence that online education can allow students who are overlooked by higher ed to gain the skills they need and signal their mastery to employers.

Michael (17:25):

And I think employers are desperate for that. I think employers are starting to realize that if you want to create a more diverse workforce, you can’t rely on elite colleges to give you that more diverse workforce. You’re going to have to go find it yourself. And by the way, if you want an interesting parallel, the question I sometimes ask in class is, “Why did Netflix need to vertically integrate into content creation? There are a whole bunch of studios making content. Why did Netflix need to do it themselves?” And the argument that I try to make is, I think Netflix realized that the studios were going to [continue to] make blockbuster content because that’s how their business model ran, whereas Netflix needed niche content to make their business model run. So [Netflix] had to vertically integrate to get the content they needed. I think we’re starting to see employers vertically integrating into education and credentialing because they recognize that elite higher education isn’t giving them what they need, either in terms of skills or in terms of diversity.

Scott (18:25):

Is part of the problem—that is, I mean, you’re saying there’s not an efficient outcome, right? And Raj Chetty’s work says that too. So would this change involve things like more vocational education and people who would’ve otherwise unfairly gone to a top school because their parents are rich or they’re alumni or whatever, can do something else. Maybe along the lines of what Peter Thiel did, paid people to drop out of college and start schools, like Figma, which sold to Adobe for 20 billion dollars.

Michael (18:53):

God bless Peter Thiel for having that idea. I sort of think higher education has taken on a very strong vocational credentialing aspect and it’s not really in our wheelhouse. We shouldn’t be the sole arbiter of who gets white collar jobs. Maybe we should go back to our core business, which is creating broadly educated liberal arts folks. And if all you want is a job, then let’s create a new pathway for you to get that job and let higher education get out of the vocational credentialing business.

Scott (19:24):

What would higher education be for then? <Laugh>

Michael (19:27):

I think higher education, I mean—there, there’s still certainly some areas where you need that broad liberal arts education, right? No doubt about it. And I think higher education also could be training people on the very, very cutting edge. The PhD students. [But,] let’s be clear, a lot of what higher education does today is really just helping people get jobs in industry and I’m not sure that’s what we’re best at. 

Scott (19:51):

Right. Also being a multi-billion dollar entertainment sports industry.

Michael (19:55):

Well, and that’s, yeah, don’t get me started about that. Why does Nick Saban make more than Alabama’s entire humanities department is a fascinating question.

Scott (20:04):

Right, it is. Although I think we know part of the answer. Can you name one person in Alabama’s humanities departments?

Michael (20:10):

Absolutely. Yeah. I mean, and that’s the interesting thing when you say that, someone’s going to say, “oh Nick Saban’s worth every penny you’re paying him.” And I say, you’re absolutely right, in terms of publicity and Alabama’s brand name and all those things.

Scott (20:23):

Right, in terms of all the things that you argue really aren’t good for us.

Michael (20:26):

Right. And that’s where I think we in higher education need to make the same transition that the entertainment industry did. I think right now, we in higher education are protecting our business model. And I would love to see us take a step back and say, “What’s the mission of higher education and how well are we doing it today, friends? And how many aspects of our business model are actually making it harder for us to pursue our mission?”

Scott (20:51):

What about changes that make these colleges much, much cheaper or even free for lower income people? Princeton said it won’t—any family that makes under a hundred thousand dollars won’t have to pay anything. And I think that’s probably broadly true for most schools with financial aid. I don’t know about a hundred thousand, but they have some level and is that something that actually helps change this distribution, or is it really a fig leaf that lets them continue their same business model and say, “No, no, look we are helping poor people,” even though they’re not letting more in.

Michael (21:20):

I think it’s certainly helpful, right? And I think Princeton certainly deserves all [the] kudos for doing that. The problem is you’ve still got to get into Princeton. <Scott murmurs in agreement>to benefit from that. And not everybody had the advantages of going to a well-resourced K-12 school district and having access to all the AP courses and having access to SAT prep classes and all the things you need to get into Princeton. I would love to see something where we don’t have to make the hard decisions up front about who gets in, that we can allow a broader set of people to get in and demonstrate for us whether they’re capable of getting the degree. And honestly, I think that’s what we’re starting to see at places like Southern New Hampshire University and Arizona State University. Michael Crow, president of Arizona State has this wonderful quote, and I’m going to butcher it. It’s basically, “Let’s create a system where, if you don’t have the background you need to succeed here, we’ll help you get it. And we’re going to help people get the background they need. And then once people get it, we’re going to allow the system to scale in a way that accommodates those extra people.”

Scott (22:34):

That’s, I mean, it sounds like kind of two outliers.

Michael (22:36):

What do you mean by that?

Scott (22:37):

The schools, there are two examples of schools doing this thing and there might be all kinds of reasons they’re doing it. That doesn’t mean it’s a trend or anything.

Michael (22:46):

It doesn’t mean it’s a trend. Although both Southern New Hampshire and Arizona State have been very successful at getting people interested in their programs and including a lot of people who otherwise would have been excluded from a traditional college admissions process. So they’ve been very successful in diversifying the number of students who are admitted and also in scaling. And I wish I had the numbers off the top of my head, but both of these are institutions that educate more than a hundred thousand students, most of them online. The other interesting thing—and here I do have the stats on Southern New Hampshire—the other interesting thing is if you look at traditional colleges, tuition has increased four times faster than inflation for the last 40 years. At Southern New Hampshire University, tuition has been exactly the same for the last decade: $10,000 a year. All during a time where everybody else in higher education was increasing their prices by 40%. Southern New Hampshire used technology to keep their tuition costs exactly the same. So not only are these new technological platforms able to give access to more people, they’re also able to do it while keeping their prices stable in a way that no traditional university could.

Scott (24:02):

So is there any way to make this in the interests of the most elite universities? Do they have to be incumbents that want to block progress because, well, otherwise they don’t have a business model?

Michael (24:15):

That’s the hard part, right? Is higher education trapped in the system where we don’t have the incentives to do the right thing? Brit Kirwan, who was the president of the University of Maryland when I was there and chancellor of the University of Maryland system, has this wonderful quote where he says, “Any university who could figure out how to deliver high quality education at a lower price will fall in the U.S. News and World Report ranking.” So you can be sure one thing, you’re going to fall in the U.S. News Award report rankings.

Scott (24:45):

Right, because selectivity is a part of those rankings.

Michael (24:48):

Selectivity is a part of those rankings. Alumni giving is a part of those rankings. A big part of those rankings is student support, which sounds nice on the surface, right? We should want give schools to give a lot of student support. How do they measure student support? Based on how much universities spend per student. And what that does is, it locks universities into this, “I’ve got to spend more than everybody else to rise in the U.S. News and World report ranking.”

Scott (25:14):

Right, increasing the number of students does not help that measure. 

Michael (25:18):

Right. Increasing the number of students you give access to hurts your selectivity. And delivering education more cheaply is going to hurt your ability to succeed on a bunch of other metrics [in the] US News and World [Report rankings].

Scott (25:30):

I mean I think a lot of people would agree that getting rid of the U.S. News and World Report rankings would be a great thing.

Michael (25:35):

I hear that a lot. Here’s the problem. If U.S. News and World Report doesn’t do it, someone else is going to. Because right now, your quality is tied to your institutional brand name.

Scott:

Right.

Michael:

And so somebody’s going to have to create a ranking of institutional brand names for employers to figure out who’s best. What if we changed how you evaluate applicants from “What’s your university brand name,” to “Show me what skills you’ve got.” I think that might be something that could help us out of this conundrum [where] we’re trapped in the system that we know is hurting students, we just can’t get out of it.

Scott (26:12):

Let’s back up a little bit. So it seems like there are, you know, you’re saying kind of two things. One is that it would be great to find ways to change the distribution of income represented by students in universities, right? Because it can’t possibly be the case that the top 1% are so much smarter than everybody else. And the other is that a whole lot more people should be in the student bodies. And each of those presents different challenges, right? Because you can maintain your selectivity even if you change the distribution of students, although you may affect your giving. So do those things necessarily go together? Are they different problems? What’s your thinking about that?

Michael (26:49):

It’s all wrapped together in a big bow in the sense that colleges are falling all over themselves to spend more per student. And because of that, it turns out only about—as student’s tuition covers only about 20% of the cost of actually educating that student. The rest of the money comes from giving, and a little bit from overhead on federal funds, but a lot of it comes from giving. So we need big donors. What does that mean? Well, it means we need to admit rich kids whose parents are going to give us big gifts. What does that mean? Well, it means that we’re going to give preference to families from wealthy income, and if you feel like that’s too harsh, read some of the discovery materials in the Students for Fair Admission vs. Harvard [case], and you’ll see that Harvard was pretty blatantly giving preference to rich alumni and rich donors.

Scott (27:41):

Yeah. That seems to be pretty well established. Maybe this goes off into a whole different direction, but does that also mean that universities are spending too much money on some things? Because I mean, you said about tuition going up so much more than overall inflation and yet it only covers, what did you say, 20% of the cost of that education?

Michael (27:59):

20% is the best number I’ve seen. Yeah.

Scott (28:00):

Right. So which part of that is wrong? Are university spending too much money somehow on something?

Michael (28:05):

I think we’re spending far too much money on new big grand buildings and facilities. I hate to say it because someone’s going to come back and yell at me. But it’s entirely possible that we’re spending far too much money on faculty.

Scott (28:18):

Or administration.

Michael (28:19):

Or administration. Yeah. And again, I’m now at risk that the key to my office door is no longer going to work.

Scott (28:25):

Right. You say there shouldn’t be elite universities. Too much administration, too many faculty. Yeah, I’m amazed you’re still there.

Michael (28:31):

Well, the book hasn’t come out yet, so we’ll see just how much academic freedom you get with tenure over the next 12 months. And I don’t take any joy or delight in that, the notion that I don’t see how we serve our students better without reducing our costs. And I don’t see how we reduce our costs without hitting faculty, right? I don’t take any joy or any delight in that. At the same time, I don’t take any joy or delight in the fact that we know we’re excluding poor kids who deserve an education. 

Scott:

Mm-hmm.  

Michael:

I have trouble saying I’m going to try to protect my position even though I know that the only way to protect my position is to exclude kids solely because they grew up in the wrong zip code.

Scott (29:15):

I mean, is technology necessarily a part of changing that? I don’t know the data, but probably European universities have a much broader slice of society because they either cost so much less or are free.

Michael (29:26):

They cost so much less or are free. I think there’s also a component in Europe that it’s much easier to get a job with vocational background than it is here. There’s also a lot more government support for universities and I know some of my university colleagues are going to listen to this and say, “Yeah, but we’re getting our government support cut. How are we going to do that?” I just worry that the university continuing to increase tuition at four times the rate of inflation for another 40 years is unsustainable. And I think that we haven’t done a good job of selling our services to taxpayers. I think at some point taxpayers are going to just naturally say, “We can’t keep subsidizing a system that is increasing its prices by four times the rate of inflation.”

Scott (30:11):

And just to play devil’s advocate, because obviously I agree with you, and nobody can sustain that rate of inflation. Well, we know that’s not actually the average tuition charged, right? Because so many people get financial aid, and then wouldn’t you want to charge these hundred millionaires whose kids go there as much as you possibly can? So you have the rack rate tuition that nobody pays except for the dumb rich people?

Michael (30:30):

So we’ve got the rack rate tuition and yes, we know that that is heavily subsidized. What’s also true though is the vast majority of those subsidies go to already rich families. 

Scott:

Right, right, right. 

Michael:

Why is that? Because we’re competing for the kids with the high SAT scores who are going to help our U.S. News and World Report rankings. The statistic is that American colleges give more aid per student to families earning more than a hundred thousand dollars per year than they give to families earning less than 20,000 per year.

Scott (31:03):

Mm-hmm. Interesting.

Michael (31:04):

The majority of our aid goes to already rich families.

Scott (31:07):

Let’s bring it back to the thesis you’re exploring. Is part of this that the universities are like the studios and maybe the record labels before them, they don’t know what’s about to hit them? And second is that these sorts of changes can be sort of in a societal sense, good along many margins. Is that kind of the way you see it? I mean, is higher ed going to be hit by this in ways they don’t understand? Or are they going to be able to react in ways that either block it or help it along?

Michael (31:38):

I would love to see higher education respond in a way that can help it. And like I say, I think the only way we can do that is by looking beyond the threat this poses to our business model and looking at our mission. I don’t think our mission is charging rich kids a quarter of a million dollars for a four-year degree. I think our mission is helping as many students as possible discover their skills, develop those skills, and use those skills to the benefit of society. Our current model is getting in the way of that.

Scott (32:10):

If things were to happen the way you think they will or should, what would your class look like in 10 years? What will your job be? What will you be doing?

Michael (32:18):

That is another fascinating question. We have a guy on our faculty who is an economic historian and he did a lot of work on what happened to the performing artists around the time of broadcast television.

Scott (32:32):

Oh, interesting.

Michael (32:33):

And what he found was when the performances were local, you could go to any city in the United States and find a very robust market for performing talent. Every city had its own playhouse and people were making money in any city in the United States. When the performance became broadcast, you ended up with a winner-takes-all outcome, where you had a lot of very highly paid actors and a lot of people looking for new work. What I think is really interesting is, I got tenure—whether fairly or unfairly—I got tenure by becoming the world recognized expert in a very narrow part of my field. And so my value to the university is that I’m an expert. When I teach, I teach like a generalist, right? I spend a lot of time reading what other people have done and trying to regurgitate their expertise back to my students. Wouldn’t it be cool if, instead of having me replicate Erik Brynjolfsson’s research and Catherine Tucker’s research, and you know, blah blah blah, that we could bring Erik and Catherine and a whole bunch of other people into the classroom and talk about what they’re really, really good at? And let me talk about what I’m really, really good at. Humbly.

Scott (33:46):

Because if you’re drawing from a much bigger pool, you can put together big classes for narrow topics.

Michael (33:52):

Yeah. Instead of me saying, “Hey, I read Catherine Tucker’s research on privacy in the context of big data and here’s what I think she’s trying to say,” wouldn’t it be [more] fun to have Catherine come in and  give that talk, and then maybe I’m there as—instead of a jack of all trades—maybe I’m there to make this symphony of experts into something that is coherent for my students? Three weeks ago we heard this from Erik. Isn’t it interesting that Catherine is saying something different?

Scott (34:18):

And then it’s not clear you’re the right guy for the job either. And I don’t mean just you, I mean maybe the people who are doing the classes. It’s a different kind of skill to put that kind of thing together.

Michael (34:27):

That’s the really scary part is yeah, maybe the skills that we’ve focused on in higher education aren’t going to be the skills that we need to succeed in this next phase of competition. The example I think of is Encyclopedia Britannica. So I do Shane Greenstein’s wonderful Encyclopedia Britannica vs. Encarta case, where he looks at, why did [Britannica] have such a hard time adapting to Microsoft’s Encarta on … CD-ROM? And we start the case by saying, “Okay, who can tell me why Britannica was so successful in their core market?” And the answer is, they had great editorial content, they had great brand name and they had a great salesforce. And then about 40 minutes in you go, by the way, why is Britannica having such a hard time adapting to Microsoft’s Encarta on CD-ROM? And the answer is, they’ve got great editorial content, they’ve got [a] great brand name and they’ve got a great salesforce and none of those things are all that helpful in this new world. And in fact, in many cases, it’s making it harder for them to respond. The salesforce in Britannica was smart enough to recognize that you don’t need my skills anymore in this new world. And so I’m going to try to forestall this change as long as I possibly can.

Scott (35:45):

So academics might be like encyclopedia sales people.

Michael (35:49):

I typically end the case by saying to the students, you know, it’s important to recognize that not every industry faces the threat of this sort of disruption. There [are] some industries that are just immune from this sort of threat. Like, I don’t know, higher education, for example. We have nothing to worry about when it comes to technology threatening our way of doing business. And the students pretty quickly get the joke and they’ll say something like, “No, no, no, don’t you guys look like the salesmen?” I say, “No, no, no, no, no. You’ve misunderstood the case.” Right? The point of the case is Britannica had these very self-interested salespeople who were going to protect their business model, whereas we in higher education have highly educated people like myself who are going to be very open to change.

Scott (36:28):

<Laugh>

Michael (36:28):

And before I besmirch too many of my colleagues, I really think there is the potential in the context of higher education for us to take a step back and say, “I would much rather have a more equitable way of people getting educated, even if that comes at the expense of my position in the market.” I do think there are good people in higher education who are going to be able to make that transition. I just think we need to wake up to the fact that the only way to protect our jobs is on the backs of students who deserve access to our classrooms.

Scott (37:04):

Well, on that note, I think we need to wrap it up. Michael, thanks for talking with us. This is a really fascinating subject and I can’t wait to, well first of all, read your book, and then see what happens.

Michael (37:14):

Scott, thanks so much for having me. This has been great.

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