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A Sector Under Siege, Part 1

Written on
Aug 6, 2010 
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DM Confidential  |
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A Sector Under Siege, Part 1

siege_smallDM CONFIDENTIAL – Those who build offers have a special talent. It’s not easy to qualify, but those who can come up with an offer don’t just understand the traffic landscape, they have an ability to create the vehicle by which to monetize it. As they do so, a subtle conflict emerges, one baked into the foundation of the offer.

Over time, the foundation of that offer gets tested and if the underlying mechanics shift too greatly, the crack gets larger and larger. It can grow to the point where the crack threatens the entire offer, and the building can collapse. The crack, this conflict, is the tug between monetization and user value/user experience.

In an ideal world, the two do not conflict — an offer can make money and add value. In the real world, though, it’s a tug of war where the need to monetize all too often equates to a subpar experience.

In the ideal world, we could say that there is never a conflict between user experience and monetization. If there is, we could say that the former doesn’t win, but that it just isn’t feasible in the world of direct marketing. For the most part, it hasn’t caused (m)any issues.

The huge exception to the rule is when discussing areas that rely upon and influence factors outside of our control. It’s one thing to have Google or Facebook change the rules. It’s another when we are talking about an area ultimately subsidized by the government.

Auto insurance has no government issues. Home improvement doesn’t either. But, education, now that is a completely different animal.

As we wrote in May, we have a government with slightly anti-business leanings, one that does not feel completely comfortable with the idea of education as a business. This government is dealing with a credit crisis due to existing unsavory lending practices, finding itself staring at a new type of lending crisis, this time involving the sacred institution of education.

At the heart of the tussle over education sits the Higher Education Act which specifies the disbursement of funds to accredited schools. As part of the re-authorization of the bill (required), the Department of Education can revisit the guidelines. They want to make sure government dollars are spent well.

This process for revising regulations takes place as part of what is known as a negotiated rule making process. Meetings are held, input accepted, and new proposed rules suggested. Agreement is preferred, but if agreement isn’t reached, then the Department of Education makes a final ruling. This process is not fast but not slow either, involving several iterations (the new proposals) in between negotiations. The in-between time is one of uncertainty.

For the education space, that period of waiting is almost over. The last of the meetings have been held. Agreement has been reached on some points, updated proposed rules shared for others. Next up come the actual changes to the marketing practices — who can do it and how. We’ll see those in November with them being enacted next July.

If schools want have continued access to financial aid, which they do, and you do, they must follow these rules, and the new rules are designed with a noble mission in mind but with (more than) a slight bend on creating barriers specific to the growth and profitability of the for-profit sector.

With billions owed to the government, lent annually by the government, and not enough being paid back, during which the for-profit sector profits, it was only a matter of time before some politicians — both righteously and for stump purposes — took notice.

The impetus last time for our covering the regulatory environment and issues surrounding the education sector had to do with a television piece created by “Frontline.” The program was surprisingly balanced, but it contained some sobering facts, e.g., 10% of the total higher education student body but consumes 25% of all student aid and accounts for an estimated 44% of all student defaults. Outstanding student loans equal the nation’s credit card debt, which is roughly $750 billion.

We got into a credit crisis, among other reasons, when people were given credit who were at risk from the start of paying it back. It’s no different when the credit is a student loan, and in many respects it is worse, because they aren’t like other loans. If you default on a federal student loan you are “hounded for life.”

It’s the “most collectible debt” — non-dischargeable in bankruptcy, wages can be garnished, tax refunds intercepted, and you can be sued in court and ineligible for other federal benefits. Twenty billion dollars are being generated each year.

This time around, the impetus for covering the education sector has to do with the latest iteration of scrutiny. It’s not regulatory scrutiny but legislative. The Department of Education’s forthcoming regulations are just regulations. They can be overturned and tweaked when a new administration comes in, just as this administration is doing now.

Legislative changes would be written into law, and couldn’t be easily revised. That is the goal of Senator Harkin the ranking member of the Senate Committee on Health, Education, Labor, and Pensions. Since, the first hearing he held in June, he has become more emboldened with the idea of legislative change. He held a follow-up hearing yesterday that looked specifically at the marketing practices in which the for-profit schools engage.

The high growth and questionable returns have become his rallying cry, and as a part of the investigation, the Government Accountability Office secret shopped 15 different locations from 13 different schools. The just-completed hearing showcased several snippets of video from the secret shopping.

As an industry, we are used to changes, but we have rarely faced a situation where a change could happen with such material consequences. It’s not all the marketers fault, but the need to monetize meant marketers creating ads and landing pages with gross misrepresentations.

That the ads contained misrepresentations isn’t the real issue, it’s that the ads that contained the misrepresentations monetized ultimately with the government’s money in the form of students taking out federal aid… lots and lots. Regardless of the rules, it’s choppy water ahead, and the microscope, more than the rules, will threaten to undermine some of the more successful tactics for generating education leads.

We wish the end of the rule making meant a turning point to get back to focusing on the business, but it’s really just the beginning. The real negative attention has just begun.





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