Larry Ellison  Knowledge Universe  Duke University  Stanford University  Oracle (ORCL)  Sony (SNE)  Siemens (SMAWY)
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It was 1998 and the fallen junk-bond king's billion-dollar educational conglomerate, Knowledge Universe, was quietly recruiting partners for its online learning venture, then known as Knowledge University. The company aimed to assemble a consortium of elite schools that would contribute courses to an online university for corporate managers. Feldberg, the hard-driving dean of Columbia University's business school, had become friends with Milken a decade earlier, when Milken was still a high-flying financier and Feldberg a rising academic.

Contacting Feldberg was part of a strategic push to get prestigious Columbia in Knowledge Universe's camp. First, Knowledge University CEO Andrew Rosenfield, a well-heeled University of Chicago trustee, called the dean. "Andy calls and says, 'Mike Milken tells me I cannot sign up any universities or business schools until I first speak to you,'" Feldberg recalls. "Then I got a call from Mike, who says, 'You want to meet with this guy.'"

Months later, Columbia students and faculty learned the result of Milken's matchmaking when Feldberg announced that the 245-year-old institution had become a Net player. Columbia agreed to license its name and contribute business courses to Knowledge University, now an independent company renamed UNext.com. In return, Columbia would get a piece of the action – in this case, shares in a potentially lucrative initial public offering from the Deerfield, Ill.-based company.

Columbia is not alone in its Internet ambitions. The nation's elite universities, long secure in their centuries-old reputations, face a rapidly changing world in which any school, from the University of South Alabama to UC Berkeley, can put its courses online and court a global market for continuing education. Fearing that they will be left behind, Ivy League administrators are becoming dealmakers, and buzz phrases like "leveraging brands" and "tapping intellectual capital" echo from the Stanford Quad to Harvard Square.

In recent months, Stanford, the London School of Economics and other top-tier schools have followed Columbia's lead, signing with UNext to trade their name and curricula for equity in the startup. Harvard and the University of Pennsylvania's Wharton School, meanwhile, have struck deals with Pensare, a Silicon Valley company that creates online courses. Harvard will receive stock warrants in Pensare, as will Duke University, which is licensing a complete MBA curriculum to the company.

Hundreds of millions of dollars will be spent in the next few years on a gamble that middle managers in Singapore or Heidelberg are as hungry for U.S. education as they are for Baywatch.

The rewards could be substantial, both financially and educationally, as new ways of teaching and learning are developed. But the elite universities also risk compromising their sterling reputations by mixing their educational mission with the economic motivations of their for-profit partners.

"No one knows if this is going to work," says David Brady, an associate dean at Stanford's business school. "You're riding the wave. Is it going to be a big wave or little wave? You don't want to be the first mover. If it's a bad wave, we all want to slide down together."


Education As Commodity

Thanks in part to the Net's ability to distribute courses to students anywhere at any time, learning is becoming another commodity, part of the $740 billion "education industry" that has attracted keen interest on Wall Street. Scores of community colleges and universities have embraced distance learning in recent years, putting courses online for people who are too busy or live too far away from institutions to attend classes. Meanwhile, online-only schools, such as the for-profit Jones International University, have emerged to capitalize on the growing demand for adult education.

The ultimate "brand" in education is a Harvard, a Stanford, a Columbia degree; the ultimate market for those schools is overseas, where there's a relative surfeit of universities and the names Harvard and Stanford are as recognized in corporate circles as Coca-Cola and Pepsi. But the Ivys have been late to move online, reluctant to put their jealously guarded reputations in the hands of the private partners that are needed to provide the technology and financing to create Internet courses.

Helen Chen is the type of potential student the top-tier schools covet but could lose to more wired competitors. The 32-year-old Harvard graduate wants to obtain an MBA but expects she'll have to do so online because the demands of her job at consulting firm Mitchell Madison Group prevent her from attending a traditional program. But Chen is still looking to enroll at a top-ranked school. "I have a pretty good undergraduate education and I don't want to get just any MBA attached to my name," she says.

The needs of people like Chen are forcing elite universities to embrace the Internet, acknowledges Harvard Business School Dean Kim Clark. "Education used to be done in the early stage of someone's life and maybe once or twice after that," he says. "We are moving into an era where organizations are much more fluid, the pace of change is much faster and much more international. There's much more need for just-in-time, just-right education. The Internet is becoming central to education because it allows you to meet these kinds of needs."

There are other motivators, however, behind university administrators' enthusiasm for the Net. For decades, they have watched professors transform the knowledge they acquired in the university's employ into royalties from books that publishers then sell back to the universities. Now that this gold mine of intellectual property can be packaged and sold online, universities are determined to share in the profits. "The idea that all of this content – we used to call it teaching and learning – can be turned into content with an economic value is extraordinary," says Geoffrey Cox, a Stanford University vice provost. "Frankly, if anyone is going to get the economic value of that, it will be the university."

Meyer Feldberg and Andrew Rosenfield share those sentiments. The partnership between the entrepreneurial dean and the academic entrepreneur set the rules of engagement for other elite schools' online ventures with UNext. Columbia's seal of approval in turn lent the company instant credibility, easing the queasiness some university mandarins felt about doing business with a venture connected with Michael Milken.

Rosenfield and Feldberg have much in common. Urbane intellectuals with a taste for stylish clothes, the two men mix easily in academic and corporate circles. Rosenfield's wife, Betsy, was a well-known Chicago art dealer; Feldberg's wife, Barbara, a painter. And both men have longstanding ties to Milken.

Rosenfield, a 48-year-old University of Chicago trustee and law lecturer, founded the legal consulting firm Lexecon with two of his professors when he was a law student. Lexecon, known for its free-market analysis of legal issues, worked on Milken's defense against securities fraud charges in the 1980s. When Milken, his brother, Lowell, and Oracle (ORCL) Chairman Larry Ellison started Knowledge Universe in 1996, Rosenfield joined them to run the Knowledge Universe online education division. Earlier this year, a Knowledge Universe subsidiary acquired Lexecon for $60 million.

"We think very highly of Mike Milken," Rosenfield says. "There's no doubt he's controversial. My own impression is that he will be regarded as the most important financier since J.P. Morgan. [Yet] there still will be people who think of him as a bad person."

Rosenfield works in an expansive art-filled office at UNext's headquarters in Deerfield, north of Chicago. A Robert Mapplethorpe portrait of Rosenfield's wife leans against one wall. Betsy represented the late photographer, and a series of his black-and-white images line a long corridor. Paintings and sculpture by artists such as Roger Brown and Dale Chihuly are scattered throughout the office, giving UNext the feel of an art gallery. Sitting in a leather club chair beneath a wall-size abstract painting by Louisa Chase, Rosenfield looks the part of the prosperous gallery owner, dressed in a casual but neatly tailored black suit over a gray collarless shirt.

The company maintained a low profile during its incarnation as Knowledge University. Rosenfield recruited a high-profile advisory board from Lexecon and the University of Chicago, including Nobel laureates Gary Becker and Merton Miller, and former University of Chicago business school dean Jack Gould, recently named president of UNext's online university.

"We made the decision to focus exclusively on higher education at a very high-quality level to be delivered to employed adults, all over the world," Rosenfield says.

The UNext business model: Capitalize on the brand name of leading universities to create an online curriculum that will attract multinational corporations seeking to educate their employees. UNext calls its Internet school Cardean University, and eventually plans to offer an online MBA.

"Universities don't have multimedia expertise; they don't have expertise in figuring how to teach tens of thousands of students. It's tremendously costly," says Rosenfield. "For them to spend tens to hundreds of millions of dollars to experiment in a new field would not be prudent. We're prepared to spend tens to hundreds of millions of dollars."

UNext is betting that when a Sony (SNE) or a Siemens (SMAWY) needs its marketing managers in Kuala Lumpur to take a finance course, it'll be more likely to turn to a company that offers an Ivy League curriculum than to a local university. According to the company, students will be able to take multimedia classes at their own pace or collaborate with other students in real time. (UNext will offer its first course next year.) Nobel-winning professors may contribute to the courses and may deliver lectures online, but they won't actually be teaching the courses in the conventional sense. UNext will hire a staff of online mentors to answer students' questions and provide guidance.

That was the business model, but it hinged on persuading the nation's most selective universities to join an untried venture. Fortuitously for UNext, Columbia's Feldberg was ready to take some risks.


Extending Intellectual Property

In his decade as dean, Feldberg has cultivated a Who's Who of corporate leaders in his drive to position Columbia as a top business school. Among them is Milken, who has funded several B-school programs. "I think Mike is an extraordinary guy. His grasp of what is doable in the application of technology to education is extraordinary," says Feldberg, a dapper 57-year-old who retains the clipped accent of his native South Africa. "I want to reach a global market, extend our reach, extend our franchise. I want to use the hundreds of years of intellectual capital that has grown up at the university."

But Feldberg's ambitions were constrained by the fact that Columbia University occupies 36 acres of some of the most expensive, densely developed real estate in North America, leaving nowhere to build out. "We are bricks-and-mortar restrained," explains Feldberg from his corner office at the Columbia Business School in Manhattan's Morningside Heights neighborhood.

The boom in MBA degrees has made it difficult for Columbia to accommodate demand for its B-school and its profitable executive education programs – where corporate managers pay up to $25,000 for a four-week course. "Our intellectual property and what we are able to do is just in this building and one other building," Feldberg says. "Our opportunities to extend our reach to the student and corporate marketplace is restricted by our physical capacity."

The Internet offered a solution. And when Rosenfield called with his vision of an online university that could reach tens of thousands of students, the dean was determined to get in on the ground floor.

Feldberg's desk sports a sign that says "No Whining." It was fair warning to anyone who questioned the supremely self-assured dean's tenacity in pushing through the deal. The faculty, Feldberg decreed, would have no role in negotiating or reviewing an alliance with UNext. Indeed, professors and students didn't learn of the deal until it was done. "A lot of people thought I was nuts," he says. "But I made the decision. I didn't take it to the faculty."

The university administration and its lawyers, however, had reservations about the deal. "When we started this process, I figured Andy and I would sign a letter of intent that would be a page or two long. We ended up with a contract that you have to measure in inches," Feldberg says. "The magnitude of the undertaking and the ramifications associated with it started to escalate."

The issues were many, beginning with Feldberg's insistence that Columbia be given the right to convert royalties into equity in UNext. "The Columbia Business School's endowment is $120 million. Harvard's endowment is $1 billion," he explains. "I saw the opportunity to participate in the market value of this company and to increase the endowment of school."

That left Columbia's lawyers scrambling to reconcile the university's tax-exempt status as an educational institution with its role as Net entrepreneur. Such potential conflicts of interest could be further intensified if Columbia accepts UNext's offered seat on its board of directors. The company also has offered board seats to Stanford and the University of Chicago. If the universities accept, they would be legally obligated to act in the best interests of the company's stockholders, which may not necessarily be in the best interests of students and faculty.

The deal also left Columbia grappling with a thorny intellectual property dilemma. Traditionally, professors own their syllabuses, class materials and other "content," and universities generally make no claim on royalties to products such as books written by faculty members. But what happens when a professor helps create an online course that may require the contributions of programmers and designers? Columbia has not adopted a universitywide policy on Internet teaching. Feldberg says business school faculty who contribute to UNext will not receive royalties, but will be entitled to additional compensation or time off.

The American Association of University Professors earlier this year fired a warning shot against such practices, arguing in a report that allowing universities to retain the sole copyright on professors' work is "deeply inconsistent with fundamental principles of academic freedom."

Also unresolved is the issue of Columbia faculty creating courses for UNext competitors. For instance, Los Angeles startup University Access picks professors from around the country to produce online classes that are sold to individuals, colleges and corporations. It recently signed up two professors from the University of Chicago, which provides business courses to UNext.

Then there was the matter of Milken. The prospect of becoming business partners with a man some people consider the embodiment of the 1980s' "decade of greed" unnerved university administrators, according to officials at several schools approached by UNext.

Feldberg says that although Milken had no role in the negotiations with Rosenfield, he did not want the financier's then-ownership of the company to be a deal-killer. "I said to Andy, 'You need to take care of this so I don't have to take it to the [Columbia] trustees,' and he did," Feldberg recalls.

After the company changed its name to UNext.com and Knowledge Universe reduced its stake in the venture to 20 percent, Columbia signed on in March. Feldberg and his lawyers negotiated what appears to be a good deal: The university not only retains control over how UNext uses its name and content, it can veto partnerships with other universities that do not meet Columbia's approval.

UNext executives declined to confirm the financial terms of the arrangement, but Feldberg says the university will receive a guaranteed minimum of $20 million after five years. That's in addition to Columbia's right to convert royalties into pre-IPO shares in UNext.

Rosenfield acknowledges a desire to ease potential partners' concerns about Milken's role in UNext. He says, however, that the main motivation for restructuring UNext was to create an independent company that could raise capital and use stock options to lure talent.


Following Columbia's Lead

With Columbia on board, the University of Chicago, Stanford and the London School of Economics followed suit. Later, Carnegie Mellon joined the consortium. All received deals similar to Columbia's, according to officials at those universities.

Stanford Vice Provost Geoffrey Cox says his university's negotiations with UNext lasted a year. "Columbia jumped first and that was good. It always makes it easier to do something like this." Stanford will initially contribute engineering courses to UNext.

The London School of Economics hammered out its agreement with UNext as early as last January but wouldn't sign until the University of Chicago did so first, in March, according to Stephen Hill, LSE's deputy director. "The London School of Economics has never in the past lent its name to any institution inside or outside the U.K.," Hill says. "The fact that Stanford, Chicago and Columbia joined was absolutely vital."

Hill says competitive pressures and the prospect of developing new approaches to learning prompted LSE to strike a deal with UNext. "We feel the need to protect our market from encroachment from others in distance learning," he says. "We also are a reasonably small university stuck in a very expensive real estate site in the middle of London with few or no possibilities of expansion." LSE will help create courses on European economics and international relations for UNext.

Despite the unprecedented scope of the agreements, the UNext partnerships prompted little debate on most campuses. That could be because UNext's relationships are primarily with business schools whose faculty often come from the corporate world. What's more, the creeping commercialization of university life – from the on-campus Starbucks to college Web sites that carry advertising – may have inured students to such deals. An editorial in a Columbia Business School student publication praised the alliance. A dissenting view, published anonymously, called Feldberg "dean and spreadsheet jockey," and questioned whether he was harming Columbia's stature at the expense of the faculty and students.

Ironically, UNext has run into its most significant opposition at the University of Chicago, a bastion of free-market capitalism with extensive ties to the company. "I don't think it is healthy for members of our board – even when they are 'good guys' who love the university – to personally profit from their appointment as trustees of our intellectual heritage," wrote psychology professor Richard Shweder in April to members of an academic committee reviewing the UNext agreement. "If the main draw of this deal is financial, it is unrealistic to believe that anyone is going to say no once the money starts to flow. We should not be setting up an incentive system that will tempt us in the wrong directions."

Says University of Chicago grad student Adam Kissel: "It looked like [the university administration] was doing it for the money, and we're not sure they're doing it for sound educational reasons. Everyone knows that it's Andy Rosenfield's company and you're going to take care of him. Nobody thinks that it's going to be purely impartial."

But the UNext controversy faded amid campus curriculum disputes and the resignation of the school's president. University of Chicago Deputy Provost Richard Zimmer concedes the potential for a conflict of interest but says the university is "quite comfortable" with the relationship with UNext.

"I think there's no question that universities have concerns that their mission and research can be impacted by relationships with for-profit corporations," he adds.


Stock Options and Star Power

Despite UNext's success in signing up top universities, two of the most prestigious schools, Harvard and Wharton, have signed on with rival Pensare, a Los Altos, Calif., company that creates online education courses for universities and corporations. Pensare was the first to offer stock warrants to its university clients, and it appeals to those schools that don't want to subsume their courses into a private company's online university.

Pensare can't match the star power of UNext. There are no Mapplethorpes on the walls nor Nobel laureates roaming its offices in a nondescript Silicon Valley building on a strip-mall-lined road. But the company founded by software industry veteran Doug Donzelli in 1996 has a jump-start on its more glamorous rival.

This month, Pensare and Duke University's business school announced an agreement to create an online MBA, months, if not years, ahead of UNext. Pensare will have the right to sell the program to corporations and other universities. "This is the first time any private Internet company has licensed its complete curriculum from a university," Donzelli says.

Pensare signed up Wharton in 1998 and Harvard last January. It was not an easy task.

"Universities knew how to license technology. But no one had thought about, 'How do we deal with the intellectual property of our business school?' It took a long time to get deals through," Donzelli says. "With Harvard, there was definitely a lot of 'What are your bloodlines like?' I had personal references called; my father even took a reference call. They look at your investors. That's very important to them."

Harvard may be the most coveted name in higher education, and the university is treading carefully when it comes to putting its courses online. "There were times we'd get at least a deal proposal a week" from Internet companies, says Jon Winder, a senior VP of the nonprofit Harvard Business School Publishing, which distributes books, videos and CD-ROMs based on professors' work and the school's case study method of analyzing business. "When you spend 350 years building what is a worldwide recognition factor, as Harvard has done, it isn't something to be given out lightly," adds Winder.

Last year Harvard Business School Publishing created a simple intranet version of its CD-ROM courses. But the cost of developing a full-blown online multimedia course can exceed $1 million, so the school went in search of a partner. The agreement Harvard signed this year with Pensare calls for the company to create up to six Internet courses with Harvard professors. The school will receive royalties on the courses Pensare sells as well as warrants for stock in the company.

But it's unlikely any Net education company will win the exclusive right to create and sell Harvard courses. Harvard's Clark says the university also is working with University Access and eCollege, startups that create Internet courses for colleges and corporations. The school has had discussions with UNext, and though Harvard might eventually license some courses to the company, Clark says UNext's business model doesn't fit the school's needs.

"It's a question of how you tap into and take advantage of your intellectual capital and put it in forms accessible to people," Clark says. "The Internet allows you to rethink the learning model. How do they learn in this medium? What can be taught effectively in this medium and what can't?" For instance, Clark envisions that Harvard might sell minicourses, or "modules," online to help startup companies handle marketing or pricing problems.

Faculty who help create online courses will receive royalties, as they do with case studies and other materials sold through Harvard Business School Publishing. "We are now trying to build an understanding with the faculty that with the Internet, it's not the same as books," says Clark. "It's a different kind of medium" that requires significant contributions from the university.

Last spring, Harvard Business School took a dose of its own medicine and performed one of its trademark case studies on itself. The course was titled Distance Learning at Harvard Business School.

"People worried about the brand, the diversion of resources, whether this would take the school down-market, whether we would lose focus," Clark recalls. "Then people recognized that this is a very powerful technology and a good opportunity."

Winder cautions that Harvard's online efforts remain tentative. "You run a number of experiments and see what you learn about the pedagogy, the market appeal, what it takes to do this," he says. "It becomes this very hard balancing act, and you hope you make enough right decisions. If you err, you err on the part of caution and conservatism."


Ivy Holdouts

The University of Pennsylvania's Wharton School so far is the only Ivy Leaguer to turn down the temptation of trading education for equity.

"We looked at this and said, 'We want to make money in this business, but we see conflicts in some of the ways you might tie yourself to some of your partners. It might cloud your judgment,'" says Robert Mittelstaedt Jr., Wharton's vice dean of executive education and external affairs.

The business school spurned UNext's advances and elected to pursue a different strategy with Pensare and Caliber Learning Network, a Baltimore company.

Wharton would seem a natural fit for UNext. Milken, after all, is one of the business school's most famous graduates, and Wharton is an early innovator in distance education.

Wharton officials say they've had discussions with Milken and Knowledge Universe. "We were approached by them long before anybody else, and that's all I'll say about them," Mittelstaedt says. "Part of it comes down to whether you're philosophically aligned with a partner and whether the business model makes sense."

Alison McGrath Peirce runs Wharton's online education program from a row house near Penn's Philadelphia campus. "This is not a commodity business. No school should do this for the money," she says. "Sure, we want to make money. But one of key things is to use this as an R&D function and take what we learn and infuse it back into the MBA program."

Wharton is hedging its bets on the viability of online learning by combining classroom lectures delivered by satellite with Internet courseware. Students go to classrooms maintained by Caliber Learning Network in major U.S. cities. In San Francisco, for instance, students sit at computers in front of a big-screen television. Lectures are broadcast live, and as professors deliver their lessons, background information is delivered to students' desktops over the Net. Students also ask questions online and collaborate on projects. Classes cost between $2,500 and $3,000.

Jim Miller took Wharton Direct's first course, Building a Better Business Case, to help him draft a new business model for Internet software company AtOnce.com. Miller, a graduate of traditional executive-education courses, likes the mix of classroom and online interaction. "Between classes I would go online from home and submit homework," he says. "I wrote a business plan and they gave me a critique. It was quite useful."

According to Peirce, Wharton will not pursue the corporate market targeted by UNext. "I think when you get those mass corporate sales, you tend to have lower-level content that has mass appeal." Pensare, however, is developing purely Internet versions of its classes.

Mittelstaedt candidly admits he doesn't know whether Wharton's hybrid approach will succeed. "I think there are lots of people jumping on all kinds of trains that are going to get derailed. It's not clear that the market is as big as the supply would imply."


Corporate Caution

If they build it, will they come? UNext, Pensare, and other Internet companies will spend a lot of money to find out. Whether or not UNext makes a penny, the company is committed to paying out about $100 million to its charter universities. Rosenfield estimates that the company will shell out more than $1 million to create each online course. An MBA program may consist of 60 courses or more.

Rosenfield has no doubts that international corporations will embrace UNext's Cardean University. "I think the investment that is currently being made by companies in education is gigantic but unguided. It will make sense for a substantial portion of that activity to be invested in online learning," he argues. "Use of the Internet is exploding outside the United States."

Wall Street analysts have been as bullish. "Education is a marketplace ripe for transformation," argues Merrill Lynch analyst Michael Moe. "I spoke to Mike Milken when he was in Europe, and he said you wouldn't believe the demand for UNext's products there."

Moe, however, cautions against selling education online as if it were so much soap. "There's a balance between education and commerce, and being sensitive to that balance will be crucial to any company that wants to be successful."

Pensare senior VP Dean Hovey says his company has enrolled France's Thompson Multimedia for its first Harvard course. And UNext is close to signing several multinational corporations, according to Rosenfield. But even IBM, which is supplying software to UNext and has been identified in press reports as the company's first client, is taking a wait-and-see approach. Says Ken Landau, IBM's director of technology-enabled learning: "All we have said is that we would pilot their first course. If and when that course gets completed – and we're still waiting – I have lined up 30 people for the pilot. Based on what we learn and what UNext learns, we'll see if we go anywhere."