Lockdown, Not Knockdown: #1 Online Language Learning

Digital Industries Booming in the Covid Era

In 2016, I took a class examining financial crises. The objective was to take a look at the major past crises and summarize learnings. Five years after, I recall most of the concepts we studied: gold rushes, peso devaluations, Black Tuesday, subprime mortgages. And while at the time the crisis patterns puzzled me tremendously, in hindsight they all very much seem like the comfort zone. 

There were very few patterns predicting the Coronavirus pandemic and its earth-shattering sanitary, social, and economic consequences. Yes, the world has seen deadly viral diseases before: Spanish Flu, Asian Flu, Swine Flu, the Zika and Ebola epidemic, just to name some.

But no sophisticated data models could possibly prepare us for the economic downturn of current proportions, with the global growth contraction estimated at -3.5%, millions of jobs wiped out, the collapse of tourism and the hospitality industry, a significant fall in consumer activity, and an overall sharp increase in economic inequality, particularly hitting the lowest-income groups.

‘Is there anything good coming out of all this?' the perpetual optimist in me wants to know. In this series of essays, I explore industries that are doing surprisingly well despite the current crisis. Specifically, I zoom in (pun intended) on some of the digital industries that are currently flourishing amid social distancing, minimal in-person communication, and general movement restrictions. The present article, in particular, addresses the digital language learning space.

Language learning landscape

Remember the level of globalization back in 2019? It seems centuries ago, but it did happen: the cliché ‘citizens of the world’ was living its golden era. Towards the end of the previous decade, an estimated 2 billion people worldwide were foreign language learners. Speaking a foreign language gives you opportunity to study, travel, work and live in areas potentially more prosperous than the one you come from. It is of little surprise that almost a billion people study English, followed by French, Spanish, and Mandarin.

Many language learners have been biased towards in-person learning. But even before the pandemic, the language learning market had already seen tremendous growth in the online space. Web and mobile apps, software as a service (SaaS), and online tutoring had already gained much prominence in the language learning community.

When 2020 showed up in all its chaos and as the world shut down and the traditional offline learning alternatives became unavailable, the already solid industry growth saw a sharp increase. In March 2020, when the unprecedented lockdowns began, most schools closed down and millions of children worldwide stayed at home, replacing text- and notebooks with iPads, mobiles and laptops. Similarly, adults who were trying to make the most of quarantine, decided to take up a new language. Consequently, the $6-billion online language market (2019) is now projected to triple or even quadruple by the end of the decade.

The digital language learning market is highly fragmented, offering instruction for total beginners as well as advanced learners, children and adults. Within the different niches that I will explain in a second, a high number of competitors are struggling to secure their part of the proverbial pie, in what two INSEAD professors, W. Chan Kim and Renée Mauborgne, labeled a Red Ocean. In their 2014 seminal work Blue Ocean Strategy, Kim and Mauborgne argued that unless you create your own market space that others can hardly access (Blue Ocean), you will be just one of the many players in a hostile and tiresome environment (Red Ocean).

Language learners are segmented into school children, university students, and adults. There is additional segmentation into private individuals, corporate learners, and government officials, all of whom are further segmented in accordance to their language-learning levels. Expectedly, each group has different learning priorities, and different players in this space, such as Duolingo, the Berlitz Corporation, Rosetta Stone, Memrise, Sanako Corporation, Babbel, Busuu Ltd, or iTutor Group, are all trying to cater to those priorities. Even though the market has hardly an established leader, Rosetta Stone (historically) and Duolingo (currently) are probably the most important names in the space.

The common advantage of all online language learning offerings lies in the flexible, self-paced programs at a comparatively lower price than their offline alternatives. Where the online learning programs substantially differ from each other, however, is the ability to accommodate multiple customer segments at the same time. 

Online courses

The antediluvian tapes and videocassettes which, if you were born after 1990, you have probably never seen, were the precursors to the modern online language courses. The tapes evolved into CDs, and finally into specialized language software offered at a one-time cost or on a subscription basis. These programs are available from both the established language learning providers, such as the aforementioned Rosetta Stone or Berlitz, as well as many younger platforms such as Fluenz, LingQ, FluentU, or Digital Dialects that offer premade courses among other products and services.

Apps

Since the early 2010s, apps have become a must in a number of industries. The digital language space is no exception. Most of the companies mentioned in the online course category developed accompanying apps so that the users could access their programs more easily. The businesses that did not adapt in this sense, are not around anymore.

A newer, slightly different generation of mobile apps is ubiquitous, free or very affordable, and beginner-focused. Duolingo, the most prominent name in this space, has 500 million registered users, 42 million of whom are active. In 2020 it made $180 million in revenue on ads and subscriptions. Duolingo’s competitors, such as Babbel, Buusu, Memrise, or Mondly, all use similar subscription or freemium models.

Online marketplaces

The online tutoring marketplace is an emerging niche. The marketplace model, in general, has seen explosive growth over the previous decade. Just think of the incredible triumph of Airbnb or Facebook Marketplace. Buyers and sellers, renters and landlords, meet in a virtual space, gauge what each has to offer, and potentially do business together. Given the tremendous success of Airbnb, online marketplaces have been blossoming, offering everything from pastries and flowers to haircuts and house repairs. So why would this model not work for language instruction, too?

Companies like italki, Preply, Cambly, or Rype have all ventured into this space. On these platforms, instructors are listed along with the necessary information on the languages taught and rates. Students on the lookout for one-to-one online classes can choose from a variety of teachers, leave reviews and recommendations, as well as book and pay sessions directly via their chosen platform. Course content is very customizable, as languages are taught either one-on-one or in very small groups. The obvious benefit is that as a learner, you are talking to a native speaker who can accommodate any level and requirement (e.g. academic, corporate, or specialized language instruction). 

As an alternative, companies like Berlitz and Fluenz offer one-on-one online language immersions in addition to their standard courses. The online immersions are the digital equivalent to the much more popular, on-site language immersions - an intense linguistic and cultural experience that is hardly replaceable.

Growing in the pandemic-stricken world

So let’s now assume this article has piqued your interest and you want to try out your business luck in the online language learning space. Where do you start? Do you build another app? As noted above, the sector is substantial and growing. However, that advantage is offset by the presence of numerous players in the market. Duolingo is a possible contender for the market leader position, yet this may be a rash statement as, so far, it does not service all customer segments. Here are some elements to consider before entering the online language industry.

1. Be mindful of where you position yourself in the product life cycle.

According to the theory of business strategy, every product has an expiration date, which is why companies need to innovate relentlessly. The product life cycle consists of introduction, growth, maturity, and decline. Many products never make it past the introduction stage. Do customers really need your product? Make sure to answer that question in the affirmative before moving any forward. Online language immersions are a good example of a product in the intro stage. In the COVID times (and before), online versions of immersion programs have managed to find their target audience despite their comparatively astronomical cost versus the apps or even regular online tutoring. This is because they are highly personalized and scratch the itch of the more serious, committed, and advanced language learners.

Arguably, mobile apps, including Duolingo, are currently in the growth phase. Online tutoring marketplaces like the Hong-Kong based italki are also in the same spot. The growth stage is characterized by aggressive marketing investments because all you want to do is capture a larger portion of the market while you still can. The beauty of an online tutoring marketplace is that it requires a relatively low startup cost. You only need to develop the platform where the supply and demand will meet. But at the same time, this is where it gets tricky: due to the network effect, marketplaces are virtually worthless without users. The network effect means that the more users there are, the better opportunities one will find on the marketplace. The flip side is also true: the fewer people are using the platform, the scarcer the supply will be, and therefore, also, less demand. Marketing can hopefully help you to spread the word and attract more users.

What better marketing than being completely free? Duolingo, launched in 2012, initially pledged to offer free language education to anyone with a digital device. Its creator, Luis von Ahn, tried to keep the app price at zero, and for a while, thanks to his previous business successes and his contacts in the tech world, the app could stay completely free and without ads. Yet von Ahn and his cofounder revisited the model, did the math, and subsequently included the ads. Later on, with the advent of the freemium model, Duolingo started charging a monthly subscription. In the freemium model, you split your customers into those who are willing to put up with ads in exchange for not paying a subscription, and those who prefer to pay a monthly fee and not see any ads. Introducing freemium, Duolingo's profits surged, and the company continued its steep growth.

Duolingo offers almost 40 languages and has gamified its content in order to snag as many users as possible. The focus is on vocabulary, which is great if you are a beginner. That being said, Duolingo has been criticized for its lack of content tailored to more advanced learners, those who prioritize grammar structure and speaking. Other competitors, notably the German Babbel, offer more grammar, more cultural references, and generally more content addressing intermediate and advanced students. However (and there is always a however), Babbel is more expensive than Duolingo as it charges all its users a monthly subscription. In fact, it sits somewhere in-between the pricier Rosetta Stone and the 'free with ads' Duolingo. 

The maturity phase is often described as the Red Ocean. Opportunities for growth are limited, and there is little space for product iteration. In the online language instruction, the premade, relatively costly language software mentioned above has reached maturity, and in many cases, also its decline. How can you ever possibly compete with apps if your price tag is a three- or even four-digit figure, while at the same time your programs do not offer any level of personalization?

2. Investigate the industry and the competition. 

According to the strategy guru Michael Porter, every business sector can be analyzed in line with the Five Forces Framework. Those five forces are the threat of substitutes, the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, and the industry rivalry.

Product substitutes. More than ever, learning a language is possible in a plethora of different forms: in person or online; with a tutor or using an app; following a fixed or a self-paced program. However, as someone who has learned several languages and enjoys learning new ones, I can attest to the bumpy journey of finding a good language course - one that actually fits your particular needs. Personally, I prefer in-person instruction because that is what I grew up and am more comfortable with. However, in the complete absence of that option in 2021, finding a more nuanced program that was built for advanced learners (and adults, at that), or meeting an instructor who is willing to rise to the challenge, is actually not at all simple. Therefore, while there are plenty of product substitutes in the space, it is safe to say that they are not at all direct substitutes.

New competitors. Developing an extensive and multifaceted language course requires expertise, time, and investment, so new competitors will not last long unless they are able to keep up with the customers' requirements. In addition, once the sufficient user critical mass is achieved, the network effect will wipe out any meaningful competition.

Power of suppliers. If your business is an online marketplace, you will be heavily dependent on the quality of the instructors present on your platform. Mid-to long-term, it will be simply unsustainable for you to keep going, regardless of how low-cost you are, if the classes offered are subpar. You will also have to rely on stable IT service in any variant of online language instruction, so make sure your have a trusted supplier.

Power of buyers. As a rule, the buyers will be less loyal the more low-cost your product is. That sounds counterintuitive, but is not: as soon as someone offers a lower price, your clients will move over to the competition. You can attempt tackling that problem by diversifying your products. For example, Duolingo, the gamified app, is now incorporating more culture- and history-related content, podcasts, and even some limited in-person meetups. On the other hand, due to digital advertising, the buyers have comparatively less influence on apps and platforms, given that the largest chunk of their revenue comes from ads. In his recent interview with the How I Built This podcast, Luis von Ahn mentioned that only 3% of Duolingo's users had monthly subscriptions.

Industry rivalry. Finally, given the number of competitors in this highly segmented industry, there is a high Red Ocean potential, but as we have seen above, not necessarily in every niche.

3. Finally, what is your competitive advantage?

Traditional business theory claims that you can gain a competitive advantage vis-à-vis the competition in two ways: 1) by being different from the rest and 2) by being more cost-effective than them. This theory has been updated over the last few years to include a 'third way', the best cost strategy, whereby the companies increase their product quality while simultaneously reducing cost. Expectedly, many companies within the online learning space are trying to match the best cost strategy - that is, have their cake and eat it. It is not at all easy.

Unsurprisingly, businesses are doing their utmost to differentiate themselves from the competitors, not least because of the sheer number of players. You can be the cost leader in the entire sector or just in a certain niche. For example, Duolingo is the clear cost leader in the app space, while italki, the online tutoring platform, could be viewed as the China cost leader in online tutoring.

Differentiation also occurs either on the whole, or in a particular market segment. Luxury onsite and online language immersions offered by, say, Berlitz, display a clear level of differentiation for a large number of languages, while a younger company like Fluenz is trying to reach their own differentiation level by offering exclusively Spanish immersions at the moment.

If you are not in some way distinguishable from others, you will run into a number of problems. Your suppliers will define the price, as it occurs on some language-learning tutoring platforms. This may lead to a race to the bottom which nobody can win, and ultimately everyone will leave. Of course, unlike a traditional language school, online tutoring marketplaces are not responsible for the quality or the fees of the instructors present on the platform. This can be a relief, or not really - especially if the teachers, wishing to beat the competition, offer ridiculously low rates and make the platform unattractive to any serious instructors or learners. Customers, for their part, are not very loyal in this Red Ocean scenario, and marketing can be of very little help. What matters here are the economies of scale (cost advantages as you grow) and the price - and yet, the margins are not that impressive. 

On the other hand, deeper-dive courses and one-to-one immersions for both children and adults, as well as specialized programs for corporate or academic learners, probably represent the digital language Blue Ocean at the time. Positioning yourself in this space means more room for innovation, higher margins, more pricing power, and returning customers. Nevertheless, this type of offering requires considerable expertise, investment, a high-quality team, as well as a carefully thought-through marketing strategy and execution. So, to answer the question above: No, you should not build yet another app without knowing why. Whichever shape your language learning material takes, let there be a strategy behind it.