If you have read the prospectus for K12 Inc's IPO, you know that the virtual Education Management Organization's (EMO) management believes it has two things going for it:

• It is the virtual education sector's first-mover and the leading for-profit player in the public schooling's virtual education space.
• It is vertically integrated, offering an "end-to-end" solution.

The Educational Technology Cooperative of the sixteen-state Southern Regional Education Board just released the results of a Spring 2007 survey that can only lead potential investors to question whether these amount to much of an advantage. 

My review of the Report on SREB State Virtual Schools leads to two conclusions that bear on K12's assertions:

• State education agencies are not merely consumers of virtual education services, they are producers. They produce content, manage student information, provide teachers, train teachers etc, etc. K12 is just a supplier.  In this respect, virtual EMOs like K12 Inc. are in a position akin to that of "bricks and mortar" EMOs like Edison. (One reason why K12 prefers to call itself a "technology-based education company.") Add this to the facts that a substantial set of nonprofit providers exist, that student information and management systems providers are not exactly in short supply, and that the barriers to entry for content (i.e. online course) providers are relatively low, and I see a company that's spent and borrowed a lot of money to acquire a small market share, without creating commensurate, defensible competitive advantages.

• States own the virtual k-12 public education marketplace. Unlike higher education, state education agencies control access to the bulk of the public school students.  Any state can chose to perform any function itself, outsource to a nonprofit, or chose a for-profit provider.  No state needs to be dependent on a single provider, let alone K12 Inc., indeed most states are likely to knit a set of providers together to meet their particular needs. And while some states will chose a turnkey solution at the outset, as they gain operating experience they will want to control the virtual system themselves and depart from some key element of any provider's model. Again, in this respect, the virtual EMO will follow a path well worn down by the EMOs (and now the nonprofit CMOs). For the most part, a for-profit provider seeking to reach public school students can only do so through the state agency. This will tend to depress prices and profits.

Some will point out that virtual charter schools offer a path around the state agencies. This is true to some extent, for some period. However, it runs into the political risk issues I've discussed earlier.  Virtual charters face legal challenges as a form of home schooling, and political opposition from teachers unions and districts. But even if the political risks are manageable, the addition of one, two, three or more providers of virtual education as alternatives to a state education agency doesn't change the basic bargaining pattern - the virtual charter school in any state has many more alternatives to a deal with K12 Inc., than K12 has to the virtual school on the other side of the bargaining table.  Critical analysis suggests that K12 - the IPO is just not a great opportunity for investors who want to put funds into k-12 education.