Whittled Away

Don't blame Edison's failure on the market.

Edison Schools Inc. is a long way from founder Chris Whittle's vision. When it was started a decade ago, Edison was supposed to be a "National Schooling Company" that would provide a high-quality education while securing profits through "economies of scale" made possible by operating hundreds of schools nationwide.

It isn't working out that way. On Sept. 6, Edison declared a $49 million net loss for the fourth quarter, bringing the company's total loss for 2002 to $86 million. Edison has now shelved plans to build a $125 million, 15-story headquarters in East Harlem. NASDAQ has threatened to delist Edison's stock if it doesn't rise above $1 per share within 90 days. Whittle himself owes Edison schools $10 million secured by the low-performing stock-20 percent of the company's current market capitalization. He recently put his East Hampton estate on the market for $46 million in what many perceive (despite Whittle's denials) as a move to generate cash.

The company has lost at least six major contracts in the past three months, and is barely holding on to others. Last spring Edison was expecting to manage 45 Philadelphia schools this term and play the role of central manager for the city's entire school system. Although truckloads of its school supplies have been repossessed for nonpayment, Edison has temporarily mollified Philadelphia schools chief Paul Vallas and is running 20 schools for the district.

Critics claim that Edison's slide proves that private companies, given the same funding as traditional public schools, cannot run more efficiently, turn out better students, and have money left over for investors. In a recent Slate article, columnist Daniel Gross questions "whether a publicly held company can operate public schools and be a viable business." Similarly, an August Education Week commentary argues that there are "contradictions inherent in the concept of operating public education as a business." National Education Association analyst Heidi Steffens and Columbia University education professor Peter Cookson restate a familiar argument: "The rules that govern the market contradict essential requirements for creating and maintaining excellent public schools."

One might be able to equate Edison schools with market failure if Edison and its government contracts even remotely resembled an education "market." But there is no competition. The company's students do not "choose" Edison schools. Exactly like the public schools they replace, Edison's contract schools have a captive customer base supported by government funding. While some parents have been very pleased with Edison's results and have fought to retain the schools, the fact is that Edison's schools are a government-sanctioned monopoly in each community they serve.

Yet even in the midst of its problems, Edison demonstrates the benefits of markets. The company will either get its act together or be shut down. Contrast that with public school bureaucracies that continue to waste billions in taxpayer dollars (think Belmont Learning Center in Los Angeles or Compton Unified), yet are never shut down because they are never held accountable for their failures. In fact, the more money you spend in public education—and the less student achievement you get per dollar—the more money you can expect to receive in the next year's budget.

Even with a half-assed public-private partnership between a once-overvalued education company and a bunch of school bureaucrats, the market does not allow a company to spend more money than it takes in. The business model of spending investors' money and counting on profits sometime down the line, when the company is "big enough" or when it has enough customers to go to "scale" is proving to be unsustainable for Edison. Hundreds of businesses fail every day for the same reasons: They grew too fast and spent too much money while banking on future sales and earnings.

That's Edison's grim, dispiriting bottom line: The company has spent more money than it has taken in. It has nothing to do with the education industry or public education, and everything to do with too many top-level executives making six-figure salaries. As Slate's Daniel Gross reported, "Thomas Tocco, the superintendent of the Fort Worth, Texas, Independent School District, which has approximately the same number of students and schools as Edison, is paid $285,000. In 2001, each of Edison's top five executives—[Chairman Benno C.] Schmidt, Whittle, President Christopher Cerf, Chief Education Officer John Chubb, and Executive Vice President Tonya Hinch—earned at least $295,000 in salaries and bonuses."

On top of that, Edison has a lousy business plan. Making deals with large government bureaucracies rather than with individual customers is a recipe for failure. To sign up new customers, it gave up the integrity of its original pedagogical model. Edison sometimes sacrificed key components (such as longer school days and more teacher training) to satisfy the unions and school districts with whom the company was willing to negotiate.

The result is that Edison has been serving the wrong customer. Many other for-profit education companies have realized that the key to growth is to satisfy students and their parents rather than the bureaucrats who can sign large government contracts. According to a January 2002 report by the Commercialism in Education Research Unit at Arizona State University, there were 36 for-profit education management companies in the United States in 2001, operating 370 schools in 24 states. An overwhelming majority of those schools are public charter schools, which receive their funding only after attracting students to enroll in their individual schools. These companies have managed to grow their businesses incrementally, hoping for a small profit at each school.

Pennsylvania-based Nobel Learning Communities is a good example. In the third quarter of 2002, Nobel earned $1 million or 14 cents a share on $40.7 million in revenue. Nobel's strategy of serving students one school at a time, coupled with a diverse revenue base from private, charter, and voucher schools, appears to work better than Edison's current government-contract model.

While the charter school model is closer to real competition, the best models for a market in education would give all students the right to exit public schools, and the ability to move freely among public, charter, and private schools. Only when the funding truly follows a child will we have a market in education that is responsive to the right customers: the students and their parents. To the extent that Edison has failed that test, the company has also failed public education.