The Parable of the Nanodegree

by Reihan Salam

A short while ago, Udacity, a for-profit online teaching start-up, was floundering. Its first forays into higher education had yielded mediocre results, and many concluded that MOOCs, or “massive online open courses,” were little more than a fad. But in the years since, Udacity appears to have identified a far more promising business model, with potentially wide implications. Essentially, Udacity has moved way from trying to substitute for a traditional academic education to instead offer an alternative to vocational education, with a focus on some of the most in-demand technical skills, as Farhad Manjoo details in his (consistently excellent) New York Times column. In lieu of offering full-blown academic credentials, Udacity is now offering highly-focused courses that it has created in partnership with leading business enterprises like Google and AT&T. Those who complete these courses are awarded “nanodegrees” as proof of their mastery of the skills in question. Students are charged $200 per month, and they can take their courses on an all-you-can-eat basis. If you choose to devote yourself to acquiring a nanodegree full-time, you can, in theory, complete your course in a few weeks time. Most enrollees, however, will balance their studies with other pursuits. On completing a given nanodegree, students are actually refunded half of their tuition. This is a strong incentive to actually finish these quite challenging courses, but of course it makes sense. The likes of Google and AT&T are working with Udacity in part because they want to expand the pool of talent from which they can at some point hire future employees. 

But what I found most striking about Udacity’s business model is this: to drive down the cost of their instructional model, the start-up relies heavily on outsourcing. Specifically, Udacity employs paid graders around the world, who do the labor-intensive work of evaluating the projects submitted by students. If Udacity were only limited to hiring Americans to do this work, it would be crippled. The U.S. is a high-productivity, high-wage society by global standards, the people with the skills to evaluate these projects have many other lucrative employment opportunities, and so Udacity would have to pay them handsomely. But when Udacity hires Indians with these same skills, it can exploit this ”place discount,” the flip side of the “place premium” that makes high-wage, high-productivity societies magnets for migrants. One of the graders Manjoo interviewed for his piece, Aparna Sridhar of Chennai, the city formerly known as Madras, told him that “with what I earned last month, I can make a trip to Europe.” By Indian standards, Sridhar is earning a handsome wage, yet her expenses are tied to the cost of living in Madras. 

Imagine if Udacity were wholly-owned by the government, or if its students were able to use federal student loans to finance their tuition. My guess is that politicians might try to change Udacity’s hiring practices to ensure that it abandoned outsourcing and instead employed only Americans. And perhaps there’d be some move towards unionizing Udacity’s work force. This would increase the cost of Udacity’s instructional model, of course, but then some politician would come along and call for subsidizing tuition, so that taxpayers would be on the hook for high costs. If students had less skin in the game, would they care quite as much about getting half of their tuition back? I don’t want to overstate my anti-statist argument. Western Governors University is a private non-profit institution that was initially founded by a group of 19 governors in the western U.S., and it works quite well. A number of public universities, like the University of Wisconsin, are experimenting with competency-based learning, and though they’ve encountered resistance from incumbent educators, some of these public efforts have made meaningful progress. Yet I strongly suspect that Udacity’s private status helps protect its autonomy, and its ability to revise its instructional model in response to changing economic pressures and opportunities. 

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