[I]n 1955 Sony of Japan introduced the mass-produced battery transistor radio. It was cheap, plastic, and the sound was, well, pretty awful. But that didn’t matter. It wasn’t aimed at dad. It was marketed to teenagers, a customer base completely ignored by firms like RCA and the makers of high-quality vacuum-tube technology. Crackly sound was good enough for rock ’n’ roll, especially if one listened to it under the bed covers rather than in the living room. But Sony didn’t stop there. It steadily improved the technology while still focusing on its new listeners. Within a decade the transistor radio had been perfected into a direct competitor to RCA and the old technology, delivering similar quality at a fraction of the size and cost. That combination of comparable quality and sharply lower cost enabled the transistor radio to invade the living room market, crushing established industry leaders and transforming the family sound system.
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Low-cost ventures of so-so quality also pose a potentially devastating threat by undermining cross-subsidies in a traditional business model. Website advertising and Craigslist were deadly to the economics of newspapers because experienced journalists and news bureaus need cross subsidies to survive, just as full-service hospitals do. The reason why getting a few stitches in the ER can cost a small fortune is that ER procedures make possible high-quality care in low-revenue generating areas such as pediatrics. That, in turn, is why the growth of walk-in clinics and other providers offering low prices for low-cost services is such a threat to big hospitals. The breakup of such cross-subsidized services is often referred to as “unbundling”, and it is a worrying phenomenon for “full-service” providers in any industry. This is precisely what we are seeing in higher education.
As with hospitals and newspapers, bricks-and-mortar institutions of higher education are particularly vulnerable to unbundling. Universities are modular institutions, and lower-cost competitors can easily siphon off customers and revenue from individual modules. For instance, universities are partly a hotel and food service industry, and partly sports and entertainment centers. They have invested heavily in buildings and services that package these elements together at essentially one price. But this makes them vulnerable to competitors that find much less expensive ways to provide discrete modules like housing or even basic first-year classes—or that simply shed costly facilities like libraries or student centers, as online colleges have done.