Can we bank on e-learning?

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When e-learning arrived a few years ago, observers predicted a seismic shift on campus. E-learning companies would knock down the ivory tower and change education for good -- and make lots of money in the process. After all, education in the United States is an $800-billion-a-year industry.This article is from the February 13, 2001, issue of Red Herring magazine.

When e-learning arrived a few years ago, observers predicted a seismic shift on campus. E-learning companies would knock down the ivory tower and change education for good -- and make lots of money in the process. After all, education in the United States is an $800-billion-a-year industry. If e-learning could grab even a piece of that, investors figured, it would be big business. Cash flowed into e-learning, and companies put their homework on hold.

But now it's exam time. The test consists of just one question, and it's a tough one: can you make a profit?

E-learning companies in the corporate training sector have come closest to having a yes answer. Most others have been sent to stand in the corner. Firms aimed at the K-12 market, for instance, face a number of problems, including public school bureaucracy, long sales cycles, and low price points. Many K-12 businesses were built around portals for parents, students, and teachers, which means an ad-based revenue model, which these days means not enough revenue.

Other early achievers in the e-learning market were the so-called 'educommerce' companies. They design online courses for e-tailers on the assumption that, if a site offers a class on, say, kayaking, it'll sell more kayaks. But educommerce plays have been taking on water along with the rest of e-commerce. The same goes for e-learning B2Bs, which hoped to make a business out of selling pencils and textbooks on the Web.

THE ABCs OF E-LEARNING Corporate training (i.e., marketing courses to companies that want to upgrade workers' skills) is e-learning's fastest-growing segment, estimated to reach $23 billion by 2005. As Tom Stein points out in 'VCs go back to the drawing board,' corporate training is seen as the only e-learning business that offers a near-term return on investment. 'The real revenue,' says Gary Rieschel, executive managing director of Softbank Venture Capital, 'will have to come from the corporate side.'

Where will it go? Two places, primarily: to content companies -- those that package and sell the courses used in online education -- and to infrastructure companies, which make software to administer corporate training programs.

Interestingly, it's the content companies that are getting the most attention. Though just about every other Web firm connected to the word content was spurned months ago, in e-learning, content is considered the most viable business. What is knowledge, after all, but information?

The content leaders, as Jennifer Lewis reports in 'Corporate training goes to the head of the class,' are a handful of companies with names like UNext.com, Capella Education, and Quisic. Most are entirely virtual. But investors are noticing them because these companies target the most sought-after online students: those with corporate parents willing to shell out big bucks for degrees by the dozen.

Those dollars are luring e-learning infrastructure companies into content as well. The danger to infrastructure companies, as Bridget Eklund explains in 'Cramming with e-learning advocates,' is that after the initial sale, revenue dries up. In response, these companies are now seeking to add more 'courseware' and become one-stop shops for corporate training.

E-learning is still in its adolescence. There will be disappointments and pleasant surprises in the years ahead. The one certainty is that education is a large market, second only to health care in the United States. Then there's the foreign market -- students who can't afford to travel to America but can pay $1,000 or so to pursue a degree online. In sheer numbers, they represent a vast opportunity.

But it's early yet for any e-learning firms to think about a trip overseas. They still have a lot of growing up to do.