CEO view: The future of e-learning

Bigger, better, faster, cheaper and irreversible

The internet is the largest learning resource on the planet. E-commerce never was the internets core service. The communication and sharing of knowledge has turned out to be its killer application. This was the original driver behind the worldwide web and the medium has now gone back to its roots, delivering the real benefits for which it was originally designed - the democratisation of knowledge.

China fears Google more than Saddam Hussein. This is a subversive technology that has crept into people's homes, workplaces, schools, colleges and universities. Students have more contact with Google than with their tutors. The e-learning phenomenon is already embedded in education, simply because it has become a consumer medium. Learners themselves are driving the market.

The good news is that the Internet, in the sense of technology, content and services is getting bigger, better, faster and cheaper. The really, really, good news is that it is IRREVERSIBLE.

Overhyped in the short-term, underhyped in the long-term

As the hype gives way to a more sensible form of market growth, several myths have been scotched:

1. Learning Management Systems (LMS) are a necessary condition for success
2. Standards will lead to a 'tipping' point
3. Reusable learning objects will allow 'lego brick' rebuilds of courses

The initial spends on technology have given way to a more sophisticated look at the people and change management issues. Buying a LMS only serves learning and business problems in the way in which a word processor serves a novelist. The real skill is in designing and writing the content to appeal to users. Too much money has been spent in enterprise-wide software and not enough on what matters - people and actual learning.

The interoperability standards were supposed to lead to a 'tipping point' in the e-learning market. This could have been true, and could still be true, but for the confusion caused by those responsible for such standards, we still have an alphabetic soup of specifications: AICC, IMS, SCORM, ADL, IEEE, ISO. The failure to settle on a single, marketable concept has left the market still confused. That's the problem with standards - there are too many of them!

The 'lego brick' analogy misled people into thinking that huge cost savings were to be gained from rebuilding hundreds of courses from the same box of 'lego bricks' or learning objects. There is some truth in this but it is way exaggerated.

Blended learning is fine, it always was. The problem with the concept is that it can be used to defend old non-scalable, practices. Most 'blends' are no more than crude fuel mixtures of the classroom and e-learning, or pre and post activities. Until there's a rational and sophisticated method for determining blends, and a move towards a more sophisticated blend into knowledge management, corporate communications and the real world, it will remain a crude peg upon which to hang your learning hat.

Changes to the market

The bearish market is separating out the market leaders and accelerating the identification of market leaders. This helps investors make choices as the fragmentation and noise is reduced. The number of vendors at the largest e-learning conference in the world, the Online Learning Conference in the US, over the last three years have been:

Those companies who are focused entirely in the corporate e-learning space have suffered badly as their earnings are directly related to corporate spend. This correlation to corporate spend makes them vulnerable as there seems to be no immediate relief. On the other hand, those with a mixed economy model and significant revenues in the government sector are doing well. Long-term growth and profitability will depend on not being too dependent on one or the other.

'Consolidation' is the word we frequently hear when the state of the e-learning market is discussed. Yet neither the evidence, market conditions nor views from analysts wholly support this view. It is not that consolidation has not happened or will not happen, only that there are two different types of consolidation:

1. Mergers and acquisitions
2. Consolidation through attrition

First, let's look at the evidence. What has surprised most observers of the e-learning market is how few mergers and acquisitions have taken place. The most substantial was the Smartforce/Centra merger, a deal that fell apart in the face of a) customer hostility (they wanted to choose content separately from technology) and b) falling share prices making the deal look ever less attractive. In the face of plummeting share prices and unsustainable models of profitability, Smartforce then merged with Skillsoft. So far, one fell through and one went through - evens. In Europe M2S in Sweden merged with Prokoda to create the biggest pan-European e-learning company. It imploded. So what other M&A activity has happened?... Not much!

Consolidation through attrition

What we've seen is consolidation through attrition. This is normal in embryonic markets that are still finding their feet. In the UK alone, lots of small companies are going to the wall, such as; Xebec, BlueU, Web4test, Multiverse, Online Learning, Scarlet Training, Mindwarp, Vfacto etc. while, at the same time, lots are starting up. This is a fragmented market where technology vendors are largely separate from content and services vendors. Despite the fact that the LMS market is hugely oversupplied, new players such as SAP (developed their own) and Peoplesoft (who bought a small team) are still coming to market. There are also demarcation lines between those who are focused in the corporate market, as opposed to higher education, schools or government. Companies like e-college, Blackboard and WebCT are big in HE. It will remain fragmented for some time as this has been the buying habit of those in training and education for decades.

Market conditions

Consolidation through attrition is also a natural consequence of the general state of the market. In a bear market, mergers and acquisitions dry up. You don't want to buy as valuations are falling. A company worth £3 million one day is tumbling into liquidation the next. The acquirer is left with large amounts of 'goodwill' on the balance sheet and left embarrassed at having paid well above the tangible asset value for the acquisition.

Yet another dampening effect on M&A activity is the difficulty in raising money beyond the cash on the acquirers balance sheet. Many e-learning companies are cash poor and in no state to acquire on this basis. If the answer is a paper transaction, then look at what has happened to stock prices! It is extremely difficult to get to market and IPOs have been almost non-existent.

Analyst views

Epic group plc is one of the few e-learning companies on the London Stock Exchange. We have four analysts that have followed us since the start of the e-learning market. None are predicting wholescale consolidation through M&A activity, none are predicting IPO activity. All see the wisdom as getting stable, profitable and cash generative.

Epic is profitable, cash-generative and sitting on over £9.5 million but has found it difficult to spot acquisition opportunities in a market that has lots of unproven businesses. Some of these businesses will succeed, others will fail. This bear market accelerates the whinnying process, which is why those with the ability to consolidate are likely to wait and see.

Expected business drivers

Up to November 2000 in the US, upward of $1.6 billion had been invested and although the private equity window was still open throughout 2001 it became much tighter, and by 2002 it had almost completely dried up.

These were the views of four of the leading US analysts in the field that I personally heard delivered at the Online Learning conference:

Consolidation through attrition is likely, as investors are now demanding:

• Rapid acceleration in top-line growth
• Large contract awards
• Strong customer list
• Near-term profitability
• Positive cashflow

Very few companies can live up to these expectations in the current climate so they will only back:

The need to show a reasonable path to profitability has become paramount. In fact, investors are now looking for clear paths to profitability within a year. This means significant contracts and an orderbook leading to profitability. The investors are keen to see companies who can change their business models and shift their spending strategies. There have also been warnings on premature IPOs. The market is merciless, and companies have to be sure about meeting, or beating expectations.

Conclusion

For the first two years of the e-learning market, buyers were bombarded with technology sells, mostly Learning Management Systems. This is to be expected in the early stages of a new market, however, the hype has now given way to more mature offers, partnerships and more informed buying. There is no doubt that the e-learning market is here to stay and that bit is irreversible. The opportunities to be successful are here for the taking. The lesson for vendors is; streamline your marketing message, position yourself as a 'trusted advisor', let the customer drive the solution and 'execution, execution, execution' - deliver what you promise.