In this article we discuss processes of internal differentiation that have characterised European higher education systems in the last 50 years. We argue that these processes have gone through two main stages and in two different directions, each of which is showing its limits in the long run. Therefore, we expect a third stage of differentiation, which will be both internal to individual higher education institutions and multi-dimensional concerning functions performed. In the first stage (1960-1970s) the main objective was to create a vocational track, without having to profoundly modify traditional academic institutions. In the second stage (mid-1990s) the main objective was to differentiate between the more and the less competitive universities as regards the amount of financial and symbolic resources provided to them. However, large comprehensive universities are containers of smaller units whose performance may vary widely. Moreover, research is just one of the several functions that modern universities perform. The final section of the article provides some empirical evidence from United Kingdom universities to support the hypothesis of a third stage of differentiation.