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Henry Levin is a professor of economics and education at Teachers College, Columbia University, and director of the National Center for the Study of Privatization in Education. From 1986 to 2000, Levin served as the director of the Accelerated Schools Project, a national school-reform initiative for accelerating the education of children in at-risk communities. A close observer of Edison Schools and other for-profit school management companies, he explains why he believes Edison's business model, which depended on achieving economies of scale, was fundamentally flawed from the start. He also discusses how the for-profit privatization movement got started and what he thinks its impact has been, and might still be, on public education. This interview was conducted in June 2002.

Where did privatization come from?

Privatization [in education] has been around for a long time. If you think of individual entrepreneurs running small academies, these go back to colonial times. However, when we think of a corporate effort at privatization, this is a very recent phenomenon. You have to bear in mind that of our independent or so-called private schools in America, probably 99 percent of them, even in 1990 were not-for-profit. Most of them were associated with religious groups, but others were community efforts and so on. It wasn't until the early 1990s that we started to see this movement towards privatization of the education industry, per se, through corporate approaches.

Who was behind it?

I think there were a number of things at play here. One was the Reagan years. The Reagan years were characterized by deregulation and a philosophy that the private sector could do a much better job. That led largely, of course, to the privatization of the health care industry, with the HMOs that we're all familiar with. In the early 1990s, there were a lot of triumphs, a lot of successes. Those places were making money. Wall Street saw this as an attempt to convert a government sector to privatization.

I think that a lot of business people saw this [as] doing well by doing good. Doing well, in terms of profitability, by doing good for society. That was a strong selling point.

Thus the question arose ... what would be the next sector that would move in that direction? In other words, where was the potential? And ... it turned out that if you looked at what was left in terms of your large sectors supported by government funding, they were the military and education. Well, the military already had a tremendous amount of privatization, certainly in the acquisition of weapon systems, and we weren't going to have private armies. So education became the logical area. ...

How big was the sector out there in terms of the amount of dollars that could be made?

If you deal with the elementary and secondary sector, you're talking about roughly $300 billion. It was a little bit less, but on that order. If you talk about the education industry as a whole, which includes higher education, which includes training, the estimates ... varied from $600 billion to $800 billion. So these are very, very substantial sectors.

Where did people see opportunities?

I think that the view was that you strike at the soft underbelly. That is where the system is ostensibly failing, where there's recognition of failing. This was in the large cities, particularly urban areas with high concentrations of children from minority backgrounds, immigrants, poverty. The view was that the private sector could do much better in these areas, that the public sector had had its chance and therefore there would also be a lot of support and a lot of sympathy from the general population, as well as the investment community in terms of moving into these sectors and doing a much, much better job.

What were folks trying to provide? What was the service ... that was going to be better?

There were different discussions. For example, there was an attempt to contract with school districts, saying basically, "We can run the schools more efficiently. Give us the same amount of money and we'll promise better results."...

[How did they go about] selling the idea to the public?

First of all, there was a lot of frustration with the quality of American education, particularly in the inner cities. So it didn't take much to say, "Let's look for another solution." Given the apparent early success of the health care transformation, the idea was: If we try the same thing in education, we can really turn around the educational sector.

So I think that there was general sympathy for "Let's try something new here" and "Maybe the private sector can do it better than the public sector." In terms of Wall Street, the idea was that business can do in education what it appeared to be doing at that time in health care and that it would have a great deal of support from those who are in power at the time, which were people who, at many levels of government, were sympathetic with deregulation and moving to the private sector. ...

This was an age in which the view was that government had gotten too large, that government was generally inefficient, that it serves only itself and its own participants and employees, and that business has a very different set of values. ...

At the time, exactly what did business say that it could bring to the table that public employees could not?

First of all it said that it could bring new ideas to the table; that it could basically be an incubator of ideas; that in order to succeed, it would have to bring new ideas to the table. It could put research and development into education, which perhaps the public sector either didn't know how to do or didn't have the funding to do; that it could put business practices in there which would lead towards much greater efficiency; that it would rethink how schools operate, something that it argued had not been done in generations. There was a general mystique that business could do what government could not do. ...

There's also something that is interesting about this concept of private business coming in. It has wonderful sales potential, almost a do-good effort, in some ways.

Yes, yes. I think that a lot of business people saw this [as] doing well by doing good. Doing well, in terms of profitability, by doing good for society. That was a strong selling point. The idea is that by doing this, we're doing -- if you don't mind my saying so -- God's work. It's a kind of sacred duty, and the wonderful thing is that we can still make a decent profit out of doing good.

When Edison came on the scene, what did they propose to do initially?

Edison proposed initially -- this was around 1992 -- to establish private schools ... that would cost no more than what was being spent on average in public schools. But in doing it, they would provide not only a better education, they argued, but also they would provide, as I recall, 15 percent of the places for scholarship students. Again, doing good. In addition, they would make a profit. That was the original model, and they expected to have virtually hundreds of schools by the late 1990s, making this projection from about 1992.

How many did they have in the few years?

They didn't have any. They didn't have any. They didn't even have a demonstration school.

Why?

I think that they began to find that the economics of private schools were really quite different than what they had proposed, and that although the demand out there was substantial -- I mean, we were keeping 10 percent or so of kids in independent schools and they could have competed in that sector if they had something going -- the competition was going to be very, very difficult.

At the time, how radical of an idea was this?

It was a very radical idea. The notion of establishing a kind of corporate presence in education, in terms of sponsoring schools, owning schools, running schools, was really different than any for-profit intervention in the past.

What did you think of it? Forget about what you know now. But at the time, what did you think of it?

I was always skeptical of the economic model underlying it. We never did see ... a clear picture of why these particular schools would succeed, of why they would compete effectively in the market out there. We never did see a clear picture of what would make these schools different. They didn't really have a prototype of a school. Basically what they did is say, 'We're doing research on this, and we're going to have something called the Edison model."

So a lot of the promotion was metaphorical in a sense, talking about [Thomas] Edison and the light bulb and inventing something new, as opposed to having a real school so you could see precisely what they were planning, what was going to happen and then you could cost it out. You could figure out what the business model really looked like.

So they invented it as they went along? What did they come up with?

Interestingly, we all expected something different. We expected that they would have established their own curriculum, some form of pedagogy, something very, very unique in terms of the use of technology. Eventually, when a schooling model emerged -- and this was not through private schools now, but through contracts with public school authorities -- it was characterized by a lot of existing programs out there that any school could adopt.

You said earlier that they promised a certain number of schools, a thousand schools ... and five years later they didn't even have a prototype. ... When Chris Whittle and others had promised a whole new network of private schools, and then failed to deliver, had any of the shine come off the idea of privatization at that point?

No, I think to the contrary, the idea had just shifted to the [public charter schools]. ... Things had changed. The landscape had changed in American education. Beginning in 1992, the states were establishing charter schools. Charter schools were the public version of trying to break the mold, of trying to create incubators, of trying to get competition among schools.

Charter schools were schools that were largely independent in terms of their responsibilities to existing laws and policies, at the local and state level particularly, but that had a great deal of autonomy to do other things. They were public schools; they had to meet the larger public-school mandates. But they were largely independent and autonomous with respect to local school districts and many state regulations. People starting these schools didn't have experience in running these schools. So Edison noted that it might be possible to establish contracts with these schools. Then, later, Edison realized that the contract model could be applied to school districts that had special needs in other schools within the district. ...

[So] I think the idea was that a new opportunity had come along -- that of charter schools, and possibly contracting directly with school districts, to provide services to run schools -- and that this opportunity could be much more lucrative. One could move into it much more quickly, because infrastructure was already there, the established relationships were already there, that could be built on. So for this reason, people tended to overlook the shifting from the old model to the new. This was just a corporation that was fast on its feet.

What is the contract model?

The contract model is basically ... for a certain fee, usually calculated on the basis of per student costs, the contractor will manage and operate the school, and provide a stipulated set of instructional services. These are called educational management organizations [EMOs], since they are hired to manage the school.

Does management decide what's taught?

Management certainly can include deciding what's taught. But I think that the agreements are different in each district. In the main, Edison has a model. So a school district, or a group of people getting together to establish a charter school, would be very cognizant of the fact that Edison has a way of teaching reading and literacy skills, has a mathematics curriculum. Again, these are taken from the outside, so other schools have these, too. But Edison puts them together in a system that you would find in any Edison school at the same level, that is, with the same grades being served.

When did they shift over to that model? And how quickly did that go?

It was about 1996, [and it went] pretty rapidly. They became the dominant firm in the industry, even though others also had these ideas, and were looking to establish either contracts with school districts or with charter schools.

How did they become the dominant one? Did they have a selling point?

I think they did. They argued that they were had put considerable investment into research on an Edison model. They made it sound extremely attractive, the notion that kids would become competent in one language by grade six, and perhaps by grade seven begin to work with Latin, that they would work with so-called electronic buddies -- that is, every child would have access to a fax, to a computer, to a telephone, and would be able to use these, and get involved in research. Initially, it appeared that they had a unique program. ...

It was very expansive. These schools would truly be different, than other schools. Also the notion that they were putting perhaps tens of millions of dollars into research to create a curriculum, to create something very, very different. So no one knew exactly what was going to come out of this, but I think that they created an image of excitement, and of possibilities. ...

But again, I want you to know this was in brochures; it was in presentations to potential investors; it was in presentations to school districts and those who might start charter schools. Eventually, they shifted to something quite different, in terms of adopting some very standard approaches that are simply out there and available to any school. ...

What was in the brochure? How exciting was it?

What was in the brochure was a very, very dynamic approach to thinking about education, in which even elementary school kids would have a foreign language by the time they reached sixth grade. They would be doing very, very strong work in mathematics. They would be developing literacy skills, they would be developing projects, have connections to the community, and a heavy emphasis on technology, on the notion that they were going to take advantage of the latest breakthroughs in technology.

It looked exciting. To some degree, I would say that it helped to generate a lot of investment capital, because to the investment community there was not only this possibility of breaking into this government sector and privatizing it, but here is a firm that obviously had thought about it, had put something together, and had created a model.

What did they actually deliver, after they'd finally put a real model into practice?

Well, you have to remember that they've been changing over the years. So what they originally delivered might be somewhat different than what they're delivering today. But what they did initially was to build on some fairly conventional curriculum packages and approaches and pedagogy that are available to schools generally and that other schools have adopted, in some cases. I think what made them unique was that they tried to create a system, so that there was continuity and articulation from grade to grade. There was an attempt to train teachers in an Edison approach, which used all of these things. And they did some other things, I think, very, very well.

Such as?

The first thing is that logistically they were quite good. They could take old and decrepit school buildings that needed repairs, that needed refurbishing, and they could do these quickly. They could do it well, so that the schools had a different feel to them. They were clean, they were attractive, and that's extremely important to parents and people in the community. I think that the public schools can learn from Edison's success in doing that.

I think that they also put much more emphasis on the selection of administrators, and in holding administrators accountable. They did much more in terms of recognizing that their teachers needed to be trained, and they needed to make a substantial investment in teacher training. So their teachers, in a sense, were all on the same page, working inside the same system.

These were all things that they were actually doing? This was beyond the brochure?

Yes, over time. I mean, whether this is true of every school, or the first schools, I don't think is the issue. The point is that, over time, they brought these elements together.

Chris Whittle was behind the marketing? What kind of a marketer is he?

Chris Whittle is one of the best marketers this country has. He's just phenomenal. He's very quick on his feet. He uses attractive language. He relates well to different audiences. He can come up with all kinds of analogies when people raise questions about what he's doing, and in a very friendly way. He's just phenomenal.

He could sell you this table?

Oh, probably. He could probably convince me that this was an antique that was placed in here, and unfortunately, it doesn't belong to me, but he could make some kind of arrangements to help me acquire it.

So they got this thing going. They put out the wonderful brochure. Again, how close did they come to hitting all those points?

Well, I want to make something very, very clear. I think that they were very sincere about putting together a good school. I do think that the publicity and the marketing ran ahead of where they were, and what they could do. But I think that's a different issue. I want to make it clear that they wanted to do good, and they wanted to do well, at the same time. ...

So in terms of the marketing running ahead of the product, how far ahead did the marketing run?

I think the marketing ran way ahead of the product, and there was a reason for this. To raise the prodigious amounts of capital without a track record, you had to put something out there that was tantalizing, that was delectable. And they were able to do that, through these images. ...

Now, let me ask you. It seems as if they did well with the investment community, they raised a substantial amount of money. Not as much as they needed to deliver everything--

In the early days, they really did raise enough, given their ambitions. I mean, they did a very good job in the investment community.

How about the [education establishment]? What kind of a reception did they receive from the education establishment?

I think the education establishment was mixed. Some of them were curious. Some were deeply opposed to the idea of for-profit firms coming into education. Then there were others. For example, I have met superintendents who were always quite positive about this simply because it gave them another alternative. Where they had schools that were doing poorly, where they couldn't get rid of certain personnel, where they had other kinds of, let's say, political problems in changing schools -- suddenly they have an alternative that they can parade out there, and replace completely the existing public school by a school that is run by Edison or some other firm.

So this is a powerful new tool.

Yes. One of the interesting things to me is the receptivity of many high-level school administrators, for privatization more generally, as an alternative, where they've been particularly frustrated in getting change.

Of course, a powerful new tool wielded in a superintendent's hand may look very different from the principal's point of view, or the teacher's point of view.

OK, let me be very clear what I mean by a powerful new tool. From the administrator's point of view, it was a powerful new tool politically. If you're having difficulties with your teachers' union, if you're having difficulties getting rid of personnel whom you feel are not doing their job, or are not capable of doing a good job, and then politically it's important to have an alternative. That is, if you can't go through the normal process, of getting change, then you want to look for some alternative. This was a very powerful alternative, because even the threat of replacing the school with this kind of contract, with a private provider, tended to be important in bargaining with your various political actors out there.

How did it look from the teacher and the principal's point of view?

I think that teachers and principals generally felt very threatened by this. They saw this as the possibility for replacing public schools in the district, and for displacing employment, potentially their own employment.

Today the climate is very hostile. Has it always been that way?

I would say that today, actually, the climate is a bit less hostile in many areas. If you go into some of the smaller school districts, the attitudes towards privatization, particularly for one school or for a charter school in that particular geographic area, are ones where it's pretty well accepted, that there will be for-profit educational management organizations involved in the business. Whereas if we go back five or six years, the whole concept was opposed as being wrong, very, very wrong.

So I think that the hostility comes because in some of the larger cities, the people who are going to be affected, the clientele now, have not been asked for their input. That is, these solutions have been imposed on them, and that doesn't fly very well. So I think that part of it is really ... the movement to take over multiple schools in large districts, where the decision is made at the top without conferring with the populations who are going to be served.

Who was behind the opposition?

I think we can round up the usual suspects. The teachers' organizations were behind it. You had parents who believed that there's something about public schools that requires that they be government-run organizations, that parents be involved in the running of those schools, and that there are standard governance mechanisms. You have ideologues who opposed it, just on the basis that these were for-profits going into an area where for-profits had not been accepted in the past. ...

If those folks were opposed to this idea, on the other side was there a political ideology, or a political backing, behind privatization?

Major elements of the business community certainly supported privatization. Major elements in the investment community, of course, supported privatization. Those parents who believed that there ought to be more choice in education felt that this was a choice that ought to be in there.

Was there a political agenda beyond that?

I can't really ascribe a political agenda larger than simply getting for-profit entities into the education business. I mean, that's formidable enough. ...

I remember, at the time, people feared that this was an all-out assault on public education. What's the credibility of that?

For some people, it is an assault on public education. This is the leading edge of change. Those are people who will be bitterly disappointed with any falling back, in terms of what has happened, with the for-profits in education. But I think that for others it was a very pragmatic thing. Look, if you're in a large city, where the schools are doing poorly for substantial numbers of children, you've got to try something.

So give this try? This has appeal in that sense?

This has appeal in that sense. Maybe they can do it. Maybe it will make a difference. How long can we perpetuate a situation that's failing large numbers of young people, and they're young people who come from poor backgrounds, minority backgrounds?

You said, "Maybe they can do it." Some people equate that with rolling the dice on kids.

Well, you know, if you're in a situation of failure, rolling the dice on kids might not be terribly bad. That is, the downside risk isn't going to be very large, and the upside possibilities at least give you something to counterbalance any risk on the other side.

It seems to me that when you're starting off in a situation that's widely believed -- and this is true of many constituencies -- they have different solutions. But they all agree we're starting off with a situation that is not kind to youngsters. To the society that those youngsters will be a part of, we have to do something. Doing something means doing something different than we're presently doing. If that's called rolling the dice, let's roll. ...

Now take me inside an Edison school. What's it like? What's different?

I think if you compare Edison to a very good suburban school, you would not find large differences, and in many cases, you might find differences in the richness of curriculum in favor of the suburban schools. But when you compare it with an inner-city school that's had very serious [difficulty] in getting qualified teachers and in getting good administration, and just simply getting fixed up, gussied up as a school -- because it looks terrible and it's falling apart, that kind of thing -- the appearance of an Edison school and what is happening looks very positive. ...

In addition, you find that when you compare it with that school that was dysfunctional, [where] there's been so much teacher turnover, teachers do not have agreement on what the curriculum is, different grades make different assumptions about what the previous grade was supposed to have done -- so they're all kinds of organizational issues.

It sounds like imposing order on some kind of chaos.

That's really what I see. What I see is that when Edison takes over a school, as I mentioned, it does get rid of some of the ugliness, some of the decrepitness, broken windows. It paints the schools. It runs the school so that the school looks clean. The teachers know that they're part of a school that follows a certainly curriculum. That has a downside, but it also has an upside. The upside is that there's consistency, and there's something systematic going on.

What's the downside?

Well, the downside is that often the best things we can do with our kids are to get them involved in a lot of enrichment and creative activities -- to get discussions going, and problem solving, and questioning, and things that are not typically possible when you have a much more constructed curriculum based on a standard script. Not all of Edison's work is based on a standard script. But, for example, their literacy program is what is known as a "scripted" approach, that is, to teach basic skills. You don't really open it up to this larger set of activities that I've mentioned. Teachers don't often adapt well, in the long run, to this kind of approach. So that can have a downside as well. ...

I think that there are problems when you talk about a corporate brand. A corporate brand -- even though I'm sure that Edison and ... some of the other for-profit providers ... probably would not agree with this -- but, implicitly, one size fits all. That is, what they want to do is to have an image, a set of standard operating procedures, a set of activities that say, "This is the Ajax brand. This is the Smith brand." And if you do that, you can't allow for the kinds of idiosyncrasies for generally learning in life, building on the things that children are curious about, building on daily events. At least it makes it much more difficult to do so, because you're working on this serious curriculum that says that kids have to learn in this order, and in this particular way.

I think that there's a basic schism, then, between the ability to adapt to local situations, to truly build autonomy of individual schools, and to have a brand, a national brand, one that's widely recognized, and one in which an individual child can move easily, from one school to another, and still be very involved in the same process. ...

What about the role of standardized tests? They're under a spotlight here.

Yes.

Talk about how test scores play a part in Edison schools.

Unfortunately, the currency of the land, in terms of the quality of education, is the test scores. If the tests always measured things that are useful, that are helpful, that probably wouldn't be a terribly bad thing.

Almost everyone that I know believes in standards, and believes in high standards. I don't know anyone who advocates for low standards. The question is whether the tests as they stand are indicative of those standards, or whether the tests themselves have a life of their own, and can be taught towards, without any deep learning underlying them.

So when schools are placed under those pressures, and then the success of the school is gauged in terms of how well they do on the standardized tests, then there's going to be tremendous pressure on all of the personnel in the school, and on the students, and of course on the school principal to meet those standards.

You can find that pressure in any school. But is there more of that in an Edison school?

I think that there's more of that pressure in Edison schools, since the Edison schools really have to prove themselves. Remember that they claim that they can do a better job with the same resources, and still turn a profit for their investors. Well, doing a better job means that the test scores are going to be higher, the way things are presently measured. So there's a tremendous pressure on them, because if they don't do better, then the question is, why should we turn the public schools over to a for-profit provider? ...

The stakes are higher for Edison. Stakes are higher because Edison's ability to expand -- not just Edison, but really, I'm talking about the industry -- the ability of these educational management organizations to expand their attractiveness, depend very heavily on strong evidence that they can out perform similar public schools with similar populations. The survival of existing public schools doesn't require that they out-perform the for-profit firms.

How does Edison do in terms of delivering on its promise, that we will out perform for the same amount of dollars?

The answer is we don't really know. There have been no rigorous evaluations of Edison, in contrast to similar public schools with similar student populations. Edison has paid the Rand Corporation to do such an evaluation. But my understanding is that those results will not be available for another year and a half to two years.

So I guess the question is, if you don't know whether they actually can deliver on their promises, why would anyone hire them?

I think there are a number of reasons. Districts typically will contract with Edison because they're frustrated, because they haven't gotten good results in the past, in the schools that they're contracting with. I think a second reason is that those starting charter schools will look for a reputable school operator to run their schools, and Edison, frankly, looks as good as anyone else, maybe better, than many. Obviously this is subjective; it's up to those people in making a decision. But they clearly have the capacity to run schools. ...

Is being a principal in an Edison school any different than being a principal in a public school?

I think being a principal in an Edison school would place both more pressure on you, but also more rewards. There are incentives for doing well, based on their criteria. So it would be both more pressureful, but also the possibility of larger rewards.

What about ability to select your teachers, that kind of thing?

Yes, there's more flexibility. Of course, this has to be negotiated with the local school district, since each contract has particular arrangements. Even the states have different charter school laws. ...

I think that, in general, an Edison principal has more flexibility in selecting personnel and in evaluating them, in terms of getting people who are going to support what Edison tries to do.

Is that a good thing?

It certainly is a good thing for Edison. It may be a good thing more generally, because there are concerns that many public school systems don't monitor their teachers well enough, don't select carefully, and so on. So I would say, on balance, it probably is a good thing.

Now let's shift for a moment to the business model. What was their plan to make money?

They had the view that they had to have a lot of schools to make money.

Why?

It's not quite clear. I mean, I can't go into their internal reasoning, but what we do know is their headquarters expenses were very, very high. ...

Edison's strategy was that it would get very large numbers of schools, and that these would be adequate to cover its huge fixed costs of marketing, of administration, of research -- its so-called headquarters costs.

How many schools do they need to cover their overhead?

I can only tell you what they said. The numbers kept shifting. I think at one time it was a hundred, and then it was 150, and then it was 200. I don't think that any number's ever been established. ...

How expensive are the Edison headquarters?

The Edison headquarters are very, very expensive, relative to any criterion. Indeed, in their own financial reports, they point out that their costs are very high, and they need to bring down those costs, as well as get more schools to spread those costs over, before they're going to break even and ultimately make a profit.

Some people use the term "economies of scale." What does that mean?

Economies of scale represents a term used in economics to characterize certain kinds of productive activities, particularly those where there's a very high fixed cost of getting into the industry. But the more production you have, the lower the cost per unit of production, because it's mainly fixed costs that you're trying to divide your production over. That is, there aren't a lot of variable costs. There aren't a lot of additional costs. A good example would be a pharmaceutical firm. ...

Edison claims that its huge research and other kinds of costs mean that its headquarters costs are high. Therefore, the more schools that they have, the more that they can take those costs and amortize them among all of these units. ...

But there's a problem in this thinking. Economies of scale occur when you have huge fixed costs, but not large variable costs -- that is, increasing costs with each school. So that if each school cost very little to start, but you just have these large fixed costs, then you can get the economies of scale, because your fixed costs are your dominant element. ...

Their expectation of making profits by building on economies of scale is inconsistent with what we know about the production of education. That is we do not find that there are great economies of scale. ... The problem is that when you establish new schools, you have large variable costs. You still have to hire teachers, you have to hire a principal, you have to get materials, facilities, all of those inputs. ... Historically, when you look at the economic research on schools, there isn't a lot of evidence of significant economies of scale. For that reason, that every time you get more students, more schools, you have to pay for a lot of other new things as well. High variable costs, so to speak.

Sounds like a hitch in the equation.

Well, I think that the equation was based on assumptions that just have never been found to be valid in education. ...

How much does Edison have to pour into a school when it opens it up?

It really depends upon the arrangement. Remember that Edison's getting reimbursed, but they have to fix up schools, they have to train teachers. So they have some costs that are associated with it. But their big expenses are simply the expenses at their central headquarters in New York. ...

What is Edison buying for its overhead?

What it's buying is administration of its overall operations. These would be comparable to a school district office or a school district headquarters. You need administrators, you need curriculum specialists, and so on. But beyond those, Edison needs people to help write and administer the contracts. So it needs lawyers. It needs accountants. It needs a major marketing presence in order to get new schools. In many cases -- most cases -- your public schools don't have those kinds of costs. ...

Edison presents itself as being lean and mean. How lean and mean are they? Compared to the public schools.

I think, at the school site, they're probably pretty comparable to public schools. This is why they haven't made enough of the margin, if there's a margin at all, to compensate for the very high costs of their headquarters. At their headquarters, they're very expensive. Their salaries are much higher, they have far more personnel than a school district, let's say, with 75,000 students, which is roughly the number of students that Edison has.

I'm scratching my head and going, "I thought it was supposed to be the other way around?"

Well, that was the argument. I mean, the argument to Wall Street, back in 1992, 1993, 1994, was, "Look, this is a government agency, a school district, and they just waste a huge amount of money on themselves. Not enough of the money is getting to the classroom, and that's the reason that they can do a better job." That both -- not only Edison, but I have to speak for the industry as a whole -- that for-profit providers in education, can get more of the money to the classroom by saving expenses at the central headquarters.

But it's turned out differently?

It's turned out quite differently. Again, even Edison, in its financial reports, mentions that it's the high cost of its headquarters that is holding back profitability. ... Edison hasn't made a profit. It's lost somewhere around $220 million, $230 million, in its existence. It's run losses, every year, typically $30 million, but the losses are likely to be much higher this year.

Are they at least heading in the right direction?

That's a difficult question for me to answer. ... Actually, their loss this next year will be higher, but they argue it's because of their ambitions to expand, to cover these economies of scale. Now more recently, literally in the last week, when they [released] their quarterly report, they announced plans to cut back on expansion. That also is somewhat surprising, because if you have a consistent argument that you need economies of scale and more schools before you can make a profit, then it's somewhat surprising to say that we're going to respond to adverse financial situations by taking the opposite tack.

Building these economies of scale, getting large numbers of schools -- how simple has that been for Edison?

I think it's been very difficult. I think it's been difficult, number one, because, although the investment community certainly in the past was convinced that this was a viable direction, many school districts and educational groups are not persuaded that it is. So there's a lot of resistance, and also resistance to the notion that schools should be run by for-profit entities. So this is one of the problems that they face.

A second problem is that contracts always have a time element to them. At the end of three, five years, the contract can be ended, and it means, not only must you continue to get new schools to expand, but you've got to replace ones that have dropped the contract. In some cases, the contract can be dropped because of success. That is, if Edison turns around a school, does an excellent job, the school district may feel, "OK, they've done their job, now we'll take over once again, and be able to run a school that's operating well."

In some ways it seems that they're in a very harsh competitive climate, that to grow the business essentially means taking over. How hostile is that climate? What's it like?

In some cases, it's very welcomed. I mentioned that I've spoken to school superintendents that are very open, to contracting. They have schools that frankly are a pain in the neck, that they've tried a lot of different things, that there are many different reasons that the schools persist in doing poorly. The view is, "Let's shift that to a private entrepreneur. Let's shift that to a private firm. Let's build in a contract, and let them take the heat, basically. It's up to them. And then, you see, if they turn it around, we can terminate the arrangement at the end of the contract, and we'll have a school that's viable." So in some sense, Edison can be hurt by its own success.

But I think that there's a larger issue, and again, this faces the entire industry, and that is, education's a tough business. This was something that simply wasn't recognized by an excited investment community. They saw this simply as another business, and if this business were taken over from the government, it could be done more efficiently. But consider this. It's a business in which you have to deal with three different levels of government. You have to deal with federal regulations. ...

You said they didn't realize it's a difficult business. Why is it difficult?

It's a difficult business because, first of all, you're not dealing directly with your clientele. You're dealing primarily with a local government agency, a school district, subject to rules and laws set out by a state, and federal government. Those laws constantly change, and so you have to constantly adapt, to what those laws say. ... So first of all, you're dealing with the political climate, where you're not just dealing with one political entity, but you're dealing with the detritus, you might say, of three of them. ...

You're dealing with the federal, the state, and the local government, but then you're also dealing with your clientele. So you have to be accepted by people in that particular neighborhood that's going to be served or by people who are choosing your school because it's a school of choice. So that already complicates matters, because if you look at the different audiences that must be served, they may not all be on the same page. They may not all be dancing to the same tune, by any means.

In addition to that, you have the challenge of trying to do the same thing across the country, or across a wide expanse, because you want to establish a brand, a brand that will be recognized, a brand that people will say, "Well they do this. Well, they do that." That's tough, because you're dealing with people. You're dealing with different needs. Any one of us as a parent who has more than one child knows that, to bring up your children, you can't do the same thing to each child. One size simply doesn't fit all.

Yet the whole nature of a corporate enterprise with a recognizable brand is that there's got to be that kind of consistency. Although they don't want to say one size fits all, to even say that this is the Edison model and it uses this curriculum here and this approach here, and Edison teachers are trained to do this, means that in fact what you do have is an approach, a brand, one way of doing things.

Were folks nave about this?

I think that they were. I think that folks were nave about this. I think that they got carried away, frankly, by a lot of the rhetoric out there, about how poor schools were doing, number one. That the reason they were doing poorly was because of quote, "the government monopoly," which you hear again and again in the investment community; that if only you could break this open and get corporate capital in there, you would have success. That it simply is a matter, without looking at the details, without looking at what the product was, without looking at the economic assumptions behind the model -- that is, there was a business plan, but whether the business plan bore any relationship to the reality that was already evident among those who had studied education -- that was another matter.

You have to remember that there are a number of firms with the same goals who have gone under in the industry. So although Edison's the largest firm, and it's easy to talk about Edison, there are other firms that tried similar strategies that have not made it. ...

Let's talk a little bit about Philadelphia for a moment. Back in the fall, when news first came out that Edison is going to get a large contract, what was at stake for the company? How significant was that news to Edison schools?

One can only speculate. But they had two things at stake. One is, they needed larger numbers of schools, according to their plan. This is what they had promised investors. They promised investors that it's only a matter of economies of scale, that if they get enough schools, it will be profitable. So they had to show progress, in terms of building revenues, and increasing the numbers of schools. ...

In other words, to acquire large numbers of new schools and therefore being able to make an announcement that they had a shot at all, or a major share of the schools in Philadelphia, became a big part of the expectations for Edison's future. ...

How high were the expectations attached to this deal?

... If you deal with the investment community, I think that the expectations were very large. This represented the possibility of taking over one of the largest school districts in the country. That would have been just a signal of enormous success.

If they pulled it off.

Well, even taking it over, the question of what happens in the long run isn't going to matter ...

Why would just taking it over be significant?

It would be major headlines, saying private firm inherits the Philadelphia schools, and will operate all of the Philadelphia schools, or most of them, or will manage the entire district. You have to remember that the only district that Edison basically managed had two schools. This is in Inkster, Michigan, outside of Detroit. Two schools with about 1200 students. Although they did talk about they are managing districts as well as individual schools, this was a serious departure from a school district with two schools and 1200 students.

So what kind of reception did they get in Philadelphia?

Well, my understanding of the situation is that it was largely hostile. The hostility came, because again, Philadelphia knew that it was over a barrel in terms of its financial situation. That is, it needed the state to bail it out. ... But I think what surprised people and the city -- and I'm talking about people in the schools, and politicians, and people at the local community level -- was that this deal would be worked out between the governor and between Edison and Chris Whittle. ...

You have a governor who had sponsored or pushed for legislation on educational vouchers for a number of years in a row. That certainly did not bode well, because the feeling was that he was committed to this not so much because of Philadelphia's needs, he was committed to this ideologically, because his view was that you have to get private, for-profit firms into education in order to basically save it, improve it, and so on. So it was being done largely, I think from their perspective, behind their backs. ...

Then of course, it was announced, that Edison was given, I believe, about $2.7 million to do a study of the Philadelphia schools to decide what needed to be done. That sounded an awful lot like the fox guarding the hen house. So that made things even worse, and Edison did come out with a report, which was widely criticized, and the view was that a very substantial part of that $2.7 million was not used for that report.

But what the report did recommend, of course, is that Edison have a very important role in managing the district, and potentially, and running very substantial numbers of schools in the district -- perhaps 65 or so schools.

How many did they get in the end?

In the end, they were awarded 20.

What was the reaction?

Well, the reaction in the investment community was that when we look at their business plan, it was premised on much larger numbers of schools, and perhaps a much more dominant role in terms of the management of the district.

What happened to the stock?

The stock, of course, went down dramatically. ...

What kind of effect does that have, or could that have on schools?

Oh, I think the first thing is it could have powerful effect on the industry itself. The industry depends, obviously, on a lot of venture capital. The hope is that eventually these firms will have public offerings, and that they will succeed. This is raising very, very serious questions in the industry as a whole. ...

This makes it harder for other companies to raise money?

Absolutely. I think that that's unfortunate, because I do think that we need to look for new models, new roles. I personally do not think that there's something fundamentally wrong with considering whether for-profit providers can do some things that are in the public interest. I think it's a matter of what the results are, as opposed to some kind of ideological view on that subject. We obviously need to do something, in many parts of the educational system today that we're not doing.

For Edison to make money, it has to have economies of scale. But it also has to spend less running its schools than it receives from whoever is paying. There is an incentive to cut. ... There's an incentive to do more with less. ... Eke out more profit. Cut deeper.

Yes. Well, look. The goal of a for-profit firm is to make profit, and make as much profit as one can. On the other hand, it's got to meet certain conditions in order to be viable on the marketplace. That is, if it's cutting services, it's not going to be very attractive, and it's not going to, at least in the long run, it's not going to get contracts, and it's not going to get clientele. So the question is, how do you do this?

If you can get some kind of innovation, some kind of breakthrough, and you can in a sense protect that advantage, then perhaps it's possible to reduce costs for some given level of educational quality, or output, and make a larger profit.

How much do you trust business, knowing that that incentive exists?

Business is involved in our daily lives in a lot of ways. I think that most of us don't question business per se in a capitalist society. What we question are businesses that have special relationships with government regulators, as did Enron, or some of these other firms that have been accused recently. We worry a lot about monopolies that control particular industries. So that would be my view. ...

But do you trust business to behave in a civic fashion?

Well, I don't trust business to behave in a civic fashion out of goodness of heart. I trust business to act in a civic fashion if it wants to be around in 10 or 15 years.

So you're willing to trust a company with educating our kids?

I'm willing to trust a company to provide services to education, if, in fact, it meets various standards that we set out consistently, yes. ...

Knowing what you know about this company; knowing what they've promised in the past and what they've delivered; knowing a little bit about Chris Whittle and his background; knowing about this SEC investigation; not talking about trusting business in general, but how much trust do you put in Edison, the company, in terms of giving them charge of children's education?

I've visited Edison schools, and I know that you've visited Edison schools. If you look at the schools, again, they're better than a lot of inner-city schools, when you simply look at how they're organized, and commitments, and teacher qualifications, and the leadership of the principal. You look at the curriculum, and it certainly isn't the worst in the world. From my perspective, it might not be the best in the world. But in many cases, it's superior to what exists in similar schools.

I think that the problem with Edison is really the business model. As far as the educational model is concerned, there are all kinds of differences in terms of values, in terms of what is a good school, and what isn't. If you take some very basic ones, that the school should be a safe place, that it should be organized, I think that most of Edison's schools probably meet those criteria. ...

I think that the business model is what hurt Edison far more than the schools. ... So I think it's important to separate the two of those. Do I think that the Edison [educational] model is the only one and will lead the world and is revolutionary? No, I certainly haven't said that. But is it better than a lot of schools? Yes. It certainly doesn't look like a model to defraud the public.

So at the end of the day, as it stands now, who's benefiting, and who's not?

I think that there are a lot of groups that have benefited. I don't think that there have been great losses because of Edison -- I want to be very clear about that -- to the public or public education. On balance, actually there's been a benefit. There's been a benefit, first of all, because schools have to now stay on their toes, since groups like Edison can come in and contract for those services. That's a very positive thing.

I think that secondly, the things that Edison has shown can be done in these large districts, making the schools look decent, making them clean. Getting teachers who have consistent training and philosophy. Selecting managers very carefully, and holding managers accountable.

These are all good things.

I think that these are all things that have, yes, some good to them.

So, overall then, sum it up for me. What's been Edison's effect on other public schools?

Edison is probably too small to have an enormous effect on other public schools. ...

Let me rephrase the question. What's been privatization's effect on public schools?

Privatization's effects on public schools, I think, has been, first, to get schools to realize that there is an alternative to traditional schools. Therefore, it means that administrators have an additional lever to try to get change, to try to get some different thinking on the part of educators and people who are involved in the schools. ...

If I were a principal of a school next door to an Edison school, I would certainly want to look carefully at my operations, and say, "Gee, I want to look good. I don't want to look bad relative to an Edison school." Further, if I saw that the Edison school looked beautiful, and my school, I was having difficulty getting services, I would put a lot of pressure on the school district, to provide similar services, so that my school functioned well, so that it was clean. All of those kinds of things.

So, if privatization goes further ... you don't see public schools going away.

No. I don't see public schools going away, because there are major segments of public education, where clientele are very satisfied. Terry Moe has written a book on this where he did a survey. In the survey, one of his major findings is that the notion of public schools is very deeply rooted among substantial parts of the population -- where the schools are doing well. The problems seem to arise where there's much more openness to other possibilities, and other alternatives, largely in your urban areas, inner cities, places that they're clearly not doing well. ...

Why is the business model important in this whole scheme of how we think of privatization, and the ideologies that are associated with it? Who cares about the business model?

Beyond the investment community, I think it's important because it raises the question of what form of privatization, if any, would be viable. So the business model is behind that. That is, one question is whether Edison just didn't have a product or a service that was viable. A different interpretation is that Edison had a pretty decent school -- no earthshaker, but a decent school, and better than a lot of the schools that it was replacing or taking over. But the business model was so flawed that it wasn't able to provide that kind of school for the amount of funding that's presently available. ...

So if Edison doesn't work in the end, the business model, is that the end? Is it the end of privatization?

I think that if Edison doesn't work, it will set back privatization considerably, simply because of the reluctance of the investment community to take a risk, even on alternative business models. So I think it's twice burned. You simply try to stay away from this kind of phenomenon. Remember, there are other firms that have gone out of business, too. ...

That would not be good thing, in your view?

I don't think it would be a good thing, no. No, I don't think it would be a good thing. I think that if we are an innovative society, we have to find ways of continuing to innovate. With innovation comes risk, comes success, comes failure.

My own view is that in moving forward in American education, well, I'm an impatient person. I would not sacrifice my own children for even one generation. Yet these problems have persisted for a number of generations. Some of the problem may be due to the fact that we need more funding. Some of it may be due to the fact that we need to more in terms of supporting families, and providing adequate housing, and health care ...

But we also need innovation?

But in conjunction with that, we need schools that can really accommodate these children. I would have to say, that at the moment, we're not doing that, and we have difficulty in taking new ideas and getting them out there in the public schools.

Can private schools do it better? Can for-profit contracting do it better? Well, I think I have to be very open about that, because we're dealing with a situation that I consider to be pretty dire. Up to now, I don't think that we can argue that these problems have been solved by privatization. But that doesn't mean that it's impossible. Remember that we're dealing with a very short time period. We're talking about roughly a decade, and very few schools, earlier in the decade. More now. It's not even clear what we've learned from the operations of those schools, because we don't have a lot of good evaluations.

So you'd rather give it time, give it the money.

... I wouldn't necessarily give it the money. What I would do is to say that if new ideas come along, and they come along through privatization and for-profit firms, let's give them a chance.

 

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