2U and edX Merger Benefits Both

The combined 2U-edX company will be a larger threat to Coursera, which has become the behemoth of the online education space.

June 30, 2021
 
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2U will buy edX's assets for $800 million.

2U and edX, major players in slightly different corners of the online learning market, announced Tuesday that they would join forces.

The merger of 2U, a publicly traded online program management company, and edX, a nonprofit online course provider, surprised just about everyone who follows online learning yet left many observers conceding the logic of this partnership.

Joining forces will give 2U access to edX’s cache of students and high-traffic website, which will significantly lower marketing costs for the OPM giant and its university partners and introduce new revenue streams for them. EdX, which has for years struggled to find a sustainable business model, will receive the capital injections it needs to continue its work and potentially expand its impact through research and improved technology.

The new partnership adds to a growing list of merger and acquisition deals between online education companies. Experts say that combined, the two companies will also create formidable competition for Coursera, which has roughly twice as many learners as edX and was valued at $7 billion when it went public last spring.

The transaction also draws attention to the increased blurring of the lines between for-profit and nonprofit entities in higher education. Throughout its history, edX has aggressively marketed itself as an alternative to for-profit players like Coursera. Now it is owned by one of the largest education companies on the planet.

A Win-Win

2U will purchase edX’s assets -- which include its brand, website and marketplace -- for $800 million. Proceeds from the transaction will go to the nonprofit that remains at Harvard University and the Massachusetts Institute of Technology -- the two institutions that founded and governed edX. Under a new name and tweaked mission, the nonprofit’s goal will be to further edX’s platform and reach. Combined, the two companies will reach 50 million students and more than 230 universities and corporate partners and offer over 3,500 digital programs, a press release stated.

EdX’s website alone is valuable; in 2020, edX boasted 39 million registered users and its marketplace was visited 120 million times, according to a slide deck 2U published for investors.

“They’re one of the top 10 websites in the world in terms of traffic, so that gives them enormous leverage across all of their products,” said Trace Urdan, managing director at Tyton Partners, a consulting firm and investment banker in education. “They can market degree programs to those students, and not just in a random way. They know about what those students’ interests are and what their aptitudes are. That’s really, really powerful from a marketing perspective.”

2U predicts it could convert 0.03 percent of edX’s users into paying 2U customers, which would lower marketing costs by nearly $400 per enrollment and save the company $40 million to $60 million annually. (Note: This paragraph was updated to reflect that 2U could save $400 in marketing costs per enrollment.) 

EdX’s assets will also allow 2U to compete more directly with Coursera in the direct-to-consumer online education marketplace, according to Michael Horn, cofounder of the Clayton Christensen Institute, a nonprofit think tank.

“Coursera has this incredible direct-to-consumer business that brings in revenue but also makes their marketing for their degree programs more efficient and allows them to do some creative things,” Horn said. “All of a sudden, now 2U has something -- not at the same scale, but certainly significant.”

Coursera has used its own user base of nearly 80 million learners to help its university partners sharply lower the prices students pay for their degree programs, as with the iMBA program launched by the University of Illinois at Urbana-Champaign in 2015. It is too early to say if 2U will seek to use the lower student acquisition costs made possible by edX to similarly lower the prices of its partners’ programs, which run on the high end of online offerings.

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For edX, the merger with 2U provides access to something it has struggled to secure: capital. Harvard and MIT each put $30 million into the nonprofit when it was founded. Since, edX has operated in the red for years. At the end of the 2020 fiscal year, edX reported $84.7 million in revenue and a $17.4 million operating loss.

EdX needs access to cash in order to thrive, Urdan said.

“Their owners are two large, rich, elite institutions, but they are not necessarily interested in continuing to pour additional capital into the enterprise,” he said. “You get to a certain point to say, ‘Wow, this turned into a real business; this is not just an academic experiment. But we’re not really prepared to steward it in that respect, so we need to find it a home.’”

All the things that make up edX as it exists now -- the employees, the website, the brand, etc. -- will go to 2U as part the $800 million transaction. 2U intends to retain all edX employees who don’t stay with the nonprofit at Harvard and MIT. The nonprofit shell left behind at the two universities will get a new name and a new mission, one that’s focused on “reimagining the future of learning for people at all stages of life, addressing educational inequalities, and continuing to advance next generation learning experiences and platforms,” according to a news release. The nonprofit will also sustain Open edX, the technology that edX built.

“The nonprofit will aim to do what edX could not: invest at the necessary scale to sustain Open edX as a fresh, vital, open-source learning platform for the world, and tackle the next great research challenges in online learning,” an MIT FAQ page on the transaction said. “It could, for example, invest in the potential of artificial intelligence to make online learning more responsive and personalized to the individual learner.”

2U will fund the acquisition with cash on hand, which includes proceeds of a recent $475 million senior secured term loan. The loan includes the ability to repay the debt at par if the transaction falls through, said Paul Lalljie, chief financial officer for 2U.

The boards of directors for 2U and edX have both approved the transaction, and it is expected to close within 120 days.

For-profit acquisitions of nonprofit companies are especially tricky, Urdan said.

"They can be really, really complicated because the price is not the dominant factor," he said. "So the trustees of edX, if you will, are more concerned with its mission as a nonprofit than maximizing the revenue or maximizing the price."

As part of the deal, 2U has promised that it will continue free versions of online courses, protect the intellectual property rights of faculty and university course providers, and protect the privacy of edX learners, EdSurge reported. 2U will also contribute to the open-source platform Open edX, which edX created and which will be maintained by Harvard and MIT.

The pandemic -- and the surge in demand for online learning that came with it -- boosted edX’s user base. The nonprofit struggled to keep up with the rising demand, Anant Agarwal, founder and CEO of edX, said during a press conference Tuesday.

"Post-pandemic, more and more of our partners were asking for more services for universities to help them create content," Agarwal said. "EdX simply didn’t have the resources to create an entire services organization."

But along with the rising demand came an increase in value for the nonprofit, making now the perfect time to sell edX’s assets.

"At this moment in time, the opportunities have never been greater," Alan Garber, provost at Harvard University, said during the press conference. "The combination of the partnership with 2U, which indeed is mission-aligned, and the creation of the nonprofit has just created the most spectacular opportunity to advance education."

Coursera, 2U and edX’s biggest competitor, should be worried, according to Urdan. Historically, edX has taken second place to Coursera when it comes to online course offerings. When the company completed a successful initial public offering in March, investors were enthusiastic about its short course business, which saw an increase in demand during the pandemic.

With edX’s new access to capital and 2U’s expanded marketing and recruitment capacity, the combined entity is a larger threat to Coursera.

“It changes the dynamic, it changes edX as a competitor to them and it changes 2U as a competitor to them,” Urdan said. “So it is a meaningful development for Coursera.”

Doug Lederman contributed to this article.

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