School for Profit

By John Greenwald/Hamden

Hi, my name is Alice, and this is Mrs. Morse's third-grade music class. Would you care to join us?" Who wouldn't? Fetching classroom greeters are just one of the appealing features of the Wintergreen Interdistrict Magnet School in Hamden, Conn., a for-profit public school with an exuberant following among its students, parents and teachers. Run by Edison Schools Inc., a company whose shares are traded on the NASDAQ, the kindergarten-through-eighth-grade facility draws students from four local districts and sports a waiting list with more than 1,000 names on it. "We're a curiosity," says principal Dale Bernardoni, who explains that everyone from student teachers to politicians has come for a visit.

Once dismissed as the loony notion of free-market zealots, for-profit schools are fast winning support and jolting the $360 billion public school market, the last major sector of the U.S. economy to feel the lash of competition. The very notion seems heretical: public schools run by private companies that charge no tuition but operate classrooms for local school boards or independent chartering organizations using taxpayer money--some of which will go to shareholders as (gasp!) profit.

Today more than a dozen U.S. companies run some 250 for-profit public schools, with an enrollment of 120,000 students--there were no such classrooms a decade ago--and venture capitalists from Wall Street to Silicon Valley are eagerly pumping funds into educational start-ups. "We originally set out to raise $100 million," says financier Jeffrey Leeds, founder of one such fund. "But the demand [to invest] was so great that we raised our target to $250 million, and we intend to cap it at $300 million."

This battle for students has had a bracing effect on public school systems. In Boston, a hotbed of for-profit schooling, the city has responded by launching 11 pilot schools to test innovative curriculums. "We want children to be educated in the best environment," says Albert Holland, a Boston public school official. "We don't mind the competition."

Yet even as they grow in clout, for-profit schools are still struggling to do what their name denotes--make money. That requires taking the same government funds that the average school district spends per pupil per year--the U.S. average is $6,500--and not only providing a superior education but also squeezing out a profit. That's a tough task in a field in which "the margins are more like McDonald's than Microsoft's," as Thomas Toch, a guest scholar at the Brookings Institution, puts it.

No company illustrates the promise and pitfalls more clearly than Edison (1999 revenues: $133 million), the leading manager of for-profit schools, which pioneered the concept of for-profits in the early 1990s. Edison has since lost about $160 million while opening 79 schools with 38,000 students in 19 states. But parents are clamoring for its product. Last week the company signed deals to open a pair of schools this fall in Rochester, N.Y., and Milwaukee, Wis., and won a five-year contract to manage two schools in North Carolina.

The flurry of activity caused the boys and girls on Wall Street--all excellent math students--to raise Edison's grade. Its stock, which had fallen below $13 a share since going public at $18 last November, jumped $5.75 last week to close at $18.625.

Chris Whittle, Edison's founder and CEO, is staking his company's future on its ability to slash administrative costs. For every dollar in a typical school's budget, 20[cents] to 30[cents] goes to administration. Edison spends around 16[cents] and plans to cut that to 8[cents]. "The money we save on central costs goes to the schools, and a portion goes to the bottom line," Whittle says. His goal is a 7%-to-8% profit margin. "If we were simply going to cut overall costs," he notes, "we would not be viable." Whittle puts the magic number of schools that Edison needs to run in order to make a profit at 440, a figure that he expects to hit within five years.

Whittle has been criticized as a sort of Music Man of Education Inc. Previously, he started an advertiser-sponsored classroom TV news program, Channel One, which was castigated for its mercenary approach. Whittle sold Channel One to Primedia in 1994. The for-profit school idea is less corporately tainted--it's not brought to you by Coke.

Growth alone won't put Edison in the black; it also has to deliver top-quality schooling. Among other things, Edison facilities provide more instruction than the typical public school--eight hours a day vs. seven, and 200 days a year vs. 180. Every Edison student above the second grade gets free use of a home computer linked to a library, a particularly prized perk among Edison students, 60% of whom come from families with incomes below the poverty line.

Edison focuses on instilling pride and discipline in youngsters who may have known precious little of either. At Edison's Granville Charter School, which opened two years ago in a former government building in Trenton, N.J., board chairman William Granville Jr. recalls how students initially covered the walls with graffiti and ran shouting down hallways. Today, after hours of instruction devoted to such concepts as dignity and self-respect, orderly students file through spotless white corridors and volunteer to sweep litter off the carpeted floors.

How well does it all work when it comes to learning? While the grades aren't in on the long-term impact of for-profit schooling, early marks have been encouraging. Whittle says Edison students have raised their performance on standardized tests an average of 5 percentage points a year--a hefty gain at a time when many districts report little improvement. But not all Edison schools can show performance superior to public schools. Says Whittle: "We either make it or don't make it on the basis of test scores."

A growing number of companies are prepared to face that challenge. In Philadelphia, Nobel Learning Communities, which runs 145 private preschools and elementary schools in 13 states, launched its first public school, the Philadelphia Academy Charter School, in a former airplane-parts plant last fall. Nobel plans to open at least five more charter schools by the end of the year. "There is absolutely no way you'll make a profit unless you have a quality program," says A.J. Clegg, CEO of Nobel, which earned $1.6 million on revenues of $110 million last year. New wrinkles at Nobel's Philadelphia school include lessons in Mandarin Chinese for every student from kindergarten to eighth grade. Why Mandarin? "It's the cash language for the 21st century," explains principal Brien Gardiner, the school's co-founder.

Whether or not that proves to be true, for-profit schooling is inching toward the mainstream of American education. John McLaughlin, chairman of the Education Industry Group, a consulting firm in Sioux Falls, S.D., predicts that the market share of traditional public schools will shrink from 89% today to 70% within 20 years, with for-profit schools claiming about 15% of the new educational mix. That would make for-profits a roughly $60 billion industry. Indeed, if such schools can live up to their name while providing a high-quality education, the answer to a question like "Would you care to join us?" will be an increasingly resounding yes.

--With reporting by Aixa M. Pascual/Philadelphia

With reporting by Aixa M. Pascual/Philadelphia