Daphne Koller was a computer science professor at Stanford University when, in 2009, she realized that the way she and other professors on campus were teaching their students was backwards.

"I would walk into class, deliver the same lecture, tell the same stories, again and again, and never have a chance to engage with my students in a meaningful way," she says. "I thought, 'Why don't I just pre-record the lecture, add interactive elements to make it less boring, and come to class to actually talk to my students?'"

So, she began offloading her lecture time to video so she could spend more time interacting with students in class, a method now widely referred to as the "flipped classroom."

Today, Koller is best known for co-founding Coursera, a Mountain View-based company that offers actual college courses for free online. Most of the hype around Coursera (and there has been plenty of it) has revolved around these so-called "massively open online courses" or MOOCs, which make classes from the best universities in the world available to anyone online for free. But that's only half the story. As companies like Coursera, Udacity, and edX struggle to find a business model to accompany their noble cause, they've turned to implementing the flipped classroom on campuses across the country, as well.

Why MOOCs Can't Abandon the Classroom

The move into the classroom setting is critical to MOOC providers for two reaons. For one thing, there’s very little money to be made in giving a college education away for free. By finding ways to generate revenue from universities, companies like Coursera might be able to supplement the courses they give away for free. Second of all, universities that have already implemented the flipped classroom are seeing impressive results.

EdX, one of the few non-profit MOOC providers, launched a pilot program at San Jose State University last fall for students in the Introduction to Circuits Analysis class. Before the school incorporated edX, the failure rate for that course had been a whopping 41 percent. After one semester, the failure rate for students in the flipped classroom dropped to just 9 percent.

"The edX course was used as a sort of new age textbook,” says edX president Anant Agarwal. "Typically students have to do reading assignments before class. Here, they watch a video, do interactive exercises, and in class they interact with the professor and each other.

Agarwal says edX didn't charge San Jose State for the pilot program, but starting this fall, it will be offering the flipped course to all California State University campuses for a fee.

"Before scaling up, we wanted to make sure it works," says Agarwal.

Meanwhile, this May Coursera announced it had struck deals with 10 state universities across the country to bring the flipped classroom to their campuses. The universities will pay Coursera anywhere from $8 to $25 per student, based on the class size. The prices will also vary depending on whether the content is created internally or externally by another university.

"I think this will be a big part of how we make ourselves sustainable financially," Koller says, noting that the biggest growth opportunity for the flipped classroom is overseas. "There's a significant lack of instructional capacity in many parts of the world, so I think this will be heavily used outside the U.S."

Experimenting With Business Models

Of course, the quest for revenue in this space hasn't been without its missteps. For as successful as edX's San Jose State program was in lowering the class's failure rate, another partnership San Jose State struck with Udacity had the opposite effect. Earlier this year, the school announced it would be offering five online courses through Udacity, making them available to both students and non-students. Then, just a few weeks ago, Udacity announced it was suspending the partnership after just one semester. The cause? More than half of the students taking the online courses failed the final exam.

It looked like a crushing blow to the industry, with skeptics pointing the finger at Udacity as just one example of why MOOCs offer students a subpar education. And that may well be true. With the entire class taking place online, and minimal instructor oversight, the students either couldn't keep up or lacked the motivation to. The flipped classroom, on the other hand, actually enhances that oversight, forcing students to participate in class.

That's not to say that some online education companies haven't already tried to replicate the classroom experience, itself, online. 2U is a Landover, Maryland-based company co-founded by former Hooked on Phonics CEO Chip Paucek and Princeton Review founder John Katzman. When they founded the company in 2008, MOOC fever hadn’t fully taken hold yet. Instead, Paucek and Katzman launched through a partnership with University of Southern California's Rossier School of Education, offering a full masters of teaching program online. Students pay standard tuition, but instead of going to class once a week, they meet in a live video chat room with the professor and the other students. Today, 2U boasts an 84 percent retention rate.

"If I don't retain a student in the program, I don't make anything, and that's good from the university's perspective," Paucek says. "What happened with Udacity isn't really possible in our program, because we could see week two the student wasn’t doing the work."

The company is now working with eight universities in total, across ten graduate degree programs. 2U's contracts with the schools last some 10 to 15 years. 2U also recently announced a program called Semester Online, which offers for-credit undergrad courses on a class-by-class basis. Though Paucek won’t reveal revenue, he says that 2U, now a 600-employee company that's raised $102 million in venture capital, has booked $230 million in tuition across all its programs this year. Through a revenue share agreement with the schools, 2U will make more than half of that.

Other MOOC providers are taking notice. This year, Georgia Tech University announced it would be launching an online masters in computer science through Udacity for the low price of $6,630. Udacity declined to comment for this story, so there's no word yet on how the company plans to avoid the mistakes it made at San Jose State this year.

Bringing the flipped classroom to schools isn't the only way MOOC providers are making money. Coursera has already tested the waters of charging students for certificates of completion, and edX has struck deals with corporations and other non-profits like the International Monetary Fund to power their internal training courses online. Still, landing long-term contracts with universities may very well be the most lucrative. 

Agarwal, for one, says experimenting with business models is critical to this industry. It’s important to remember, he says, how new this space is and how very little education has changed over the last century. "We have to be ambitious, otherwise education will stay the same for the next hundred years. Some experiments will turn out well and some won't," he says, "but as they say, 'Nothing ventured, nothing gained.'"