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Trend Two: Don't Hate, Vertically Integrate

Note: Andrew Kelly, a research fellow at AEI, is guest-posting this week.

On Monday I talked about what the burgeoning of middle-class urban dwellers may mean for charter schools. Today I'm talking about how some charter organizations are actively developing new markets, and what this might mean for school choice and competition more broadly. The topic of the hour: vertical integration in the charter market.

In the corporate world, one of the most basic decisions that firms face is the "make or buy" choice. Should we make the component parts and services we need to produce our product in-house? Or should we buy those parts and services from an outside provider? Firms that choose "make" are often called "vertically integrated"; in the extreme, they control each facet of the production process. High school history textbooks are full of horror stories about vertical integration gone awry. Carnegie's U.S. Steel and Rockefeller's Standard Oil were vertically integrated ad absurdum. More modern examples include many of the country's top innovators: Apple, Google, Oracle, and Amazon.

Not sure how this relates to charter schools? Charter middle schools may find it in their interest to reach further down into the "supply chain" of new students by opening elementary and even pre-K schools. Enrolling students in a rigorous learning environment from an earlier age allows those students to get a running start before heading into the big leagues in middle and high school. In an industry judged almost entirely on student achievement, this kind of vertical integration must look enticing. Developing the other end of the pipeline by building high schools may also be attractive; rather than scattering to mediocre high schools, why not keep the beneficent chain going and move them through 12th grade? Slowly but surely, charters could "own the stack" from pre-K to high school.

It is tough to document this trend with any certainty, but there is some suggestive evidence out there. Take KIPP's growth pattern over the last five years as an example. KIPP's bread and butter has typically been middle schools. It's where the network started in 1995, and it's how KIPP introduces its brand to new cities. But there are some signs that this is changing. Since 2007, the network has opened or is in the process of opening 69 schools nationwide. Any guesses as to the percentage of those new schools that were non-middle schools? According to data we collected, fully 81 percent of those new schools were elementary or high schools. Thirty-two were elementary schools, 13 were high schools, and 24 were middle schools. In describing KIPP's priorities on this very blog in June 2011, KIPP CEO Richard Barth told Rick Hess:

"We've committed to going kindergarten through twelfth grade in KIPP schools across the country. The original cohorts that we just [reported upon] only got fifth through eighth grade. So [we're going to] start with our kids earlier and stay with them longer."


Pre-K is a new frontier for this kind of expansion. State and local policymakers have boosted funding for public pre-K programs, making charter pre-K schools an attractive option for savvy charter operators looking to capture more public dollars in the years to come. In a fantastic, soon-to-be-released AEI paper on for-profits in early childhood education, Harvard Graduate School of Education' s Todd Grindal argues that annual funding for state preschool programs doubled between 2001 and 2008, totaling $4.6 billion in 2008. Forty states and D.C. currently provide publicly funded care and education for kids between 3 and 4. This is a growing market, and the opportunity to vertically integrate makes the opportunity even sweeter.

From the organization's perspective, this type of expansion is strategically smart. It provides schools with a steady flow of students who have come up through their model from age three, enabling educators to build basic skills rather than playing catch-up later on.

But what does vertical integration mean for the charter school movement and for choice and competition more broadly? Two things:

First, it potentially changes the narrative that has been so heavily baked into the charter school ethos: that they take students who have been underserved by the traditional system and make impressive gains in learning in a relatively short time. While young students from low-income backgrounds will still come to school with the same disadvantages, getting them at age four will allow educators to get to work early.

More broadly, vertical integration of charters raises interesting questions about competition. In a district where charters were fully vertically integrated, we might expect seats to be scarce at the higher grades, because students that won a seat way back in kindergarten or Pre-K will continue to re-enroll and are typically given preference. Some seats will open, to be sure, but enough so that the flow of students out of mediocre neighborhood schools is more than a trickle? Claims about the benefits of school competition have been overblown, but does a set of vertically-integrated charter management silos remove any competitive pressure, such as it is, from the middle schools and high schools that no longer have to worry about losing students?

None of this is an argument against vertical integration. High-powered, successful organizations need to focus on how they can expand their footprint while maintaining the quality of their product. For education policy watchers, though, vertically integrated charter schools are an interesting wrinkle to keep an eye on.

--Andrew Kelly

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