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Fragmented Industries



February 28, 2012 – Comments (4)

One place where some excellent profits can be made is when a fragmented industry with a lot of small companies has someone figure out how to consolidate it. The consolidator tends to do very well. McDonalds is an example of this in that most hamburger stands were owned by small business men with no more than a few locations before it changed the hamburger world.

I was reading Professor Damodaran's blog a few days ago and he got me to thinking. His post was about they way higher education is done and how it is remarkably expensive. After thinking about this for a while I think he is most correct. College costs have risen much faster than the rate of inflation for about 30 years. An undergraduate education is now at the point where it is economically hard to justify for some careers. And it is a fragmented industry with a lot of different providers, no one of which has a commanding share of the business. So it would seem to be an industry ripe for someone to figure out how to do it better and cheaper and change the world.

Now there are some impediments to consolidation. People go to college for a lot of reasons besides education. At the higher end schools, the contacts you make can literally change your life. And at all the schools, partying is a big part of it. That might be hard to do if the college is a virtual one and people are scattered around the globe.

A number of places are trying to find a model for non-traditional education that will work. University of Phoenix is probably the leader here. The problem is that is has just a faint odor of second rateness about it, and whatever really takes off will have to be perceived as having some status appeal. 

There is a lower tier of schools that do various kinds of training, but there have a number of scandals where people paid large sums of money for education that didn't actually lead to much in the way of job prospects. I think the government largesse that helped fuel part of the industry is gone for the forseeable future.  

Given the economic incentives, I suspect that various entites will keep trying stuff until someone gets it right. And when they do, I want to own that company. 

4 Comments – Post Your Own

#1) On February 29, 2012 at 10:17 AM, Valyooo (33.66) wrote:

I suspect you may be right for online colleges.  But I don't really see it for the brick and mortar ones.  There is too much sports rivalry and prestige compared to hamburgers.  With food, people like consistancy.  This is why people want FDA certified things (which is a complete joke, but whatever).  They don't want the risk of eating bad meat, or eating food they are unfamiliar with.  However, students travel across the globe to be a part of a university...I don't think it will translate the same way.  I also don't think the government would want that.

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#2) On February 29, 2012 at 12:40 PM, chk999 (99.96) wrote:

One driver I forgot to address is the need for continuing education. It used to be that you could get an undergraduate degree and that was pretty much all the education you needed for life. That is not true anymore and most careers have ongoing training and education needs. So we need a format for getting doses of education on a regular basis for a working lifetime.

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#3) On February 29, 2012 at 3:32 PM, tekennedy (92.43) wrote:

I work for a school in admissions and, I've got to say, I wouldn't touch the stocks of any publicly traded schools.  The reputation of the schools is terrible and I've seen far too many people apply to take the exact same degree that they got from a Pheonix just so they have a reputable name of the piece of paper. 

I think the big barrier to consolidation in the industry is public funding.  In order for a publicly traded school to compete on cost they need to take in a fraction of the money state schools do (I'd say this is their primary competition) and deliver a comprable product.  They do save on a number of costs by not having the assets of traditional schools, but that takes away a lot of the college experience and lowers the price most students would be willing to pay for the service.  They are in a tough place in the industry.

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#4) On March 14, 2012 at 2:01 PM, lemoneater (57.22) wrote:

I invest in higher education by having shares of Pearson PSO. Students still have to purchase textbooks in some form wherever they get their degrees. I went to two different colleges and I noticed that many of my textbooks were published by Pearson. Now they also own a part of the achievement test market because they own Stanford tests. (The company I currently work for sells Stanford to private schools and homeschools, so I bought some PSO to indirectly make money off myself :) Besides, Pearson publishes Penguin books many of which I've enjoyed over the years.

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