supply-side
My prediction for bespoke companies is more of the same. The exponential rise of mobile platforms expands the market and brings in more players, but the basic economics are unchanged. We will continue to see new entrants with new ideas and a low cost base challenging the established players in an increasingly global cottage industry.
Off the shelf Companies that went down the OTS route followed a very different business model. First, upfront investment is required to develop the products. Then, depending on the exact nature of the content, there can be significant ongoing costs in keeping it up to date. Courses on subjects such as financial regulation, for example, might require updating several times a year as regulations and tax rates change. Technology trends also create costs. Generally OTS companies do not need
to be as close to the leading edge as bespoke businesses, and will often potter along at the same pace as the slowest of their major clients (the lowest common denominator problem). However, major step-changes in technology can create substantial conversion costs – the move from CD-ROM to the internet was one such step, and the rise of mobile learning is the latest. For a bespoke company, such a technological advance is an opportunity –
clients will pay to have their bespoke courses updated. For OTS businesses it is a major challenge. Imagine that you have 500 titles in your library all built in Flash! So in contrast to the bespoke business, OTS has substantial cost barriers to
entry and requires regular further investment to maintain competitiveness. In addition, OTS companies need to invest in a route to market. In the early days this typically meant a sales force, promotional brochures and stands at HR events alongside whiteboard manufacturers, and hotels and conference centres (specialist e-learning events didn’t yet exist). It is much easier to target your sales and marketing effort now, but it remains a major cost in the OTS business mix. But perhaps the most important feature of the OTS business model is repeat
revenue. The early pioneers in this sector in both the US and UK adopted an annual licence model, and it has proven robust. In fact, it is the predictable revenue stream that funds all that ongoing investment in the product and the channel. A major difference between bespoke and OTS businesses is that the latter have inherent transferrable value, in the form of both the repeatable revenue stream and the intellectual property in their courseware titles. As a result, growth by merger and acquisition in the OTS market has a rather better track record. It is easier to put a value on an OTS company that both parties can agree on. It is also easier to integrate a new range of titles into an existing catalogue than to integrate teams of developers and managers who can walk out the door. As a result, although few of the pioneers still remain as independent
companies, most, like Ken George’s Ivy and Paul Palmarozza’s Intellexis, have become part of larger groups. Indeed, growth by acquisition has been a major feature of the development of this sector Michael Porter’s famous work on business strategies, How Competitive
Forces Shape Strategy, identifies three main routes to success: cost leadership, differentiation and focus. Across the OTS market, you can see examples of all
Despite all those mergers, takeovers and ambitious plans, there is still no dominant force in bespoke e-learning. It remains highly price-competitive and resource-constrained, with few economies of scale
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The ups and downs of the ILX share price
1500 1000 500 0
2001 2003 2005 2007 2009 2011 2013
The pressure to grow shareholder value can lead to risky acquisitions. Buying companies requires a very different skillset from growing an e-learning company organically
three. SkillsSoft is the outstanding example of the cost leadership strategy. The company has grown through acquisition (NetG, Element K and many others) to a market-leading size that few can challenge, and is able to sell on value rather than just cost – a wider range of titles for your money. At the same time, there are successful niche players focusing on specific
subject matter or markets where they have specialist expertise and relationships that create barriers to entry. Atlas for example has a very strong position in oil and gas. This specialism route can also be advantageous in the bespoke business, and is one of the few routes to successfully integrating bespoke and OTS services in the same company. Differentiation through quality of product or service is difficult in a market where ideas can be swiftly copied, but the alternative for niche companies, to sell on price, is generally economic suicide. Prices are inevitably driven down to marginal cost, quality suffers and the bottom feeders often drive out the companies with higher standards before going bust themselves. A final word of caution – about going for a public listing. Although it makes more sense for OTS than bespoke businesses, as it can provide funds for internal investment and/or growth by acquisition, a public listing is costly and time-consuming and puts the company in the spotlight in bad times as well as good. The pressure to grow shareholder value can lead to risky acquisitions. Buying companies requires a very different skillset from growing an e-learning company organically. ILX, for example, floated on the AIM stock exchange as long ago as 2000,
originally as Time2Learn, then Intellexis, then ILX. Over that time a robust underlying business has been subject to volatile financial results as a result of its acquisition strategy. Most notably the purchase of a company called CTG directly led to record profits between 2006 and 2008 totalling almost £4m, and then losses of £12.5m in the following three years as the investment was written off and CTG closed (see chart). So, what of the future for OTS? While I doubt there will ever be an Amazon of e-learning (unless it is Amazon of course), there is good reason for optimism. The rise of mobile platforms and the related trend towards performance support – short, focused learning at the point of need – is creating new opportunities and delivery models. It remains to be seen whether the existing main players will be agile enough to be able to take advantage or whether they will be outmanoeuvered by more nimble startups, or even by big corporates entering the market in the way that Pearson, Google and others have already done in education.
Peter Phillips is founder and CEO of Unicorn Training e.learning age october 2013
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