Charter school market at a crossroads?

The Wall Street Journal reports that the number of charter schools in the U.S. is likely to mushroom in the next few years as a result of U.S. Secretary of Education Arne Duncan warning states that if they’re unfriendly to charter schools, they shouldn’t expect to see much of the $5 billion in federal stimulus for schools. Not surprising, many states are now scrambling to create charter-friendly environments.

Last month, the Center for Research on Education Outcomes (CREDO) at Stanford University, released a nationwide study analyzing charter school performance. The report was notable for a number of reasons—starting with its methodology. To control for any possible “cherry picking” (i.e., enrolling easier-to-teach students), the study compared the mathematics performance of students in charter schools with their “virtual twins”—students with similar demographic, socioeconomic, and special needs status—in traditional public schools.

Using this analysis, the study painted a mixed picture.

It found that only about one in six (17%) of the 2,400 charter schools studied were actually successful in helping their students perform better than their “virtual twins” in traditional public schools. About half (46%) offered little or no bump for their students compared with their “twins.” And nearly two-fifths (37%) appeared to have a negative impact on achievement; their students learned at lower rates than their comparable peers in traditional schools.

Whither market forces?

So what happened to the market forces of choice and competition that were supposed to make charter schools better than public schools? It appears that these market mechanisms have blunted in at least two significant ways.

First, according to the Stanford researchers, too few charter school authorizers are shutting down low-performing charter schools. Consider, for example, that in states where multiple agencies are licensed to grant charters, charters turned in their lowest performance—presumably because weaker schools have been able to shop around for more permissive entities under which to operate.

Second, it seems that parents, who were supposed to pull their kids from ineffective schools and create market-based incentives to provide better outcomes, have yet to become informed consumers of schools. Conversely, parents choose charters schools on the basis of more than just the academic performance of their students. Indeed, the Stanford study notes that it is often parents and communities who most strongly resist closing low-performing schools, arguing that shutting down their school “does not serve the best interests of currently enrolled students.”

A fragmented market

At the moment, the charter school market resembles what Harvard professor Michael Porter describes in Competitive Strategy (a common business school primer) as a “fragmented market.” No single provider—or even handful of providers—has achieved significant market share. According to the National Alliance for Public Charter Schools Web site, 77.5 percent of charter schools are “free-standing,” not associated with an education or charter management organization, such as Edison or KIPP.

My own quick scan of charter school Web sites (see below) suggests that combined, the top four largest charter and education management organizations operate 320 schools—or just 6.9 percent of the 4,618 charter schools nationwide. Throw in the next six on the list and you find that the top 10 companies still only control 11.4 percent of the market.

Top 10 charter or education management companies*

1. Edison Schools (97 schools)
2. KIPP (82 schools)
3. Imagine Schools (73 schools)
4. Big Picture Learning (68 schools)
5. National Heritage Academies (57 schools)
6. White Hat Management (51 schools)
7. EdVisions (40 schools)
8. Aspire (21 schools)
9. (tie) Green Dot (19 schools), Charter Schools USA (19 schools)

Shakeout coming?

Fragmented markets, like this one, can be ripe for “shakeouts”—with increased competition forcing smaller, less effective companies out of business. After the dust settles, usually just a handful of big players are left (consider, for example, video rental stores, roadside motels, and airlines).

So can federal stimulus dollars infused into the charter school market create more competition and ultimately a “survival-of-the-fittest” shakeout?

Probably not.

Simply incentivizing states to allow more charters is not likely to change the underlying conditions that Porter says creates fragmented markets:

• Low barriers to entry—The abundance of charter school authorizers, especially those with lax oversight, makes it easy for a variety of providers, regardless of their demonstrated competence, to enter the market.
• Few economies of scale—For the moment, given that most costs of running a school are tied to salaries and personnel, operating in multiple locations doesn’t offer much advantage in terms of marketing, curriculum development, or teacher training; this could change, however, if parents or authorizers were to demand better demonstrated results (which are typically expensive to document) of charter school operators.
• Diverse market needs—Because parents often enroll their children in charter schools to serve the unique needs of their child, it could be difficult for any single type of charter school to serve a large population of students.
• Local regulation—Charter schools are typically authorized by local districts or state granting agencies, each with their own criteria or rules, which may favor local, “mom and pop” providers.

Killing charters with kindness?

A fragmented market is not always a bad thing—it can provide fertile ground for innovation and experimentation. However, as Duncan told a gathering at the annual conference of the National Alliance of Public Charter Schools that “The charter movement is putting itself at risk by allowing too many second-rate and third-rate schools to exist.”

Ironically, a little more regulation and oversight (anathema in the eyes of some charter proponents) might help to create a more mature market, allowing the effective 17 percent of charter models become the norm, not the exception. By more regulation, I don’t mean red tape restricting hiring policies or the number of hours the schools can operate, but rather, as suggested by the Stanford report, encouraging charter authorizers to raise the bar by more consistently closing ineffective schools (which is, after all, the second half of the charter school “bargain”—less red tape for better results).

States might take that a little further, entering into multi-state compacts that could both raise the barriers to entry by demanding higher results from charter schools, while at the same time, creating a consistent set of criteria for charter applications across multiple that could make it easier for effective charter providers to enter new markets.

To help authorizers make better decisions and parents make more informed choices, better information is needed across the system. The Stanford report recommends, for example, that national metrics be created that would allow for better comparisons of schools and identification of high and low performers. Such metrics could allow parents to more accurately gauge a school’s contribution to their children’s academic success and weigh that value against other less tangible benefits they may perceive their school provides.

While some charter authorizers may have adopted a laissez-faire approach to regulation early on to encourage the growth of the market, the movement may now be at a cross roads. Those who support it may need to decide whether a proliferation of new charter schools is in their best interest, as quantity comes at the expense of quality. More to the point, they should decide whether a continued hands-off approach to regulation is in the best benefit of the charter market or conversely, killing it with kindness.

* I didn’t include Expeditionary Learning or Core Knowledge on this list, both of those organizations offer curriculum to charter schools (35 and 23 schools, respectively by my count), but don’t function as management organizations, actually running the schools. If I’ve missed any CMOs or EMOs, please let me know. I’d be happy to update this chart.

Bryan Goodwin is McREL’s Vice President of Communications & Marketing.