On April 11 Kaplan announced plans to buy Sagemont Virtual, the firm operating University of Miami's online high schools and course developer Virtual Sage. Earlier in the year, online higher education provider Apollo Group acquired Insight Schools based in Portland, Oregon for $15 million. Insight has roughly 600 students, Virtual Sage doesn't say.

The question is whether online high school education - now a highly fragmented market with a mix of for-profit, nonprofit and government providers drawing content from a wide variety of sources, is scalable nationally, subject to a roll up of some kind, or structurally balkanized. Kaplan and Apollo are prepared to put a few million in the game to find out (Insight's price was $15 million.) They are not "betting the farm," they are testing the waters and creating options for future growth. There is nothing earth shattering about the announcements, unlike say Pearson's May, 2006 purchases of PowerSchool and Chancery in the student information management segment.

Your editor feels reasonably confident that the online high school market is structurally fragmented. Entry costs are relatively low. Tiny market shares yield substantial profits, discouraging small providers from selling out. Local content developers are relatively cheap. (Your editor's experience with the human capital costs of product development at New American Schools eight independent design teams and their subcontractors suggests that very high quality k-12 expertise is not much more expensive than mediocre talent, and far cheaper than comparable professional support in most other fields.)  Content itself is broadly available - Virtual Sage's Connections Academy lists eighteen content partners whose products and services are widely available to any other potential virtual provider. Demonstrating alignment to 50 sets of state standards and high stakes exit exams, across four grades in math, literacy, science - not just of materials, but in staff expertise - is tougher. Nonprofit providers have access to philanthropy and are not concerned about providing investors with a financial return. Government providers have access to the treasury and only have to show they are less expensive than brick and mortar schools. And "brand" probably doesnt matter as much as in the consumer sales markets Kaplan and Apollo dominate.

The only potential distinguishing factor among firms is delivery of the online experience. Because teaching and learning is not like serving and eating fast food, this means both mass customization for students and strong local relationships with state educators. Your editor can see large local, state and even multi-state providers, but the only national firm will be a congolmerate, and the economics here don't seem to offer a great competitive advantage. Diseconomies seem more likely as headquarters tries to homogenize and field units try to remain distinct.

Along with many firms, Kaplan and Apollo are likely to develop profitable businesses, but not enough to change their revenue trajectories in a way likely to excite Wall Street. Both are more likely to spin them off or sell them to management than build them into something like their positions in online higher education or test preparation -  where in most cases one standardized product can serve a national market. Indeed, Kaplan may have bought Sagemont with an eye towards shifting its online course production capacity to web-based higher education, a point intimated in its press release and underlined by the new unit's operation under Kaplan's Higher Education Division.

Advanced Placement is perhaps the sole example of a national online market. Yet even Seattle-based Apex Learning which closed a $4 million in equity finance last November, serving 30,000 students, is only the largest of several competitors offering AP services. Still, if Kaplan and Apollo are looking for an online high school business close to their core business models, Apex would be the right target.

See Alison Damast, Business Week, April 19.

Kaplan Press Release, April 11.

Apollo Press Release, January 10.

Rhea R. Borja, Education Week, March 30.

Apex Learning Press Release, November 29, 2006.