The modern university is a conglomerate. It performs a huge variety of duties and functions, serving a wide range of constiuencies. Because most universities are non-profit, they tend not to account for money in a way that ties revenues to expenditures within each function. Rather, they raise money from a variety of sources—tuition, the government, donations, fees for service, investment earnings, etc.—and spend money on a variety of things—education, research, scholarship, musuems, hospitals, sports, administration, and so on and so forth. Revenues and expenditures are often only loosely connected, and there’s a great deal of internal cross-subsidization between things that make money and things that don’t. How much is unclear—most university budgeting and accounting systems aren’t even designed to answer that question. But on some basic level, cross-subsidization is absolutely vital to the logic and financial vitality of large higher education institutions. It’s an inefficient, madcap system, but on some level it works, in that it’s been sustaining a large number of very successful colleges and universities for a long time.

But conglomerates that operate this way are also vulnerable to external competition. Cross-subsidization by definition means that some people are paying more than what they’re buying costs to provide. What happens if someone comes into the market and competes on just that one service, the profitable part that’s keeping the money-losing activities afloat? Traditionally, universities haven’t had to worry about this, because they only competed against other conglomerates. Then the Internet came along and started breaking established markets into smaller pieces. It allowed new organizations to provide information-based services at radically lower costs. Higher education is, unavoidably, information-based. But it’s been shielded from this kind of competition because the accreditation process is hostile to new organizational models and essentially requires competitors to adopt many of the conventions and costs of the conglomerate model.

What if that weren’t the case? How cheap could, say, a standard introductory course in College Algebra be? How about $99 a month, by subscription—not for one class, but as many introductory classes as a student is able to complete? It’s not a theoretical number—it’s actually happening, right now, as I explain in this new article in Washington Monthly magazine. If universities are no longer able to charge more than an individual course costs to offer—if the positive side of the cross-subsidization scheme disappears as prices fall to the marginal cost of production—what’s going to happen to the conglomerate as a whole?

The Monthly also has a whole new Web site complete with other interesting articles, new college rankings, a blog (of course), etc. Take a look!