eLearning: The engine of the knowledge economy

ELEARNING

THE ENGINE OF THE KNOWLEDGE ECONOMY

JULY 6, 2000

“An investment in knowledge pays the best return.” -Benjamin Franklin

Brian W. Ruttenbur (901) 531-3458 [email protected]

Ginger C. Spickler (901) 579-4865 [email protected]

Sebastian Lurie, Associate Analyst (800) 366-7426 [email protected]

Page 1 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 2 of 107

ELEARNING:

THE ENGINE OF THE KNOWLEDGE ECONOMY TABLE OF CONTENTS

EXECUTIVE SUMMARY ...................................................................................................... 5 SECTION I: INVESTMENT THESIS ELEARNING FOR THE KNOWLEDGE AGE .............................................................. 10

LEARNING IN THE 21ST CENTURY ........................................................................ 15 SEEKING PROFITABILITY IN THE ELEARNING INDUSTRY ..................................... 20 VALUATION AND PERFORMANCE OF THE ELEARNING STOCKS ............................ 22 RISK FACTORS..................................................................................................... 26 KEY TRENDS AND SIGNPOSTS FOR INVESTING IN THE ELEARNING INDUSTRY ..... 28 SECTION II: A TOPOLOGY OF THE ELEARNING INDUSTRY A BRIEF HISTORY: THE FORMATIVE YEARS OF THE ELEARNING INDUSTRY ....... 32 THE BUSINESS MODELS OF ELEARNING ............................................................. 37 SECTION III: THE LEARNING MARKET THE ACADEMIC MARKET .................................................................................... 50 THE CORPORATE MARKET .................................................................................. 66 THE CONSUMER MARKET ................................................................................... 74 SECTION IV: LEARNING TECHNOLOGIES FROM ABACUS TO LMS: THE EVOLUTION OF LEARNING TECHNOLOGIES ......... 78 NEXT ON THE AGENDA FOR ELEARNING?............................................................ 84 ELEARNING STANDARDS:

CREATING A BLUEPRINT FOR THE FUTURE ................ 89

CONCLUSION ................................................................................................................... 98

Page 3 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 4 of 107

EXECUTIVE SUMMARY The following is a summary of the four main sections of the report. For more information on any of the topics mentioned in this summary, please refer to the corresponding section in the body of the report. Section I: Investment Thesis eLearning will be critical to the success of individuals, organizations, communities and economies in the dawning knowledge economy. Much touted are the benefits of the Internet for the various functions of organizations ranging from procurement to marketing to customer service. However, the digital age has spawned an overwhelming mass of raw information that is frequently difficult to retrieve and to use. We argue that the critical and distinguishing strength of countries, organizations, and individuals lies in their intelligence and knowledge in this new economy. Network technology has enabled a proliferation of customized and timely educational tools that optimize investment in human capital: eLearning solutions facilitate the delivery of the right information and skills to the right people at the right time. The globalization of the economy, shortage of skilled workers, free agent mentality, new flexible work situations (telecommuting, for example) and numerous other factors have created problems not easily solved by traditional education, spurring the initial growth of the eLearning industry. Companies in this space are addressing these problems using technology-based learning resources targeting the academic, corporate, and consumer eLearning solutions facilitate spheres with managed, interactive, just-in-time, current, and userthe delivery of the right centric education tools. These factors, and others, set the stage for information and skills to the what we believe are exceptional investment opportunities in the right people at the right time. eLearning space. Although profitable Internet companies are still few and far between, we think that, with rapid top-line growth and highly scalable business models, select eLearning companies should reward investors with significant returns. •

Rapid Top-Line Growth: We estimate that expenditures by organizations on education in the United States alone exceed $750 billion and worldwide reach $2 trillion. Swelling demand for educational products (particularly U.S. products), a shortage of teachers and other learning resources, and the centrality of education in the knowledge economy should drive growth in the education and training industry. Revenue growth for eLearning should considerably outstrip revenue growth in all sectors of the education industry as eLearning companies capture an increasing share of the industry total. In the corporate space alone, IDC is projecting eLearning revenues to grow from right around $1 billion in 1999 to $11.4 billion in 2003. We expect growth in the academic and consumer markets to be significant as well.

•

Highly Scalable Business Models: We believe that eLearning companies will benefit from the same favorable cost structures that other “e” businesses, in theory, will. Whereas traditional education and training providers have high fixed costs in the form of real estate and high G&A expenses, eLearning companies are considerably leaner. An eLearning company is also likely to be better able to leverage its content over a larger We believe that the maturation body of learners, as they are generally not reliant on live of the industry should bring instructors for delivery of their services. Over time, we expect declining costs and, therefore, that more and more content will be developed in the form of increasing profitability. learning objects that can be assembled on the fly into highly customized courses, analogous to a just-in-time inventory system. We believe that the maturation of the industry should bring declining costs and, therefore, increasing profitability.

Page 5 of 107

Given that most of the players are still losing money, traditional profit-based valuation techniques will not be effective in the early stages of the eLearning industry. Since first-mover advantage, market share, and the possibility of leveraging costs will be central to determining the winners in this industry, we think revenue-based valuations are most germane. However, given the variety of companies competing in the space and the rapid evolution of the space itself, companies will succeed due to a variety of competitive advantages. Therefore, treating revenue as a predictor of profitability is an exercise that must be conducted with care and must be tailored to specific companies. Section II: A Topology of the eLearning Industry The eLearning industry has emerged only within the last couple of years, and like many new high-growth industries, it is highly fragmented and populated mainly with young, unprofitable start-ups and a few of the more traditional companies in transition to e-companies. Many of the younger players are getting financial support from venture capitalists, who We expect that today’s have invested a total of $6 billion in education and training companies since relatively small public 1990. Of this figure, $931 million was invested in the first quarter of 2000 company comp group alone, with 64% going to eLearning companies in particular. Given this will grow significantly growing support from the financial community and assuming continued over the years. product adoption by customers, we expect that today’s relatively small public company comp group will grow significantly over the years. eLearning companies are difficult to categorize because they offer such a wide range of products and services to a number of different target markets, using several different revenue models. In broad terms, we divide the industry into three main categories: content, services, and technology. However, we have developed a unique “eLearning matrix” which allows a company to also be characterized by which sector of the learning market it serves (academic, corporate or consumer) and by what type of revenue model it employs (contracts, pay-per-use, or ads/sponsors). We also break down the content, services and technology categories into several subcategories, which enable a more detailed look at a company’s business model. Section III: The Learning Market Our method of analysis divides the overall learning marketplace into three main categories: academic, corporate and consumer. Each of the three categories is characterized by different drivers of growth that, when considered in aggregate, suggest the potential for sizable growth in the overall learning market. We believe that each of the three sectors presents a set of unique challenges to the eLearning vendor community in terms of providing the products and services that will truly meet the needs of learners. •

The Academic Market: In the U.S. alone, 76 million people (more than a quarter of the population) are directly or indirectly involved in providing or receiving formal education from the pre-primary level through the upper reaches of higher education. Educational expenditures in the U.S. are second only in size to healthcare, and Educational expenditures represent 7.3% of the GDP. These expenditures have grown by over in the U.S. are second 42% since 1991. While efforts have begun in recent years to use only in size to healthcare, technology as an instructional tool, we believe that the academic and represent 7.3% of the world has barely scratched the surface in terms of utilizing the GDP. Internet to improve academic performance. Growth drivers of the academic market include • • • •

a growing student population as a result of both changes in demographics and greater rates of participation in the upper levels of education; public demand for a more effective education system that will prepare students to be competitive in the knowledge economy; a shrinking base of teachers, as expertise is better rewarded in the private sector; and increasing international demand for U.S. higher education.

Page 6 of 107

•

The Corporate Market: In 1999, U.S. organizations spent more than $62 billion on training-related resources, salaries, and technology. Other estimates put government spending on training at $40 billion. While the eLearning component of these expenditures totaled only about $1 billion, all indications are that training in the future will be delivered less and less by instructors in a classroom and increasingly by networked technology. All areas of the workplace, from the manufacturing line to the boardroom, are beginning to see this type of shift. For the same reasons that businesses have come to rely on technology-based systems to manage their human resource and sales efforts, we believe that the task of managing a company’s training initiatives will increasingly fall to learning systems that are integrated into the enterprise framework. Some of the key growth drivers for eLearning in the corporate market include • • •

•

a shrinking labor pool and, at the same time, an increasing demand for skilled labor, particularly in technology-related fields; organizations’ need for learning resources that are both accessible and timely; and globalization of the enterprise demands flexible training programs.

The Consumer Market: In the consumer market, we include not only “lifelong learners” pursuing avocational learning experiences (gardening or wine selection, for example), but also individual professionals who seek out educational opportunities either because it is mandated for or is conducive to the purpose of career advancement. The size of the consumer learning market is much harder to pin down, but we believe that it could eventually prove to be one of the largest growth markets for the following reasons. • •

Consumers who currently use the Internet for informally researching avocational interests will transition to more formal educational opportunities as the quality of content itself and the method of delivery improves. The flexibility of eLearning will draw those requiring and/or desiring professional continuing education.

Section IV: Learning Technologies We believe that education is one of the last bastions of society that has been largely unchanged by the technological advancements that have revolutionized almost every other facet of life. Certainly we have seen technology begin to pop up in the world of education and training in recent years. However, in academia, computers are generally utilized as expensive typewriters, and in the corporate training world, computer-based training has generally been limited to stand-alone, linear course modules that typically elicit a groan of boredom from users. However, as a result of the ubiquity and growing capabilities of the Internet, we believe that technology will increasingly play a role in learning across all sectors of the market. Web-based collaboration tools enable people in far reaches of the world to share an educational experience, while sophisticated learning management systems allow a As a result of the ubiquity and user’s progress and preferred instructional style to be tracked so that growing capabilities of the adjustments can be made to a personalized curriculum in order to Internet, we believe that effectively address learning objectives. Technologies such as these technology will increasingly are in use today, but are, we believe, a pale version of the play a role in learning across manifestations of eLearning that we are likely to see in the future. all sectors of the market. Beyond technologies that are specific to the field of learning, we believe that advancements in the overall capabilities of networked technology (e.g., broadband access, wireless networks, etc.) will serve as a catalyst for acceptance of eLearning technologies on a more widespread basis in all markets. Such improvements will make user concerns about the capabilities of the technological medium secondary to actually providing meaningful educational experiences.

Page 7 of 107

Finally, we believe that the emergence of a set of open, industry-wide eLearning standards will be a critical turning point for the industry as a whole. eLearning standards will allow learning content to be easily accessed and reused in various formats and will enable the interoperability of learning technologies from different vendors. Virtually no emerging industry has ever experienced dramatic growth without the acceptance of a set of common standards on which all product and service offerings are based. We expect that the eLearning industry will be no different. Conclusion We believe that the eLearning industry holds much promise for profitable investments over the coming years. However, given the immature state of the industry, the wide array of target markets and the difficulty of keeping up with changes in learning technologies, we believe that discrimination is warranted. Careful research must be undertaken in order to determine which companies will eventually emerge as winners, and we believe that this report addresses the issues that will be key in making investment decisions.

Page 8 of 107

SECTION I:

INVESTMENT THESIS In this section: •

The information age becomes the knowledge age, driving investments in human capital

•

How eLearning addresses the needs of the knowledge age

•

The potential for profitable business models in the eLearning industry

•

Valuing the emerging eLearning industry

•

Cautionary points regarding investments in eLearning

•

Our outlook for the industry

Page 9 of 107

ELEARNING FOR THE KNOWLEDGE AGE

“The biggest growth in the Internet, and the area that will prove to be one of the biggest agents of change, will be in online training, or eLearning.” – John Chambers, CEO, Cisco Keeping up with new information and knowing how to use it are “mission critical” activities to businesses and individuals alike in a market where competition is no longer characterized by the big beating up the small, but rather by the fast running past the slow. If we define training and education as giving people the information and skills they need to compete effectively in the marketplace, many traditional learning methods are anachronisms in today’s fast-paced, information-driven economy. With that realization, we believe that training and education as we know it today will give way to a new form of preparing individuals to be productive and thrive in today’s society. Despite our reluctance to stick the letter “e” in front of anything else, we’ll call this new form of education “eLearning”, as it is the use of networked technology that will make the learning revolution possible (and it’s the trendy term these days). However, its name is less important than the role it will play in changing the way we work and live. Many people have touted the ability of eLearning to provide information to “anyone, anytime, anywhere”, and although we believe that this is the phrase that best describes it now, this description is also appropriate for traditional distance learning methods or even the Internet in general. The above description does not accurately encompass what eventually will be eLearning’s greatest strength. We believe that the true power of eLearning will be in its ability to bring the right information to the right people at the right time. Therefore, we would urge investors to think of the “e” in eLearning as standing for “effective”.

The Growing Learning Industry It should come as no surprise that learning in America, both in schools and the workplace, is already big business. According to The Digest of Education Statistics 1999, more than one out of every four Americans participated in formal education, whether as a student, a teacher, an administrator, or a member of support staff. Education expenditures alone account for over 7% of the GDP, making it second in size only to “Until well into the 20th century most the healthcare industry. We believe that when workers were manual workers. Today expenditures for both education and training for mediumin this country only about 20% do and large-sized organizations in the U.S. are added manual work. Of the remainder, nearly together, the sum reaches over $750 billion. Worldwide, half, 40% of our total work force, are this total reaches $2 trillion. These numbers do not even knowledge workers.” include government training, the hard-to-track stats on Peter Drucker training in small businesses, required continuing education, or voluntary consumer learning, all of which would fall into the learning expenditures category.

Page 10 of 107

Chart 1

U.S. Learning Market Size (in $Billions) $65 $63

Post Secondary $247 preK-12 Training Consumer

$382

Source: Morgan Keegan estimates, National Center for Education Statistics, Training Magazine

Despite the often high costs, individuals and businesses are willing to invest great amounts of time and money in the development of knowledge and skills because of the simple fact that today’s economy is built solidly on the foundation of human capital. Virtually all of the big players in the technology world (e.g., Microsoft, Cisco, Oracle and Sun) have major internal initiatives in the area of eLearning. At the fall 1999 COMDEX show, Cisco CEO John Chambers, after provocatively suggesting that eLearning would be one of the central catalysts of change in the development of the Internet, went on to say that online learning will make e-mail usage look like a rounding error. And he’s not the only one. High profile names such as Paul Allen (Microsoft), Larry Ellison (Oracle), and Michael Milken (yes, that one) have made major personal investments in the industry. Workers who neglect to invest in their own intellectual capital do so at their own peril, as they can no longer rely on a single set of skills for lifetime employ. People starting out in the workforce today can expect to change jobs, and even careers, numerous times during their working years. The nature of today’s economy is such that even within one particular job, the responsibilities a worker has and the challenges he faces are likely to change drastically every few years. Bearing this in mind, it’s easy to see why four years of education in a person’s late-teens and early-twenties is hardly adequate these days if he or she wishes to get ahead or, in many cases, just maintain a standard of living. Propelling the need for technological innovation in education is technology itself. The infiltration of technology into every part of society has made our lives both easier and more complicated. Yes, we are able to generate infinitely more information with which to do our jobs and make decisions in our daily lives, but managing all of that information has "Nothing in become a cumbersome task, requiring a new and ever-changing set of skills. education is so Ironically, the sheer volume of information that is available sometimes makes astonishing as the it even more difficult to find the information we need. The challenge of the amount of new century, then, is to take these stores of information and build useful and ignorance it manageable bases of knowledge, which can be tapped at any given time to help accumulates in the solve any given problem that students and knowledge workers face on a daily form of facts." Henry Brooks basis. In other words, we believe that the much-vaunted “Information Age” is giving way to the “Knowledge Age” and that the Internet (and eLearning by Adams (1838-1918) association) is at the crux of this transformation.

Page 11 of 107

The Knowledge Age: Investing in Human Capital The industrial revolution was fueled by physical capital – the machines and the backs of the workers that made the goods, the factories that housed the machines, and the ships and trucks that delivered the goods to market. The businesses that succeeded in the first half of the 20th century invested primarily in things you could touch. Around the middle of the century, however, the tide began to turn and our goods-based economy began to give way to one based on services – people doing things for other people. Suddenly, it was not enough to teach a worker one task and put him to work for the rest of his life on an assembly line; workers had to learn to adapt to constantly shifting demands, both from their employers and from their customers. The key outcome of the transformation from the industrial age to the information age was a dramatic shift from investments in physical capital to investments in human (or intellectual) capital. The main currency of the economy today is unarguably information: information about customers, information about competitors, information about employees. It’s a chicken-and-egg problem to determine whether the advent of the computer age brought about the proliferation of information, or if the need for information drove the rapid development of computer technology (and we suspect it was some of both), but the fact remains that the computer age and the information age hatched at about the same time. However, even the notion of the information age, with its vast stores of computer-generated data locked away in inaccessible databases, is looking a bit antiquated. Information that is unavailable Gary S. Becker, Nobel laureate and professor of to the right people at the right time is of economics and sociology at The University of little use. Fortunately, though, that is Chicago, has estimated that around 70% of a precisely where the Internet comes into country’s wealth today is in human capital, as play. opposed to physical capital. He said, “The beginning of this century, in my judgement, should be called, The major impact that the Internet has ‘The Age of Human Capital.’ This is because how already had on the world and its promise well individuals and economies succeed will be for the future is its ability to connect man determined mainly by how successful they are at and machines to one another so that investing in and commanding the growing stock of information, whether it is stored in a brain knowledge. In the new economy, human capital is or on a server, can be organized into the key advantage.” meaningful knowledge bases that are readily accessible to those who can benefit from them. The result of this connectivity has been our ability to take bits of information and transform them into knowledge that is infinitely more valuable and powerful to the enterprise. While the overt changes from the information age to the knowledge age will be more subtle than those from the industrial age to the information age, we think that it is a shift with major implications. As in the case of the information age, the knowledge age is still marked by the need for investment in human capital. However, we believe that the Internet, by creating greater connectivity, is generating marked improvements in the efficiency and productivity of that human capital. Hallmarks of the Knowledge Age It has been suggested that the amount of stored information in the world doubles every 2.8 years. Our problem is no longer that the needed information does not exist, it’s that specific information is difficult, sometimes impossible, to locate in the vast networks of technology in which it is stored. It is here where we believe eLearning meets the needs of the enterprise, for information and skills that are unobtainable by the workers who need them are virtually useless. Alan M. Webber, in his 1993 Harvard Business Review article, “What’s So New About the New Economy?” stated “In the end, the location of the new economy is not in the technology be it microchip or the global telecommunication network. It is in the human mind.” Students of all sorts must be taught, with the help of technology, the skills to harness the vast and often raw array of information that technology itself has helped to generate.

Page 12 of 107

The concepts of eLearning and knowledge management are beginning to organization, but we believe that the characteristics of the “new economy” are making the need for these tools even more apparent. What are these characteristics? Not surprisingly, they generally all relate to the humans within an organization.

make their mark on the “This new economy is based more on brains than brawn – and moves more on broadband byways than concrete highways.” Ray Smith, former Chairman, Bell Atlantic

•

Global Economy: The workforces of today’s organizations are increasingly spread out around the globe, creating the need for a corporate knowledge base and learning tools that are just as accessible (and perhaps even more so) to an account rep in Korea as they are to the CEO in Chicago. Barriers such as time, distance and language must be overcome if strategies devised around the water cooler in the home office are to be communicated to and implemented in far-flung branches, and vice versa.

•

Need for Skilled Workers: Job growth today is occurring at the top end of the food chain, requiring an increasingly better-educated workforce. According to Futurework, a paper published by the U.S. Department of Labor, occupations that require at least a college degree are growing twice as quickly as others, and this is true throughout the economy. Chart 2

10 Fastest Growing Occupations in the U.S., 1998-2008E 120%

Growth Rate

100% 80% 60% 40% 20%

ta nt s

nt s

as sis

So ci

al a

nd

Ph ys ic

ia n

as rv ic e se

hu m an

an d re ca rs on al Pe

sis ta

ist a la ss ed ic a

M

nd

le g

ho m eh ea

al a

lth

ss is

nt s

ai de s

ts ta n

ist s ia l sp ec eg al sa

Pa ra l

D es kt op

se a

pu bl ish in g

dm in ist

ra to rs

na ly sts D at ab a

Sy ste m

sa

ia lis ts sp ec

su pp or t pu te r

Co m

Co m

pu te r

en gi ne er

s

0%

Source: U.S. Dept. of Labor, Bureau of Labor Statistics

•

Shortage of Skilled Workers: The supply of skilled workers has failed to keep pace with the surge in demand. Organizations must be ready to take untrained workers and quickly bring them to a point where they contribute to the organization’s goals. The flip side of this problem is that in today’s fastmoving business environment, employers can rarely afford the luxury of pulling workers away from their jobs to attend off-site training events. Learning opportunities must be available in a just-in-time package.

Page 13 of 107

•

“Free Agent” Mentality: The skilled workers who are participating in the marketplace today exhibit little of the loyalty to their employers that characterized earlier generations. Whereas career advancement used to mean moving from the mailroom to the boardroom within the same company, today it often means a series of moves to positions of “The rise of Free greater responsibility in different companies. Recognizing this trend, Agent Nation means companies increasingly understand their obligation to employees in terms of that big companies the cultivation of marketable skills rather than the promise of lifetime no longer have an employment. Also, individuals are now taking more responsibility for their advantage over own career development by seeking outside educational opportunities, such as smaller ones when it second degrees or certifications, in order to enhance their prospects for comes to getting the advancement. The result of this trend for the organization is that valuable best talent.” intellectual capital may walk out the door with the employee unless efforts Seth Godin, have been made to integrate his personal intellectual capital into organizational Fast Company intellectual capital.

•

Training Viewed as a Benefit: Workers are more likely to leave an organization that does not give them the opportunity to learn new skills because they know that it does not take long to become unmarketable in an economy where the skill sets employers demand change so frequently. Futurework estimates that at 1,600 and growing, the number of “corporate universities” could exceed the number of traditional universities by the year 2010.

•

Stretched Workforce: Putting in hours outside the time and space parameters of the traditional workday is becoming more commonplace as both work and family responsibilities pull employees out of the office on a more frequent basis. Workers must have be able to pursue their education and have access to company knowledge resources whether they’re sitting at their desk, in an airport, or at a weekend Little League game.

It is largely these issues that have spurred the first wave of eLearning initiatives in the corporate environment. Likewise, we look for similar factors (time constraints, access to distant resources, the need for more learning opportunities) to drive growth in the academic and consumer markets as more products come to market that efficiently meet the needs of We believe that these groups. Simply put, we believe that eLearning addresses many issues eLearning addresses that traditional learning methods cannot in today’s marketplace. We will look many issues that at the markets for eLearning and their growth patterns a little later, but first, traditional learning let’s outline exactly why it is we believe that eLearning is not just a neat methods cannot in gimmick, but rather is a fundamentally better way of accomplishing education today’s marketplace. and training goals.

Page 14 of 107

LEARNING IN THE 21ST CENTURY We believe that of all the major components of daily life, formal learning is the one that has, to date, been least affected by the technological developments of the past 50 years. Advances in technology have revolutionized communication, transportation, and even household chores, but in fundamental respects, the process of learning today is much the same as it has been throughout recorded history. In an interview in the March 2000 issue of Converge, Don Tapscott, The ability to adapt author of Paradigm Shift, The Digital Economy and Growing Up Digital, and learn may have describes the current education model as one that has “teachers simply being never been more factoid fountains at the front of the class.” Members of today’s wired urgently required st generation, he suggests, are no longer interested in this model. Indeed, than in the 21 enlightened educators from ancient times have insisted that the cultivation of the century economy. ability to think, rather than the accumulation of facts, is the proper goal of education. However, the ability to adapt and learn may have never been more urgently required than in the 21st century economy, and these abilities can now be fostered in entirely new ways with the help of networked technologies. To date, the use of technology in instruction has generally been limited to copy machines, calculators and overhead projectors. Certainly attempts have been made to utilize technologies such as audio- and videotapes, and even non-networked computer based training (CBT), in the learning process, but without mechanisms that tie use of these sometimes expensive technologies to actual improvements in performance, their broad-scale purchase could often not be justified. In addition, the creation of these older types of technology-based learning materials is often a time-consuming exercise, particularly when we consider the fact that they are often not reusable outside of a narrow context. We believe that the concept of eLearning addresses a number of these issues, and below we will examine in greater detail the primary benefits of eLearning.

The Benefits of eLearning (or, Everything I Needed to Know I Learned on the Internet) The main benefits of using networked technology for learning are, we believe, fairly obvious. The immediacy of information on the Internet is an obvious advantage in comparison to the more traditional methods of information retrieval. It is certainly a lot easier to flip over to your Internet browser and look up information on almost any subject in the world than it is to trek down to the local library and hope that they have a relevant book that’s not checked out. To date, the Internet has been used for primarily this type of learning: random seek-and-find events that are not connected to your previous or next learning experience. Some early adopters of eLearning may have taken actual classes on the Web, but in general, the percentage of the population that has “Learning how to learn participated in a formal course of learning that took advantage of all the has become the most possible facets of an eLearning experience is very small indeed. We fundamental skill that believe that is about to change. an educated person needs to master, and the As we stated in the beginning of this report, we believe that the true power instrument that enables of eLearning lies not in the anyone, anyplace, anytime model, but rather in learning in almost every its potential to provide the right information to the right people at the right field is the computer.” times and places. This is the yet-to-be-fulfilled promise of eLearning. So Dr. Peshe Kuriloff, what does the future of eLearning look like? We think that web-based Adjunct Associate integrated learning systems will revolutionize eLearning by enabling Professor of English, personalized, interactive, just-in-time, current, and user-centric learning University of tools. These systems will allow all facets of a course of study, including Pennsylvania pre-assessment, learning modules completed, practice items, collaboration, and testing to be tracked. Adjustments can then be made to the learning program to make it more effective, and learners (and those to whom they are held accountable) will be able to monitor progress. We believe that eLearning will embrace the following characteristics.

Page 15 of 107

•

•

Personalized: Entire programs of study will be customized for the learner. By analyzing the learner’s objectives and existing skill level, courses will be assembled on the fly that address exactly what the learner needs to know without wasting time working on areas in which the learner is already proficient or uninterested. This level of personalization will be achieved by using We believe that coming small chunks of information, or learning objects, to assemble a course manifestations of from the ground up using pre-existing templates. The reusability of eLearning will truly these learning objects will make this level of customization feasible in engage the learner in a terms of both time and expense. We believe that these reusable give-and-take type of learning objects, the interoperability of which will be based on a set of learning that involves accepted industry standards, will be the key to the creation of an simulations of realexpansive learning economy. We will elaborate on the significance of world events and learning objects and the standards on which they are based later in the sophisticated report. collaborations with other learners and the Interactive: Much of today’s technology-based learning is simply an instructor. extension of traditional textbook-based learning, where the user reads content from a screen instead of from a page. Today’s interaction generally consists of the learner being able to click on an unknown word for the definition on a linked page or the ability to play a short video clip. We believe that coming manifestations of eLearning will truly engage the learner in a give-and-take type of learning that involves simulations of real-world events and sophisticated collaborations with other learners and the instructor.

•

Just-in-Time: eLearning will move education and training away from the “just-in-case” model in which learners engage in event-based sessions (i.e., classes) that require learning to take place outside of the context in which it will be used. Technologies such as electronic performance support systems (EPSS) will allow users to receive training at the exact time and place that it is needed to complete a task. Wearable computers will allow augmented reality experiences, in which the user can receive real-time technology-based assistance in the actual work environment, as opposed to a simulation in a virtual environment.

•

Current: We believe that one of the most under-appreciated benefits of learning via networked technology, as opposed to earlier non-networked versions of technology-based training (like CDROMs or installed software), is its ability to always present up-to-date material. It is relatively easy for the content provider to remotely change and update material on a web page based on new information or new needs of the learner. On the other hand, a CD-ROM is static, requiring a new product to be distributed anytime there is a We believe that change in the material. eLearning introduces an entirely new model User-centric: Finally, we believe that eLearning introduces an entirely for learning – one that new model for learning – one that focuses primarily on the needs of the focuses primarily on learner, instead of on the abilities of the instructor. With eLearning, the the needs of the learner is able to participate in custom-fitted learning experiences that learner, instead of on offer the exact material she needs in the form in which she learns best. the abilities of the The instructor, if there is one, goes from being the “sage on the stage” to instructor. the “guide on the side.” We believe that this model of learning imparts

•

more responsibility to the learner, resulting in a richer and more dynamic experience.

Page 16 of 107

If Aristotle Had Been an “eInstructor” . . . We believe that the above attributes certainly make eLearning an exciting proposition for the learner. However, the learner is not today (and we believe never will be) alone in the learning process. The instructor, whether it be a second grade teacher, a university professor, or a corporate trainer, also plays a key role. In our opinion, eLearning holds similar promise for making the work of an instructor easier and more effective. •

Leverage: One benefit, in particular, that eLearning lends to the process of teaching is leverage of time and resources. In live collaborative learning environments, a teacher can only respond to so many students in a given amount of time. Also, the number of students that can participate in the class will be limited by those who can make the time (or simply fit in the room). We might place the leverage we can get on instructors on a continuum, using Aristotle as our example instructor. So, when Alexander the Great hired Aristotle as his tutor, little leverage on the teacher was attained. More leverage was achieved when Aristotle lectured in his Lyceum, still greater leverage would have been possible if Aristotle could have led a synchronous Internet seminar, and potentially the greatest leverage could be achieved with asynchronous Internet modules recorded by Aristotle. While perhaps not on the same level with Aristotle, in-demand business experts such as Tom Peters and Peter Drucker are leveraging their time and expertise by developing eLearning modules.

•

Organization: Even in a traditional learning environment, such as a college classroom, eLearning has the potential to greatly aid instructors in the organization of a class. Web-based tools are now on the market that give an instructor the ability to centralize the management of a class on the web. Such a web-based forum allows the archival of notes (or even video files of lectures), communication with students outside of class, and possibly even the ability to monitor student performance. At the corporate level, a web-based learning system can track an employee’s progress through a training program and measure resulting changes in performance, enabling the corporate trainer to more accurately calculate ROI for training programs.

Standards are Key to the Success of eLearning In order for any of the above benefits of eLearning to be realized, however, we believe that a set of eLearning standards must be developed and accepted by the vendor community. In order to achieve true sophistication in terms of understanding the objectives of a learner and addressing those objectives with a highly customized program of learning, all of the components of a technology-based learning system must be speaking the same language. In other words, if I have a web-based content management tool from one vendor, but another vendor develops the We believe that a set type of content modules that are crucial to meeting my learning objectives, I of eLearning want to know that my tool can search the various content repositories on the standards must be web and be able to easily identify and deliver the proper materials, regardless developed and of their origination. This requires that units of content be labeled to convey accepted by the vendor information about themselves – things like subject matter, author, vintage, community. format, and even price. It is these labels that will form the basis of the standardization effort and allow an organized “digital marketplace” for learning to develop. While the standards development process (which is being conducted by various groups with an interest in their existence) is still underway, it is close to being finished, and eLearning vendors are beginning to focus on how standards will affect the products and services they offer. We believe that companies that do not work on implementing standards in their offerings will be left out of the growth of the industry, making examination of this issue crucial to the analysis of investments in the eLearning industry. In Section IV, which focuses on learning technologies, we provide further discussion of standards as they relate to eLearning.

Page 17 of 107

Who are the Learners? While some might think of learners as being students in the traditional sense, a learner today might be just as likely to be found carrying a briefcase as a backpack. And learning is not relegated just to those tasks assigned by a teacher or trainer, but also takes place on a learner’s own time, when reaching personal milestones (whether in a professional or avocational sense) is the goal. While we analyze the three sectors of the learning market in greater detail in Section III, below we quickly review some of the factors that are driving people in all three markets to seek out educational experiences. •

The Academic Market: With 76 million people directly or indirectly involved in providing or receiving formal education, the academic market is huge. As a percentage of GDP, educational expenditures have held steady at 7.3% (representing the second largest component of GDP) for about the past ten years, but the dollar figure has grown by over 42% since 1991. We expect strong growth in expenditures throughout each of the market’s segments, driven by the following factors.

With 76 million people directly or indirectly involved in providing or receiving formal education, the academic market is huge.

Pre-Primary • Recognition of the advantages conferred by pre-primary education • Growth in the number of working mothers Primary and Secondary Schools • Sustained school-age population growth as a result of the “baby boom echo” • Increasing sponsorship of technology and expertise by the business community • Technologically-inclined and ambitious kids • Increased involvement by parents • Growing shortage of teachers • Government determined to tackle the digital divide Higher Education • Knowledge economy offers superior compensation for highly-educated workers • Growth in adult learners • International demand for U.S. higher education • Institutions reaching capacity •

The Corporate Market: While actually counting the number of people who are involved in workplace-related training is virtually impossible, it is a little easier to come up with a dollar figure for the size of the market; according to Training magazine’s 1999 Industry Report, approximately $62.5 billion was budgeted for formal training by According to Training magazine’s 1999 U.S. organizations, which was about 24% higher than it was in 1993. Of Industry Report, this, approximately 44% is spent on trainer salaries, 24% goes to outside approximately $62.5 providers of training products and services, and the rest is spent on things like facilities, materials, hardware, seminars and conferences. The main billion was budgeted part that we are concerned about, of course, is the 24% that is outsourced, for formal training by which currently represents about a $15-$17 billion market. More U.S. organizations. specifically, we are looking at the eLearning component, which, according to IDC, totaled a little over $1 billion in 1999.

Page 18 of 107

Chart 3

U.S. Corporate eLearning Revenue by Component, 1997-2003E 12

$Billions

10 8 6 4 2 0 1997

1998 Content

1999

2000E

Learning Services

2001E

2002E

2003E

Delivery Solutions

Source: IDC

IDC predicts that spending on outsourced services, content and technology for training will grow from approximately $14.9 billion in 1998 to $33.7 billion in 2004. While information technology (IT) training currently dominates the mix, outsourced business skills training is expected to reach parity by 2004. IDC is currently projecting the corporate eLearning market to grow to $11.4 billion in 2003, representing an 83% CAGR since 1997.

IDC is currently projecting the corporate eLearning market to grow to $11.4 billion in 2003.

Primary Growth Drivers • The demand for skilled workers will overwhelm the internal resources of companies to train their employees; competitive pressure demands quick response to this disparity. • The global economy means that an organization’s workforce may be spread out all over the world, creating difficulties in keeping all members up to date with the latest developments. • The U.S. government is actively pushing integration of technology in its workforce.

•

The Consumer Market: The size of the consumer learning market is a little harder to pin down than that of the academic or corporate markets. However, we believe that in time it could actually prove to be one of the largest targets for eLearning vendors. Primary Growth Drivers • The Internet is increasingly used for researching avocational interests and should transition to more formal educational opportunities. • Instructional resources are easier to find and use when they are part of a learning portal. • The flexibility of eLearning will draw those requiring and/or desiring professional continuing education.

Page 19 of 107

SEEKING PROFITABILITY IN THE ELEARNING INDUSTRY We will be the first to admit that several key factors caution against arguing for, or making predictions about, the profit potential of eLearning companies. •

Actuality is the best proof of possibility, and few of the publicly traded pure play eLearning companies are operating in the black. In fact, as these companies strive first and foremost to gain market share, many suffer widening losses.

•

Making general assertions about the group as a whole may be unwise to the extent that the universe is comprised of hundreds of companies with divergent business models. What is true concerning the fixed and variable cost structures of technology providers may not be true of content or service providers.

•

As we have intimated several times in this report, the health of the space may depend in large part on the emergence of technological and content standards. Failure of such standards to take hold on an industry-wide basis would not only inhibit the growth of the whole sector, but would make comparison of eLearning companies very difficult for users of eLearning products and investors alike.

•

The fact that eLearning companies are focusing almost exclusively on top-line growth at the moment (as we indeed think they should) may have important consequences. Only a few companies--those that are cash rich--may survive, thus reducing earnings visibility. The companies that make it to the top may not be those with the best business models or the most advanced technologies but those with the deepest pockets and the best luck with the capital markets. Also, “buying revenue” with deep discounts and/or aggressive marketing may distort attempts to evaluate companies and may even undermine their long-term profitability. By burying revenue-generating costs deep in the income statement in line items such as G&A, companies may understate their true operating costs. Moreover, eLearning may condition customers to subsidized products, and attempts in the later stages of the industry to remove discounts may cause newer customers to resent older customers, and longstanding customers may not stand for price increases. More seriously, profitability in contested markets may be indefinitely deferred as cash-rich companies, in an effort to win market share, undercut those seeking normal profit margins. So long as the capital markets are generous, companies can interminably “delay gratification.”

Having assembled these warnings, and in addition, cautioning the investor to consult our Risk Factors section for further considerations, we still argue that investors should be excited about this space. We believe that while the “land grab” strategy does carry real risks, it is the right one because in the formative stages of this fragmented industry, the number of companies that exist and that will shortly come into being greatly exceeds the number that can survive. We think the winners by and large will be those that establish or leverage brand names and become leaders in their respective segments. Also, more importantly, as we argue below, we think that eLearning We think that companies have the capacity to leverage their costs in a way that their brickeLearning companies and-mortar competitors do not. Therefore, it makes sense for these have the capacity to companies to aggressively ramp up revenue in the hunt for profitability. leverage their costs in a way that their brickIt is no surprise the investment promise of eLearning stocks, like other “e” and-mortar companies, lies in the purported scalability of their business models. competitors do not. Scalability suggests that small incremental costs are associated with growth in revenue. Or, conceived of differently, a higher proportion of a company’s costs are fixed as opposed to variable so that as revenue ramps up, a company’s profitability increases dramatically. For example, while Amazon.com has to spend gobs of cash building its infrastructure and promoting its goods and services, it does not, at least to the same extent as its brick-and-mortar rivals, have to purchase expensive real estate, hire workers, and so on, when it wants to enter a new market. In theory, after Amazon covers its overhead, it should cost considerably less to sell each additional book or CD versus its offline competitors. In this sense, Amazon.com (and similar companies) should be able to leverage its resources and attain superior returns on investments vis-à-vis its brick-and-mortar competitors.

Page 20 of 107

We think that eLearning companies should enjoy many of the same sort of leveraging opportunities. In the long run, companies should be able to enjoy better cost structures on some or all of the following: real estate, inventory, revenue per worker, quicker time to market, and so on. Hand in hand with the idea of scalability is the idea of the massive market The Internet is a medium opportunity that the Internet provides. For example, only those qualified more perfectly adapted to students willing to live in Nashville are able to get an MBA from developing, advertising, Vanderbilt’s Owen School. Universities offering MBAs over the Internet, and delivering on the other hand, can attract qualified students from all over the world. In educational products than an important sense, the Internet is a medium more perfectly adapted to it is for books, CDs, and developing, advertising, and delivering educational products than it is for apparel. In general, books, CDs, and apparel. In general, educational products can be digitized educational products can without loss. The eLearning module retrieved by the Mary Kay salesperson be digitized without loss. in Siberia will serve her well while the digitized image of a warm coat from Lands’ End will not cut the frigid winter winds. The take-away point is that the Internet allows education companies to hawk their goods and services to clients anywhere and anytime. The acquisition of new customers, in the long run, should cost Internet companies less than legacy companies. And lastly, the Internet is especially powerful when a company’s products are wholly digital or knowledge/information based. Clearly, Internet companies do not exist in a business Wonderland where these scalable business models come free. Indeed, we have already discussed some of the costs and dangers associated with buying market share. Also, having a greater proportion of costs fixed, with heavy required investments in technology infrastructure, IT workers and marketing, Internet companies may often have higher breakeven levels than offline counterparts. It should be no surprise that higher risks attend higher anticipated rates of return. Nonetheless, we believe that due to the types of reasons articulated above, eLearning companies, like other Internet companies, have the potential to attain excellent levels of profitability.

Page 21 of 107

VALUATION AND PERFORMANCE OF ELEARNING STOCKS We are currently valuing pure play eLearning companies on a multiple of enterprise value (market capitalization plus debt less cash) to projected revenue.

Valuation of stocks within the high-growth Internet sector is a science of enormous imprecision. While companies are currently being valued on some multiple of revenue, we believe that valuations will eventually be based on a multiple of cash flow or at least gross operating cash flow. We are currently valuing pure play eLearning companies on a multiple of enterprise value (market capitalization plus debt less cash) to projected revenue. Based on this metric the average eLearning company is trading at 9.2x estimated calendar 2000 and 4.6x estimated calendar 2001 numbers. There are many questions you as an investor may be asking.

Why should pure play eLearning companies be valued today on multiples of enterprise value to forward revenues? We believe that using revenue multiples for the valuation of the pure-play eLearning companies is justified because they are the best available predictor of potential profitability. Given that more than 300 companies compete in this industry, we believe it is key to grab market share at this early stage. Also, as we have argued, getting to scale as quickly as possible and building brand identity are of paramount importance, and revenue growth is central to both. Of course, other crucial factors such as management quality, strategic alliances, and aggressive marketing campaigns play into market positioning and brand building. However, the best quantitative measure of progress in the land-grab battle remains revenue and trends in revenue. We believe that companies that do not gather market share early in the game will not be around in a few years when the valuation parameters shift to multiples of earnings. Should these companies always be valued in this manner? No, is the short answer to the question. While in the short term we believe this is the most effective way to quantitatively measure which companies are gaining market share, the problem with valuing companies on a multiple of enterprise value to projected revenue over the longer term is that revenue can be bought. Revenue can be bought primarily in two ways, first by using aggressive sales and marketing tactics, and secondly through deep discounting or giveaways. Many companies are laden with cash from the professional investment community and are spending it primarily on marketing and sales in order to grow the top line. We believe that over the long term, companies will be valued on the viability and profitability of their business models as measured by a multiple of operating cash flow. Why are there such big differences in group multiples? For our analysis, we have broken the eLearning industry into three distinct groups: content, services and technology. A description of the types of companies we would include in each group can be found beginning on page 37. (For purposes of comparison, we are excluding DigitalThink when calculating the average multiple of the content group. We have done this for two reasons: 1) the company’s large multiple tends to skew the overall multiple for the group, and 2) we believe that an argument could also be made for including the company in either of the other two categories.) There is a large spread in group multiples, primarily between the technology and content groups versus the service group. Pure play eLearning companies that fall into our technology category are trading on average at 10.7x estimated 2000 enterprise value to revenue, which is slightly above the content group multiple and far exceeds the service group multiple. We believe there are several reasons for this differential. 1) Market Cap: We have heard over and over again that “content is king”. In the realm of investments, however, we believe that market capitalization is king. As all the unemployed small cap or micro cap portfolio managers will tell you, Wall Street has rewarded the larger market cap companies. eLearning is an emerging industry and no company has more than a $2.5 billion market value (still relatively small in the bigger scheme of things). However, the larger market cap companies have well outperformed the smaller. Importantly the technology group has the largest average market capitalization of all the groups.

Page 22 of 107

2) Coverage by Sell-side Analysts: In many cases, the companies with the most sell-side support have performed the best over the last year. In our opinion the eLearning industry, much like many other emerging industries, is affected by the “herd mentality”. Strong sell-side support increases a company’s profile among investors, often resulting in better stock performance. We would note that with the exception of SmartForce (which we include in the technology category), few eLearning companies have yet to be picked up by any sell-side firms other than the initial underwriters. 3) Technology Companies the First to Benefit from the eLearning Growth Wave: Using the trusty razor/razor blade model as an illustration of the eLearning industry, technology companies can be viewed as providing the razor, whereas services and content companies supply the razor blades. In order to implement an eLearning strategy, a backbone (the razor) must be in place. The backbone of eLearning is technology. We believe that as customers get past the point of making major investments in the technology-based backbone of their In our opinion, select eLearning system, they will begin to spend money on the content and companies in the services (razor blades) that will actually make the technology investment technology category worthwhile. In our opinion, select companies in the technology category will maintain a will maintain a premium to the rest of the group, but only those that premium to the rest of continually stay one step ahead of the pack in terms of innovation in the the group, but only field of delivering and managing eLearning for the enterprise. Being a those that continually leader in the technology field will not be easy – it will require significant stay one step ahead of investments in R&D. This is why we suggest that only a select group of the pack in terms of technology companies will maintain a premium to the eLearning group as innovation in the field a whole. The rest of the companies in the technology group will continue of delivering and to offer the products that have long since become commodities. These managing eLearning companies will compete solely on price and therefore will not warrant a for the enterprise. premium valuation. 4) Visionary and Capable Management: Management that (a) can articulate a global vision by technological revolution and, more particularly, the value created by transforming knowledge resources by eLearning, and (b) can explain and execute these conceptions, will garner the favor of the investment community. 5) Key Alliances: We think investors will look for substantial relationships between established players & eLearning companies. Such relationships can supplement young companies’ core strengths, establish advantages of scale and size, and validate technologies. However, we would differentiate these types of alliances with those that are made simply for press release purposes. Why are pure play eLearning companies compelling as an investment opportunity over the long term? We believe that three key issues will drive the eLearning sector over the long term. •

The shift to a knowledge economy has made investments in intellectual/human capital more crucial.

•

The learning market (corporate, academic, consumer) is big and getting bigger.

•

Given eLearning’s characteristics of scalability, easy access, and timeliness, we believe that the eLearning model is fundamentally better than that of its traditional education/training counterparts.

Page 23 of 107

eLearning Comparable Table

Company

Ticker

Price % Chg 07/05/2000 Year High Year Low YTD

%Chg LTM

Mkt Cap (Mil)

Enterprise Value*

CONTENT

Revenues**

# of Analysts

Enterprise Value / Revenues

LTM

CY2000E

CY2001E

ABOUT

BOUT

$30.58

$105.75

$19.50

-65.9%

-35.6%

$541.2

$495.2

$26.9

$94.5

$179.3

LTM 18.4

CY2000E 5.2

CY2001E 2.8

6

DigitalThink

DTHK

$35.00

$62.00

$15.00

34.6%

34.6%

$1,151.5

$1,096.5

$7.2

$18.6

$38.7

152.3

59.0

28.3

4

Lightspan

LSPN

$5.81

$25.38

$4.88

-58.5%

-58.5%

$256.9

$155.9

$16.9

$44.3

$62.9

9.2

3.5

2.5

3

Prosoft

POSO

$15.00

$29.88

$2.00

44.6%

471.4%

$286.5

$282.5

$11.7

$18.0

$30.6

24.1

15.7

9.2

3

Provant

POVT

$5.50

$26.00

$2.88

-78.2%

-62.7%

$115.5

$161.5

$211.0

$216.8

$237.3

0.8

0.7

0.7

6

SkillSoft

SKIL

$13.38

$33.50

$8.50

-25.7%

-25.7%

$176.6

$164.6

$4.2

$16.2

$42.5

39.2

10.2

3.9

3

Content Average

-24.9%

53.9%

$421.4

$392.7

40.7

15.7

7.9

Content Average Excluding Digital Think

-36.7%

57.8%

$275.3

$251.9

18.3

7.1

3.8

SERVICES

LTM

CY2000E

Learn2.com

LTWO

$2.13

$9.50

$1.50

-35.2%

-57.5%

$112.2

$108.2

$13.6

$30.0

SmarterKids.com

SKDS

$1.66

$17.13

$1.50

-77.2%

-89.4%

$34.0

$18.0

$5.4

$40.0

VarsityBooks.com

VSTY

$1.44

$13.13

$0.63

-90.8%

-88.0%

$22.3

-$5.7

$10.6

ZapMe!

IZAP

$2.88

$13.75

$1.75

$2.5

Services Average

-66.7%

-72.6%

$126.5

$46.5

-67.5%

-76.9%

$73.7

$41.7

TECHNOLOGY

CY2001E

LTM

CY2000E

CY2001E

8.0

3.6

$91.0

3.3

0.4

0.2

3

$33.5

$55.0

(0.5)

(0.2)

(0.1)

3

$34.6

$116.5

18.6

1.3

0.4

3

7.3

1.3

0.2

LTM

CY2000E

2

LTM

CY2000E

CY2001E

Centra

CTRA

$9.44

$40.38

$5.50

-71.8%

-71.8%

$227.4

$157.4

$8.6

$18.1

$31.0

18.3

8.7

CY2001E 5.1

4

Click2Learn.com

CLKS

$18.06

$23.00

$3.88

62.4%

325.0%

$265.5

$246.5

$34.7

$42.8

$59.7

7.1

5.8

4.1

3

eCollege.com

ECLG

$4.75

$17.50

$2.63

-56.6%

-64.5%

$73.6

$58.6

$4.7

$14.7

$38.9

12.5

4.0

1.5

3

Saba

SABA

$19.00

$41.00

$13.25

-42.4%

-42.4%

$828.4

$808.4

$6.7

$30.6

$67.6

120.7

26.4

12.0

4

SmartForce

SMTF

$46.19

$60.88

$14.50

37.9%

160.2%

$2,249.3

$2,181.3

$197.8

$157.5

$255.0

11.0

13.8

8.6

11

Vcampus

VCMP

$8.31

$19.00

$2.25

166.0%

12.3%

$67.3

$65.3

$11.5

$12.0

$20.8

5.7

5.4

3.1

1

Technology Average

15.9%

53.1%

$618.6

$586.3

29.2

10.7

5.7

Pure Play Average

-25.5%

10.1%

$371.2

$340.2

25.7

9.2

4.6

*Enterprise Value is calculated by taking market value and adding debt and subtracting cash **Morgan Keegan and company estimates

Page 24 of 107

Recent Performance of eLearning Stocks Year-to-date stock performance data of the pure play eLearning companies show us that the content group (down 37%, excluding DigitalThink) and the services group (down 68%) have underperformed both the NASDAQ (down 5%) and eLearning technology group (up 16%). However, the stock performance trends of the technology and content groups are somewhat more flattering when viewed over the last 12 months. These sectors both increased more than 53% and 57%, respectively, over the 12- month period compared to a 47% rise in the NASDAQ. Why have the content and services stocks underperformed technology stocks since the beginning of the year? As we argue in our report, the eLearning technology companies provide the “backbone” of the industry and therefore have been the first group to experience rapid and potentially predictable revenue growth. We believe that once the technology backbone is better established this sector will undergo a dramatic consolidation, leaving three to six leading technology companies. We foresee that these leaders will be able to sustain superior operating margins, and, in turn, superior stock price returns. While we believe that the content and services sectors will see similar consolidation, we think the industry can support many more of these types of companies. In the long run, we believe that stocks in the content and services groups will match or even exceed the performance of the technology group.

Page 25 of 107

RISK FACTORS As with all new industries that have high growth potential, the eLearning industry presents investors with several risk factors that must be understood before making investments in companies within the industry. Below we list the major issues that we believe pose the most threat to eLearning as a viable investment. •

Young Industry in Flux: While learning itself is certainly not a new concept and learning as a forprofit venture has been around for a least a few decades, businesses that attempt to profit from technology-mediated learning have appeared on the scene only within the last few years. As a result, there is a great deal of uncertainty surrounding the industry and its participants. Many traditional education and training companies are making significant changes to their business models to capitalize on the opportunities in eLearning, while many more companies are what we would call “born on the web” and have little to no operating history to While we believe that evaluate. revenue growth rates for many companies • Revenues and Earnings Minimal (or Nonexistent): Many of the within the industry are players in this industry are recent entrants to the market, have very small likely to be significant revenue bases and are generally still losing money. Even the more over the next few years, traditional education and training companies are experiencing upheavals in the vast majority are their revenue streams as they make the transition to an Internet-based still one to two years model. While we believe that revenue growth rates for many companies away from profitability within the industry are likely to be significant over the next few years, the at the very minimum. vast majority are still one to two years away from profitability at the very minimum.

•

Confusion Among Customers: Although few investors (or even analysts) would claim to have a solid understanding of the dynamics at play in the eLearning industry, the investment community actually has been more exposed to information about the overall marketplace than many of the customers that vendors are targeting. There seems to be widespread confusion about the various products and services that vendors are offering. While many companies claim to be a “one-stop-shop” for learning needs, reality often falls somewhere short of that promise. We believe that many potential buyers are holding off on making major purchases until they have had a chance to sort through the hype and gain an understanding of what vendors really have to offer.

•

Technology Ahead of Content: The technology involved in eLearning has made dramatic strides over the past few years. The content that is delivered via the technology, however, is still several steps behind in terms of sophistication and relevance to knowledge workers’ needs. While we look for the coming years to deliver a mature content development market in which a premium is placed on highquality, specialized material, the content offerings of today are quite simplistic in comparison, representing more of a commodity-type good. We believe that the biggest risk in delivering this type of content over a sophisticated technology-based platform is that users may become disillusioned with the concept of eLearning before it has had a chance to mature into the powerful tool that we believe it can be.

•

Resistance to Using Technology in Learning: Although we believe that this is less of an issue in the corporate world than in the academic one, both markets face reluctance by certain groups of people. In academia, for example, there has been resistance from some members of college faculties, as the advent of technology-mediated instruction introduces uncertainties into the professor’s traditional role. Likewise, in the corporate world, trainers may see their job as being usurped by enterprise learning systems that do the work of organizing and delivering training. While we believe that the benefits of eLearning as a supplement to traditional learning methods are becoming more evident with the passing months, we do recognize that there will always be opposition from some camps to using technology in the pursuit of learning.

Page 26 of 107

•

Lack of eLearning Standards: Earlier in the report, we presented a detailed review of why we believe that the development and adoption of a set of standards for the eLearning world is so important. Here we feel that it is prudent to restate the fact that this body of standards is still in the development stage and even upon completion is not guaranteed acceptance by all members of the industry. We believe that customers We believe that will only develop the comfort needed to make significant eLearning customers will only purchases when they are free from the concern that a certain technology develop the comfort or library of content will be rendered obsolete with the next product needed to make release. We believe that only the industry-wide adoption of a set of significant eLearning standards, which create interoperability between tools and content, will purchases when they create this assurance. are free from the concern that a certain • Legal Issues: As learning is essentially the transfer of knowledge technology or library of from one person to another, there will always be issues of intellectual content will be rendered property involved in the process of delivering instruction. Colleges and obsolete with the next universities face this problem in dealing with the research products of product release. faculty members, and eLearning vendors will have to deal with it as well. Particularly when repurposing the instructional content of a professor who is employed by a college or university for an eLearning medium, companies will have to deal with the issue of who owns the rights to the content – the professor, his employer, or the eLearning company. As eLearning becomes more prevalent and begins to draw more content from recognized “experts”, the issue of intellectual property is likely to be raised often.

Page 27 of 107

KEY TRENDS AND SIGNPOSTS FOR INVESTING IN THE ELEARNING INDUSTRY •

Companies based on an eLearning model will be more successful than their counterparts in the traditional education and training industries. We believe that using networked technology to deliver or supplement learning resources is a fundamentally more effective way to educate and train citizens of the 21st century. The characteristics that we have used several times to describe eLearning – scalability, accessibility and timeliness – will drive its adoption as a mission-critical component of business and education. We continue to assert that there will always be a role for traditional learning methods, but only as one component of a more complete program that includes networked learning resources.

•

Capital will continue to flow into the learning market. We strongly believe that investors are beginning to latch on to the idea of learning as a growth industry. To that end, we look for private investments in the education and training sector We look for private (including non-eLearning companies) to continue to grow in 2000, investments in the ultimately quadrupling the dollars invested in 1999. This capital will serve education and training as the fertilizer needed for smaller companies to grow into the larger sector (including noncompanies that will look to the public markets for additional infusions over eLearning companies) the coming years. We believe that the public comp group will be to continue to grow in significantly larger in a year’s time. 2000, ultimately quadrupling the dollars • Having a recognizable brand name will be more important than invested in 1999. being first to market. While some have touted being first to market as the best indicator of long-term success, we do not necessarily believe this is so. In some cases, we believe being an early entrant to the market may actually be a hindrance, as a user’s early experiences with eLearning may not live up to all the hype. The factor that we do believe will be crucial to a company’s long-term viability is establishing (or aligning with) a recognizable brand name. We believe that for some companies, being first to market will result in becoming a known brand name, but other factors are also likely to come into play in determining who is to become the Yahoo! of the eLearning industry.

•

Alliances and partnerships will continue to form, but with more meaningful results. And speaking of Yahoo!, the trend in the eLearning industry, as in many other sectors of the “new” economy, is to announce as many alliances and partnership agreements with big-name companies as possible. This, in essence, is an attempt to establish a brand name (or at least to bask in the reflected glory of someone else’s). While a handful of these announcements may actually have some significance, we chalk most of them up to an attempt at generating The larger technology hype. Rare (and probably nonexistent) is the “exclusive” companies will play a role in agreement with any major technology company. However, we the growth of the eLearning believe that as the players with a clear edge on the competition industry, and we believe it begin to emerge from the pack, we will see select cases of will be through relationships eLearning companies formalizing meaningful agreements with with companies that have larger brand-name companies. The larger technology companies already demonstrated success will play a role in the growth of the eLearning industry, and we in the field. believe it will be through relationships with companies that have already demonstrated success in the field.

Page 28 of 107

•

The next several years will be marked by rapid consolidation of the industry. In any one niche of the eLearning industry today, there are at least a half-dozen companies that each want to claim the market for itself. Many of these companies will simply disappear into the far-reaches of cyberspace, while others will join up with partners or the competition in mergers designed to increase vertical or horizontal market share. Again, we would emphasize that the established technology companies are not likely to sit idly by while a few young upstarts take control of a rapidly growing industry, leading us to believe that the Ciscos and IBMs of the world will be active participants in the M&A frenzy to come.

•

Content will eventually be crowned king. As much as we hate to use the phrase, we do believe that five years out, content will indeed be king. The field of companies offering eLearning’s technological backbone will have been whittled down to just a few players who are consistent and effective innovators. The services field is likely to undergo a similar (if less dramatic) transformation. In contrast, we believe that there will be ample room in the field of content creation for a number of providers developing highly specialized content. No longer will end-users be looking for a $19.95 version of “Word Processors for Dummies;” buyers will instead put a premium on content that truly addresses the needs of their organizations. Because we believe that content in the not-too-distant future will be delivered in a learning object format – capable of being sold for uses in a multitude of contexts – the content development sector will likely be much more profitable than it is today.

•

We will see an overall maturation of the eLearning industry. In our opinion, many of the current ailments of the eLearning industry will be cured with the simple passage of time. As with any emerging industry, there are too many players chasing the same goal in too many different ways. The market will determine The market will determine who will succeed and who will end up as just a footnote in sellwho will succeed and who side analysts’ industry reports. We believe that as standards will end up as just a footnote begin to take hold, buyers will gain the confidence to make in sell-side analysts’ industry major purchasing decisions without fear of near-term reports. obsolescence. It will be at this point that the eLearning industry will gain widespread acceptance and will experience the growth we believe is possible.

Page 29 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 30 of 107

SECTION II:

A TOPOLOGY OF THE ELEARNING INDUSTRY In this section: •

A (brief) history of the eLearning industry

•

Private equity investments in the eLearning industry

•

eLearning business models characterized

•

Descriptions of the companies that made our “pure play” list

Page 31 of 107

A BRIEF HISTORY: THE FORMATIVE YEARS OF THE ELEARNING INDUSTRY The eLearning industry today is still quite small in terms of revenues (and practically non-existent in terms of profits), but is populated with literally hundreds of companies already and more are jumping into the fray everyday. As we might expect from any industry with an “e” prefix, the eLearning industry is still very immature and highly fragmented. With a tiny public comp group and a mass of private companies each wanting to take a place in the public markets, the next several years will see more dramatic changes in the industry landscape, including • • • •

growing private investments, more IPOs, increased partnership and alliance activity followed by formal mergers and acquisitions, and a shake-out of the players that got edged out by competitors.

The formative years of the eLearning company will be marked by a great deal of change for all the players involved.

What the industry will look like in a few years after all this has taken place is anybody’s guess, but as the old saying goes, the only thing certain is change. The formative years of the eLearning company will be marked by a great deal of change for all the players involved. Our goal is to furnish the information that will help investors capitalize on this change, regardless of which form it takes.

First of all, though, where did all these eLearning companies come from? While some began as traditional learning companies that adopted a business model with more relevance to the digital age, many others began in the nursery of the net economy – the proverbial garage (or dorm room or living room). Below we’ll review each type and give our analysis of how each will fit into the eLearning marketplace.

Teaching Old Dogs New Tricks Several of the companies that we include in the eLearning group today emerged from the more traditional education and training sectors. While the core competency of these companies (educating people) did not change with the advent of the Internet age, their methods of reaching their customers had to if they were to address issues such as scalability, access, and timeliness. The traditional model of educating people via a live instructor lacked all three of these characteristics; an individual can only teach so many people at a time, is not available anytime and anywhere to the We believe that only learner, and may not be up to date with the most recent information. eLearning can be scaled Likewise, even a technology-based delivery medium like a CD-ROM does almost infinitely, is not quite meet these standards, as it must be physically distributed to the user available anywhere (who may be on the other side of the world) and is rendered obsolete when there is an Internet any new information surfaces. We believe that only eLearning fits the three connection, and can be characteristics: (1) It can be scaled almost infinitely, (2) it is available continually updated anywhere there is an Internet connection, and (3) it can be continually with new information updated with new information relevant to the learner. relevant to the learner. The two companies we would give as examples of a successful shift from a traditional education or training business model to an eLearning business model are Apollo Group and SmartForce.

Page 32 of 107

Apollo Group (APOL): Apollo Group’s largest subsidiary, the University of Phoenix (UoP), became the first accredited for-profit university in the U.S. targeting working adults in 1978. Today it is one of the largest regionally accredited private universities in the U.S., enrolling more than 74,000 students. Realizing that its target market of working adults was growing busier by the year and consequently less able to attend classes in person, UoP created an online arm of the school in 1989. The UoP courses offered online are in a shared, asynchronous format, meaning that students are in a “class” with other students and have a common professor, but can log on anytime to receive and complete homework assignments or post messages to the rest of the class. Online enrollments at UoP have increased at a much more rapid pace than traditional enrollments in recent years (up 43% from the end of 1998 to the end of 1999), and currently reach more than 13,800 students. SmartForce (SMTF): In the training sector, we believe that SmartForce has undergone one of the most dramatic business model shifts, including a name change from its old CBT Systems. The company had long had one of the largest libraries of internally-developed IT training titles. In the old model, SmartForce rented its courses on a yearly basis and disseminated these via the customer’s internal network. For example, a customer would decide at the beginning of the year which titles it wanted access to for the year and would not have access to other titles until the contract was up the following year. In October, however, SmartForce announced a dramatic shift when it unveiled its fully integrated eLearning solution delivered on an Internet platform. The platform allows SmartForce to offer content in a variety of formats developed by itself and others and to tailor that information to individual learners.

Born-on-the-Web Startups In contrast to companies such as Apollo Group and SmartForce, which each had to undergo fairly dramatic transformations in their old business models to meet the learning needs of the 21st century, the vast majority of companies that fall under the heading of eLearning are relative newcomers to the scene. Being a newbie in the world of eLearning has both its ups and downs.

The vast majority of companies that fall under the heading of eLearning are relative newcomers to the scene.

•

Advantages: Start-up eLearning companies lack the baggage from the old world; they’re more nimble and are free to start from scratch in their attempt to leverage the Internet in the learning space. There are a multitude of niches to be exploited, and we believe that many of these start-ups have the potential to essentially create something from nothing – that is, get customers to spend money on products and services that have never been available before.

•

Disadvantages: The disadvantage, of course, is simply lack of credibility and resources. Whereas the more traditional companies may already have a well-recognized name, or at least a fairly established revenue stream that can help fund new ventures, start-ups have to fight just to be heard in the midst of the chaos that characterizes the eLearning marketplace today. Out of the hundreds of companies we have listed at the back of this report, it is highly unlikely that most people (even within the education and training industries) have heard of more than just a few of them. Because the Internet is such a natural medium for addressing the needs of the learning industry, and because Internet companies have been relatively easy to launch, many companies have attacked the same small niches, making it difficult to find sector leaders.

Page 33 of 107

Venture Capitalists Smell the Opportunities Eduventures.com reported that $6 billion of private capital has been invested in the education industry since 1990. Close to $1 billion of that was raised in the first quarter of 2000 alone.

The positive aspects of eLearning business models seem to be outweighing the negative ones in the eyes of investors, though, because venture capital investments have skyrocketed over the last couple of years. Eduventures.com, a company that aggregates news and research pertaining to the education industry, reported that $6 billion of private capital has been invested in the education industry since 1990. Close to $1 billion of that ($931 million, to be exact) was raised in the first quarter of 2000 alone. The firm went on to predict that investments in 2000 will grow to reach $4 billion, up from $2.6 billion in 1999.

Chart 4

Private Investments in Education $4,000 $4,000 $2,567

Millions

$3,000

$2,000 $824

$1,000 $585

$496 $40

$10

$21

$100

$477

$149

19 99 F 20 00 F

19 98

19 97

19 96

19 95

19 94

19 93

19 92

19 91

19 90

$0

Source: Eduventures.com

Of the first quarter’s $931 million in investments, approximately 64% went to eLearning companies, seemingly indicating that investors see the true value proposition to be in the intersection of education and the Internet.

Page 34 of 107

Chart 5

Q1:2000 Private Investments in Education Companies (by Type)

36%

64%

eLearning Companies

Non-eLearning Companies

Source: Eduventures.com

This increase in the capital needed to get ideas off the ground and into full-fledged operations has also driven an increase in education IPOs. Whereas IPOs of education companies were in the single digits for the past three years, there were seven education IPOs in the first quarter of 2000, and the pace only seems to be accelerating.

Chart 6

Education Company IPOs

33

35 30

No. of IPOs

25 20 15 8 10 5

6

1997

1998

5 0

Source: Eduventures.com

Page 35 of 107

1999

2000F

Performance of recent IPOs has been somewhat spotty, as the following table illustrates. During a certain short period around the beginning of February, the eLearning IPO market benefited from a little “irrational exuberance” as eLearning was viewed as a hot, up-and-coming sector and investors went looking for any entry into the group. Given the pullback in the market since that time period, we expect that investors will focus more on company fundamentals rather than dumping money into a stock that is simply reflecting the bright outlook of the eLearning industry as a whole. Given the larger public comp group that we expect to exist by this time next year, we believe that investors will have a much greater selection of eLearning stocks from which to choose.

Recent eLearning IPOs

Company Name Saba Software DigitalThink, Inc. VarsityBooks.com, Inc. The Lightspan Partnership Centra Software, Inc. SkillSoft Corporation eCollege.com SmarterKids.com ZapMe! Scientific Learning Corp. Student Advantage, Inc. Companies In Registration: Docent MindLeaders.com, Inc Element K

Filing Date

Offering Size

Filing Range

SABA DTHK VSTY LSPN CTRA SKIL ECLG SKDS IZAP SCIL STAD

01/31/2000 12/09/1999 10/14/1999 11/01/1999 10/27/1999 09/10/1999 05/13/1999 09/09/1999 08/05/1999 06/10/1998 04/07/1999

4,000,000 4,400,000 4,075,000 7,500,000 5,000,000 3,100,000 5,000,000 4,500,000 9,000,000 2,300,000 6,000,000

$12-$14 $10-$12 $12-$14 $10-$12 $8-$10 $12-$14 $8-$10 $13-$15 $10-$12 $14-$16 $10-$12

DCNT MDLR LMNK

04/11/2000 09/17/1999 05/09/2000

Ticker

Offer Price $ $ $ $ $ $ $ $ $ $ $

15.00 14.00 10.00 12.00 14.00 14.00 11.00 14.00 11.00 16.00 8.00

Offer Date 04/07/2000 02/25/2000 02/15/2000 02/10/2000 02/03/2000 02/01/2000 12/14/1999 11/22/1999 10/19/1999 07/21/1999 06/17/1999

Price % Close on 07/05/2000 Return Debut $ $ $ $ $ $ $ $ $ $ $

19.00 35.00 1.44 5.81 9.44 13.38 4.75 1.66 2.88 21.81 7.13

26.7% 150.0% -85.6% -51.6% -32.6% -4.5% -56.8% -88.2% -73.9% 36.3% -10.9%

$ $ $ $ $ $ $ $ $ $ $

33.00 29.00 9.88 13.50 33.25 18.00 14.25 14.00 9.50 17.94 8.00

% Return on Debut 120.0% 107.1% -1.3% 12.5% 137.5% 28.6% 29.5% 0.0% -13.6% 12.1% 0.0%

Offering Amount $ $ $ $ $ $ $ $ $ $ $

60,000,000 61,600,000 40,750,000 90,000,000 70,000,000 43,400,000 55,000,000 63,000,000 99,000,000 36,800,000 48,000,000

$ 80,000,000 $ 40,300,000 $ 75,000,000

Page 36 of 107

THE BUSINESS MODELS OF ELEARNING For as many eLearning companies as exist, there are almost as many business models. The companies within the eLearning industry, as with many industries in the net economy, defy traditional categorization methodology. Do we characterize them . . . • • •

by the products or services they provide, by how they make money, or by the markets they serve?

The truth is that using any one of these characterizations alone would still leave vast holes in the picture of almost any company within the eLearning market. In addition, whatever categorization method we use today is likely to be invalid in the near future, as business models are continually (and quickly) evolving in this nascent industry. As companies seek to define their territory, many are trying to stake out fairly large areas in the marketplace by claiming to offer everything (content, services and technology) that everybody (academic, corporate and consumer markets) needs. While we understand the desire to not close any doors to new business while companies are still in the process of developing their offerings, we also believe that these claims of being a “one-stop shop” are, for now, simply confusing the marketplace and causing hesitancy on the part of purchasers. Instead of using a traditional method of simply categorizing the companies by “what they do” alone (which is actually not simple at all), we think that it is more instructive to plot the various characteristics and competencies of individual companies on a table that allows description by more than one variable. This table uses three key variables, and, we believe, will enable us to provide the most complete description of companies within this industry. These variables are • • •

Markets Served: Academic, corporate and consumer Revenue Model: Contracts, pay-per-use, and ads/sponsors Core Offering: Content, services, and technology • Types of Content: IT, business skills, lifestyle, academic and custom • Types of Services: Content distribution, consulting, implementation, eCommerce, and community portals • Types of Technology: Learning management tool, content creation tool, delivery platform and collaboration tool

The matrix that includes all of the various alternatives of these variables looks like this.

Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portals

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

The elements of this matrix are described in detail on the following pages. In the sections that follow the description of the matrix, we give brief descriptions of all the public companies that we believe represent pure plays in the eLearning industry. Within each company’s matrix, we have highlighted the company’s primary market, revenue model, and core offering in dark gray. The lighter gray squares represent any areas that we believe the company is focusing on or offering as well, but to a lesser extent.

Page 37 of 107

By mapping an eLearning company on a matrix like this, we are able to illustrate how it might fall into more than one category. Below, we expand upon the definitions of these variables and their various components in order to provide a clearer picture of the competitive landscape.

Market Served In Section III we will examine the various markets that the eLearning industry serves in great detail. As a preview, though, purchasers of eLearning include the following markets. • • •

Academic: Includes people involved in formal education, from kids just starting out in preschool to older adults going back to college and everything in between. Corporate: Corporate customers typically spend money on eLearning for employee training purposes, but they are increasingly focusing their dollars on other groups within their spheres of influence, such as customers and suppliers. Consumer: While the consumer market includes what we might deem “lifelong learners”, or people who want to take a quick class on wine selection or building a doghouse, this is a fairly small component of the (paying) consumer market. The largest part is made up of people taking continuing education courses. Although some might argue that these learners should go in the corporate category because of the work-related nature of their learning, we would counter that many of these people are professionals who bear the responsibility (and cost in many cases) of their continuing education.

Revenue Model As with business models in the eLearning industry, there are numerous different currently being used. Pricing itself varies widely across competitors, as is often the case in an immature market. We believe that as the market matures, we will begin to see some standardization in pricing and revenue models. We have broken the types of revenue models into three main categories. • • •

revenue models that are We believe that as the market matures, we will begin to see some standardization in pricing and revenue models.

Contracts: In this category we include any sort of long-term agreement, whether it be a one-year subscription to all the courses you want, tuition for an online degree program, or some type of service agreement. Pay-per-use: As the name implies, this category represents one-time purchases of products or services. Ads/Sponsors: For companies who are in the business of providing free content or services, advertising or other types of sponsorship relationships are usually the main cash generator.

Core Offering This is the area where definitions and categories really start to get hazy, as many companies could arguably be put into any of the three categories of content, services, or technology. However, for purposes of organization we will at least attempt to put each public company into the one main category that best describes the company’s core offering, while also specifying through the use of our eLearning Matrix any other categories in which it offers products or services.

Page 38 of 107

•

Content: In the content category we include companies who actually produce and publish their own content, whether it be text-based, or some type of multimedia content. If the company’s main business is the development of content, it will fall into this category. We break the content category down into five types. • Information Technology (IT): IT includes any type of technical instruction. • Business Skills: This includes “soft skills” such as management and customer relations, but also “harder” skills such as finance or specific instruction on a business system. • Lifestyle: Lifestyle content appeals more to the “lifelong learner” and includes a wide range of topics ranging from Tai Chi to napkin folding that are typically not work-related (unless you’re Martha Stewart). • Academic: This is simply content that is of an academic nature or intended for students in an academic program. • Custom: Many companies will custom design content for certain applications or processes.

•

Services: This broad “catch-all” category can be roughly broken down into the following five areas. • Content Distribution: This includes both learning portals and other types of content aggregators, such as online universities, who are distributing content that comes from an external source (e.g., traditional publishers, eLearning publishers, university professors, subject matter experts). Companies that primarily distribute their own internally-produced content would not fall into this category. • Consulting: This includes any sort of advisement services related to developing or using an eLearning solution. • Implementation: These companies focus on the physical integration of learning systems into a school or business. • eCommerce: This category includes companies that sell learning-related products (either B2B or B2C) on websites accessible to the public (i.e., not on extranets). • Community Portal: This indicates a web site that serves as a destination site for a group of people with interests or other characteristics in common. A community portal may or may not provide formal learning courses, but is likely to provide information and other resources of interest to a common group.

•

Technology: Companies that fall into this area may be providing content or some type of service, but it is their technological tools or platforms that constitute their core offering and give them their competitive advantage. We break the technology category into these four areas. • Learning Management (Tool) System (LMS): An LMS integrates and adapts the overall learning initiative (both technology- and non-technology-based learning) for the dynamic student. • Content Creation Tool: This type of tool allows end-users to develop content on their own. • Delivery Platform: A delivery platform provides a customized, technology-based (typically browser-based) interface for learners to access eLearning content and services. As eLearning technology matures, we foresee a melding together of the learning management tool and the delivery platform into an integrated learning system (ILS), but at this point, we believe that many delivery platforms are not sophisticated enough to be considered as a full-blown ILS. • Collaboration Tool: A collaboration tool allows real-time interaction between learners and instructors via the Internet in the setting of a classroom or meeting. This type of tool may or may not have voice over IP capabilities.

Page 39 of 107

We would again emphasize that very few of the companies that we believe comprise the eLearning industry fit neatly into one category, which is the reason for our matrix approach to characterizing them. The depictions of these companies are certainly subject to our interpretation of We emphasize that available information and may not completely represent all the attributes of a very few of the company. However, we believe that this is the best way to provide a companies that we standardized comparison of the companies within the eLearning industry. believe comprise the eLearning industry “Pure Play” eLearning Companies fit neatly into one category, which is In the following pages we show the companies we consider to be “pure play” the reason for our eLearning companies organized by the companies’ core offerings. We have matrix approach to categorized each company by the market served, the revenue model and the characterizing them. core offering. We then further sub-classified each company’s core offering according to the definitions listed above. Again, within each company’s matrix, we have highlighted the company’s primary market, revenue model, and core offering in dark gray. The lighter gray squares represent any areas that we believe the company is focusing on or offering as well, but to a lesser extent. Finally, we provided the website of each company to facilitate further research. (Note: At the end of this report, we have also provided a classification of some 300 private companies.)

Content Companies ABOUT (BOUT) www.about.com ABOUT provides highly-targeted content on a wide range of topics that are directed toward individual consumers. The network includes more than 700 topic-specific sites, each overseen by a professional guide. Each site provides Internet link directories, original content, community features, commerce opportunities, and how-to's. The ABOUT network is organized into 36 channels, covering more than 50,000 subjects with more than 1 million links to the Internet. The company has partnership agreements with other web sites that drive traffic to the ABOUT web site. Revenues are generated through advertising and electronic commerce. ABOUT Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portals

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

DigitalThink, Inc. (DTHK) www.digitalthink.com DigitalThink provides business organizations with more than 180 proprietary courses via a hosted eLearning environment that consists of a content delivery system and learning management elements such as course enrollment options, a tracking and reporting system, tutoring, collaboration, and assessments. These offerings are targeted to achieving three types of learning goals: workforce transformation (achieving organizational learning objectives), sales performance (either for internal or external sales channels), and customer advocacy (providing eLearning to customers).

Page 40 of 107

DIGITALTHINK Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Lightspan, Inc. (LSPN) www.lightspan.com Lightspan develops curriculum-based educational software and Internet products and services for students to use both in school and at home. The company’s software products for students in kindergarten through eighth grade cover core curriculum areas, such as language arts, reading and math, and is sold exclusively to schools and school districts. An online subscription service also provides curriculum-based content that is correlated to state academic standards, and includes tools to assist students in using the Internet to learn and communicate, as well as assessment tools for measuring student progress against standards. Lightspan also develops software for use by under-prepared college students to address deficient math and writing skills.

LIGHTSPAN Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

ProsoftTraining.com (POSO) www.prosofttraining.com Prosoft develops courseware and provides instruction focused on vendor-neutral Internet and Linux skills. The courses that the company develops are structured to prepare learners to participate in the company’s Certified Internet Webmaster program, which is a certification program built around the job roles of Internet professionals. The main distribution channel for Prosoft’s content is its worldwide network of authorized training centers and academic institutions, but the company also licenses its content for distribution by eLearning vendors and major publishers. Instruction is delivered both in person, by the company’s internal instructors and by certified instructors at authorized training centers, and via an online learning environment.

Page 41 of 107

PROSOFTTRAINING.COM Market Served Academic Revenue Model Contracts Core Offering

Content IT Business Skills Lifestyle Academic Custom

Corporate Pay-per-use

Consumer Ads/Sponsors

Services Content Distribution Consulting Implementation eCommerce Community Portals

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Provant (POVT) www.provant.com Provant develops and provides content and services geared toward performance improvement training. The company’s main areas of expertise include subjects such as leadership development, human resource issues, sales productivity, customer service, and career and organizational development. Provant delivers its solutions via a range of methods including live instructors, audio/visual, CD-ROM, print and the Web, for which the company is increasingly converting its content today. The company also provides customized web-based learning management systems designed to automate the enrollment, tracking and measurement functions of an organization’s learning initiatives.

PROVANT Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portals

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

SkillSoft Corporation (SKIL) www.skillsoft.com Working in cooperation with outside content developers, SkillSoft assembles courses focused on professional effectiveness (e.g., management, leadership, communication, etc.) and business expertise (e.g., finance, sales, operations, etc.). The company’s library now contains approximately 275 such courses that are deployed to corporate users via intranets or the Internet. SkillSoft’s courses include not only text-based instruction, but also audio instruction, practice exercises, assessment components, behavior modeling, and simulations. Other services deployed through the company’s web-based architecture include online job aids, online mentoring, intelligent search capabilities, and access to a wider array of web-based learning resources.

Page 42 of 107

SKILLSOFT Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portals

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Service Companies Learn2.com, Inc. (LTWO) www.learn2.com Learn2.com provides eLearning products and services to both individuals and corporate customers. The company’s website serves as a portal into its catalog of online learning titles. The content within the portal is developed and owned almost entirely by the company and focuses on life skills, technology skills, and workplace-related skills. The company also sells CD-ROM and videotape-based tutorials through catalogs, technology retailers, its direct sales force, resellers, and distributors. For the corporate customer, the company works to develop custom eLearning environments that are hosted by Learn2.com and are delivered and managed by its proprietary eLearning environment.

LEARN2.COM Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

SmarterKids.com, Inc. (SKDS) www.smarterkids.com SmarterKids.com is an online retailer of educational books, toys, games, and software for children ages 0 to 15. Beyond simply selling products, though, Smarterkids.com also provides educational content on its web site to help parents choose the right materials for their kids. Product reviews, learning style surveys, and personalized product recommendations based on confidential educational profiles of kids help purchasers make informed decisions. The site links teacher-reviewed toys, games, books, software, and hands-on activities through a patent-pending evaluation process.

Page 43 of 107

SMARTERKIDS.COM Market Served Academic Revenue Model Contracts Core Offering

Content IT Business Skills Lifestyle Academic Custom

Corporate Pay-per-use

Consumer Ads/Sponsors

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

VarsityBooks.com (VSTY) www.varsitybooks.com VarsityBooks.com is an online retailer of new college textbooks. Through this eCommerce avenue, the company has established a large customer base in the college market, which it uses to attract marketing agreements with other businesses that target the college demographic. In addition to textbook sales, the company also offers general interest books, scholarship opportunities, free e-mail, and job and career information. VarsityBooks.com has recruited a large network of student representatives to increase awareness of the company’s brand on college campuses. VARSITYBOOKS.COM Market Served Academic Revenue Model Contracts Core Offering

Content IT Business Skills Lifestyle Academic Custom

Corporate Pay-per-use

Consumer Ads/Sponsors

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

ZapMe! (IZAP) www.zapme.com ZapMe! provides computer labs with “always on” Internet connections to schools at no cost. The company’s package includes from 5 to 15 high-end multimedia PCs with monitors, a satellite-ready computer server, a laser printer, and broadband access to the Internet. The company provides a proprietary browser-based interface that links to thousands of pre-selected websites, as well as other content and services, including productivity applications such as word processors, spreadsheets and presentation tools. ZapMe!’s proprietary interface also includes school-related e-commerce and school fundraising opportunities. Funding for this system, which is free to schools, is provided by corporate sponsorships and e-commerce relationships.

Page 44 of 107

ZAPME! Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Technology Companies Centra Software (CTRA) www.centra.com Centra’s core offering is software that provides the Internet infrastructure for live collaboration. Components of the software include voice-over-IP capability (web browser-based conference call), realtime data exchange, application sharing and shared workspaces. In addition to learning, Centra’s collaboration software can be used for selling, marketing, and other types of meetings. The company offers several levels of service, from an enterprise-level application designed to support large numbers of users with multiple functionalities, to a free service designed to provide base-level services to smaller groups of users without having to rely on technical assistance.

CENTRA SOFTWARE Market Served Academic Revenue Model Contracts Core Offering

Content IT Business Skills Lifestyle Academic Custom

Corporate Pay-per-use

Consumer Ads/Sponsors

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Click2learn.com, Inc. (CLKS) www.click2learn.com Click2learn.com provides corporations with a complete “virtual university” platform on which learning resources are available. The company’s hosted offering includes an extensive catalog of third-party eLearning courseware and other learning products, as well as a learning management system, a suite of site management tools, and authoring and publishing tools, all accessible in a browser-based environment. For corporate customers who want a “behind-the-firewall” implementation, the company can customize and implement an enterprise eLearning solution that is based on its proprietary learning management and skills assessment system. The company also has a services group using a rapid content development engine that allows custom content to be quickly developed.

Page 45 of 107

CLICK2LEARN.COM Market Served Academic Revenue Model Contracts Core Offering

Content IT Business Skills Lifestyle Academic Custom

Corporate Pay-per-use

Consumer Ads/Sponsors

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

eCollege.com (ECLG) www.ecollege.com eCollege.com uses its proprietary software to build and host online campuses, courses, and course supplements primarily for the academic market, but also for the corporate market to a lesser degree. The company works with faculty and staff members to convert traditional courses into an online format using automated authoring tools. The company can also provide integration of existing back-office systems with the online campus, creating a web-based front-end to the entire system.

ECOLLEGE.COM Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Saba Software (SABA) www.saba.com Saba licenses software that allows organizations to offer a wide array of third-party learning content to users. The software also manages the learning process, both in its online and offline manifestations, by assessing learning needs, selecting and purchasing learning materials, and tracking the progress of individual learners and the organization as a whole. Saba also offers a platform for third-party learning providers (content vendors) to develop, market, sell and distribute learning materials to end-users. The company also offers strategic consulting and implementation services for both end-users and content vendors.

Page 46 of 107

SABA SOFTWARE Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

SmartForce (SMTF) www.smartforce.com SmartForce’s main offering is a fully-hosted Internet platform for corporate learning that provides access to the company’s library of more than 1,300 courses on business and IT subjects. Also included in the company’s integrated eLearning solution is access to online seminars and mentoring, customer-created content, news articles, white papers, case studies, peer-to-peer collaboration, assessments, and progress tracking. The company strives to offer continuously-updated material that is personalized to the learner using mass customization technology.

SMARTFORCE Market Served Revenue Model Core Offering

Academic Contracts

Corporate Pay-per-use

Consumer Ads/Sponsors

Content IT Business Skills Lifestyle Academic Custom

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning Mgmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

VCampus Corporation (VCMP) www.vcampus.com VCampus develops and hosts eLearning environments for both corporate and academic customers that give access to the company’s library of online courses. The infrastructure of the eLearning environment consists of a proprietary courseware delivery platform that has both content creation and learning management capabilities. The company’s library of courseware is a compilation of acquired material, internally-developed courses, and content supplied through relationships with third-party suppliers. VCAM PUS CO RPORATION Academic M arket Served Contracts Revenue M odel Core Offering

Content IT Business Skills Lifestyle Academic Custom

Corporate Pay-per-use

Consumer Ads/Sponsors

Services Content Distribution Consulting Implementation eCommerce Community Portal

Technology Learning M gmt. Tool Content Creation Tool Delivery Platform Collaboration Tool

Page 47 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 48 of 107

SECTION III:

THE LEARNING MARKET In this section: •

In-depth discussions of the academic, corporate and consumer learning markets

•

Examples of eLearning companies targeting the various sectors of the learning markets

Page 49 of 107

THE ACADEMIC MARKET The academic market has a number of very different sectors, making it difficult to describe in general terms, but one thing is certain: It is big. More than a quarter of the U.S. population is involved in formal education in some way. In the fall of 1999, about 68.1 million persons were enrolled in American schools and colleges. About 3.8 million were employed as elementary and secondary school teachers and as college faculty. Other professional, administrative, and support staff of educational institutions numbered 4.2 million. Thus about 76 million people were involved, directly or indirectly, in providing or receiving formal education. In a nation with a population of about 273 million, more than 1 out of every 4 persons participated in formal education. -Digest of Education Statistics 1999 National Center for Education Statistics U.S. Department of Education To put things into historical perspective, we would note that the above figure for total enrollment in schools and colleges (68.1 million) is actually 19% higher than it was just 15 years ago in 1985. While part of this growth is attributable to growing populations, the rest (particularly in higher education) is a result of higher rates of participation in formal education. In In 1998, total 1998 (the most recent year for which there is estimated data), total expenditures for all expenditures for all educational institutions were $618.6 billion. As a educational percentage of GDP, educational expenditures have held steady at 7.3% institutions were (representing the second largest component of GDP) for about the past ten $618.6 billion. years, but the dollar figure has grown by over 42% since 1991.

Chart 7

U.S. Expenditures on Public and Private Education $700.0

7.4%

$600.0

7.2%

$500.0

7.0% 6.8%

$400.0

6.6% $300.0

6.4%

$200.0

6.2% 6.0%

$-

5.8% -8 19 1 81 -8 19 2 82 -8 19 3 83 -8 19 4 84 -8 19 5 85 -8 19 6 86 -8 19 7 87 -8 19 8 88 -8 19 9 89 -9 19 0 90 -9 19 1 91 -9 19 2 92 -9 19 3 93 -9 19 4 94 -9 19 5 95 -9 19 96 6 -9 7 19 97 (P) -9 8 (E )

$100.0

19 80

(Billions of dollars)

(Total and as a percentage of total GDP)

Total expenditures Source: National Center for Education Statistics

Page 50 of 107

As % of GDP

Pre-Primary Education Before we launch into an overview of the K-12 and higher ed markets, we want first to note the growth trend in the pre-primary education markets. The enrollment percentage of 3- and 4-year-olds in school has grown from just under 11% in 1965 to over 52% in 1998. Although the overall market is smaller and data harder to come by, we believe that this dramatic growth (which is considerably higher than for any other age groups) illustrates the growing importance that is placed on education in America. A study conducted by the RAND Institute in 1999 suggested that kids who participate in “high-quality early childhood programs” are likely to grow up to earn 60% more than their peers who do not. States also have an incentive to provide pre-primary education for their residents; the same RAND study indicates that for every $1 invested in early childhood development, $7 is saved in the cost of remedial education, welfare, and incarceration. Therefore, whether you look at it from the reward-seeking or risk-avoiding perspective, it appears that the earlier kids start learning, the better off they’ll be later in life. Certainly part of the growth in pre-primary enrollments is a result of an increase in the number of working mothers. However, we believe that it is also driven by parents’ desire to give their children a leg up on all those other tots with whom they’ll be competing for admission to college in 15 years and for jobs in 20 years. Given this awareness, we expect to see continued growth in the amount of money parents are shelling out not only on formal pre-primary education, but also on materials (both traditional and technology-based) that they can use with their child before even reaching school-age.

ELEARNING IN ACTION

SmarterKids.com (SKDS), an online retailer of educational materials, appeals to the parent who wants to provide her child (from birth to age 15) with learning opportunities before the child reaches school or (for older kids) in addition to what they get in school. The site doesn’t just sell books and other materials, but aids the parent in making selections based on product reviews and confidential profiles that parents enter based on their kids’ age, test scores, learning styles, etc. We believe that this approach is particularly appealing to the parents of very young children who face an abundance of choices, but who are not yet receiving guidance from their child’s school about what type of materials are appropriate.

Primary and Secondary Schools Current Size: Since 1985, primary and secondary (K-12) enrollment figures are up approximately 18% to 53.2 million. Expenditures in 1998 were $371.9 billion, representing 4.4% of GDP. Projected Growth Rate: According to the NCES publication Projections of Education Statistics to 2009, K-12 enrollments are expected to continue to rise (although at a slower rate) through the first half of the decade. Net growth by 2009 is forecasted to be just under 2%, with primary enrollments staying about the same and secondary enrollments increasing by 8.5%. In the near future, we also expect that total spending will remain at a steady 4.4% of GDP, but we would not rule out the possibility of that percentage increasing over time as social and political pressures mount to reform the public school system.

Page 51 of 107

Chart 8

Enrollment in U.S. Public and Private Elementary and Secondary Schools

(Thousands of students)

60,000 50,000 40,000 30,000

Total 9-12 Total K-8

20,000 10,000

20 08 E

20 06 E

20 04 E

20 02 E

19 98 P 20 00 E

19 96

19 94

19 92

19 90

19 88

-

cation Statistics" Source: National Center for Education Statistics

Growth Drivers: The forecasted growth of K-12 enrollments is largely a result of the spike in births between 1977 and 1990, a phenomenon known as the baby boom echo. As enrollment rates for K-12 have remained fairly steady in recent decades, population sizes will continue to be the key determinant of enrollment figures. However, we do not look for simple We look for greater increases in enrollment to have the most dramatic impact on spending growth involvement by all in the K-12 arena. Rather, we look for greater involvement by all members of members of the the community, from the students themselves to the businesses that will community, from the eventually hire them, to drive increased expenditures on education initiatives. students themselves As this growing focus on education is increasingly supported by private to the businesses that individuals and industries, we look for a much higher percentage of will eventually hire expenditures to be directed to the private sector. Today, revenues of for-profit them, to drive education companies account for less than 10% of total education expenditures. increased expenditures on In addition, we believe that much of the increase in spending on K-12 education initiatives. education will go toward technology. As technology continues to achieve greater acceptance as a teaching tool, we believe that expenditures will ramp up dramatically, not only for hardware, but for applications and services that aid in the day-to-day instruction and management of the student population. IDC forecasts an 18.9% CAGR in spending on instructional technology between 1998 and 2003.

Page 52 of 107

C h art 9

E s t im a t e d U .S . K - 1 2 P u b lic S c h o o l S p e n d in g o n I n s t r u c t io n a l T e c h n o lo g y

8 7

$Billions

6 5 4 3 2 1 0 1998

1999

2000E

2001E

2002E

2003E

S o u rc e : ID C

Some of the parties with an interest in increasing the amount and quality of K-12 education through the use of technology include the following. •

Students: With competition for entry into top universities growing fiercer by the year, many students seem to be taking their education more seriously. More students are taking the difficult courses offered by their high schools, including advanced placement (AP) courses that can earn them college credits. According to the Department of Education’s publication The Condition of Education 1999, between 1984 and 1997, the number of students taking AP examinations (in any subject) increased from 5.0% to 13.1% of high school seniors. Demand for courses that focus specifically on standardized test preparation has also grown as a result of the increased competition for college admissions, but can rarely be met within the confines of the school day. Similarly, students are increasingly seeking outside help in searching for and applying to colleges. At the other end of this spectrum are the students who may need remedial help in certain areas or adults looking for assistance in getting a GED. Implications for eLearning: Although Internet access in schools has been spotty over the past several years, we believe that a number of initiatives by government, businesses, and even private individuals has begun to alleviate this issue. While access within the classroom is still just over 60%, the percentage of schools that are wired reached 95% in 1999, representing a dramatic increase over the previous six years. C hart 10

I n te r n e t A c c e s s in U .S . S c h o o ls 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

95%

89% 78% 65%

63% 51%

50% 35% 27% 3% 1994

14%

8%

1995

1996

S c h o o ls w ith In te rn e t a c c e s s S o u rc e: N a tio n a l C e n te r fo r E d u c a tio n S ta tis tic s

Page 53 of 107

1997

1998

1999

In str u c tio n a l ro o m s w ith I n te rn e t a c c e ss

We believe that one of the major opportunities for eLearning companies is to provide both the advanced and remedial coursework via online learning that high schools may not be equipped to offer because of constraints in both the number of teachers and gaps in teacher proficiency. The nation’s schools will need to hire more than 2 million teachers over the next ten years, but the coming wave of baby-boomer retirements will make this difficult. Particularly in the areas of math, science and technology, schools are finding it more and more difficult to offer salaries that are even remotely competitive with the private sector. eLearning, therefore, may become a more valuable tool for students as teachers become ever scarcer resources. ELEARNING IN ACTION

The offerings of eLearning companies catering to the needs of high school students are many and varied. Below are just a few examples. Online AP Classes: Providing Advanced Placement (AP) classes online gives students the opportunity to get a head start on earning college credits even if their school does not have the teaching resources to dedicate to an AP class. • Apex Learning – www.apexlearning.com Online High Schools: Several companies are now offering accredited high school courses for home schoolers or adults looking to finish up a high school education. • Class.com – www.class.com • Keystone National High School – www.keystonehighschool.com College Admissions: Wading through college applications can be difficult and time-consuming for the students. However, the following are some of the companies that provide resources and services to make the experience easier for all parties involved. • Embark.com – www.embark.com • Achieva College Prep Services – www.achieva.com Homework Help: When Mom and Dad just aren’t much help with homework on cell reproduction or geometry, students can turn to the Web for tutorials and interactive simulations. • Homeworkhelp.com – www.homeworkhelp.com • TopTutors.com – www.toptutors.com • Tutor.com – www.tutor.com • Tutornet.com –www.tutornet.com Online Communities: Academic help isn’t all the web has to offer high school students, of course. Sometimes it's just a good place to hang out and meet other kids. • HighWired.com – www.highwired.com • IHigh.com – www.ihigh.com

•

Teachers: As we just mentioned, teacher resources are stretched pretty thin these days. Between coping with onerous administrative record-keeping, keeping up with new state educational standards and accountability requirements, communicating with parents, doing their own continuing education, integrating new technologies into the classroom, and actually teaching, the demands on teachers are overwhelming. We believe many teachers feel that they are not adequately prepared with the proper training or tools to teach 21st century kids. The National Center for Education Statistics reports that although 99% of public school teachers indicate that they have access to computers or the Internet in their schools, only a third of them feel well prepared to use them in their teaching.

Page 54 of 107

Chart 11

Teachers’ Feelings of Preparedness to Use the Internet in Teaching

Very well prepared 10%

Not at all prepared 13%

Well prepared 23%

Somewhat prepared 54%

Source: National Center for Education Statistics, U.S. Dept. of Education

Implications for eLearning: The list of web-based tools and services available to aid teachers in organizing their classroom, communicating with students and parents, developing lessons, and simply teaching continues to grow everyday. On the organizational end, tools are available that facilitate record keeping and that allow teachers to securely make grade and homework information available to parents. The web is also not only an excellent source for raw information that can be used to supplement lessons, but also serves as a venue for teachers to collaborate with their peers. A main problem that teachers face in using online resources in their teaching is information overload: It is difficult to sort through the plethora of “help” being thrown at them. We believe that companies that can not only provide quality control services, but also assist teachers in becoming comfortable with using technology in the classroom will achieve success in the K-12 market. As will be the case in many other industries, we think that online continuing education will be big for teachers, especially because limited time and financial resources often prevent travel.

Page 55 of 107

Schools: Particularly for larger schools, keeping track of student progress and making sure that no one slips through the cracks of the educational system has become an enormous task. Now that standardsbased testing is showing up in most states, schools are increasingly being held responsible for the performance of the students in their care. In many cases, where testing is deemed as “high stakes”, state funding or even student graduation rates are dependent upon the results of these tests. And sometimes half the battle of getting kids up to par with state standards is simply scheduling them in the proper classes and getting them to show up. Again, for large school systems, particularly in areas that have a large “at-risk” population, these can easily become the most formidable hurdles. Implications for eLearning: Schools are increasingly turning to technology to help with both the organizational aspects of managing the academic careers of their students and with curriculum development. Sophisticated student information systems and even more extensive enterprise resource planning (ERP) systems not only help with the day-to-day management of a school district, but also help keep track of and analyze students’ educational records. Systems like these can be useful in highlighting areas of weakness so individual students can receive help before it’s too late. These tools can also be valuable in keeping parents apprised of assignments, tests, activities, and overall progress. In addition, services and tools exist today that can help a school precisely map its curriculum to state learning standards in order to achieve accountability requirements. We believe that the trend in primary and secondary education is toward more accountability, not less, and schools will only be able to keep up with these requirements through the use of technology. ELEARNING IN ACTION

Education Supplies Procurement: In addition to the high-profile expenditures on expensive student information systems and back-office integration, schools are also faced with the more mundane tasks of buying things such as workbooks and lunch trays. Several companies have been formed recently to create B2B purchasing networks for education-related supplies. Epylon.com – www.epylon.com HigherMarkets.com – www.highermarkets.com simplexis.com – www.simplexis.com •

Parents: Both research and anecdotal evidence support the notion that parents who are themselves well-educated tend to place more emphasis on education and therefore offer more support to their children in their academic pursuits. Between 1972 and 1997, the percentage of 6- to 12-year-olds whose parents completed at least high school rose approximately 20 basis points to about 84%. Over the same time period, the percentage of 15- to 18-year-olds whose mothers were college graduates nearly tripled from 7% to 19%, and the increase for fathers was from 15% to 26%. We believe that these numbers indicate that family support for educational attainment should continue to rise, and is being demonstrated not only with greater moral support, but also with increased spending on supplemental educational opportunities. We believe that most parents if given the opportunity would also like to be more involved in their child’s formal education through increased communication with teachers and the school itself. Another trend that supports our belief that parents are growing increasingly concerned with the quality of their child’s education is the growth of home schooling. Although estimates vary widely, the National Home Education Research Institute has reported that the home-schooled population has grown from 400,000 in the 1990-1991 school year to an estimated 1.31.7 million in 1999-2000, and continues to grow at a rate of 7 - 15% per year. Implications for eLearning: We believe that parents may become ready purchasers of eLearning products. Whether for formal homeschooling purposes or simply supplemental learning, we believe parents are looking for more types of academic products and services to aid in their child’s education. Many parents are starting to teach their children to use technology at a very early age and are looking for appropriate educational applications for kids from preschool through high school. Whether the child needs remedial help in a particular subject to keep up with classmates or is looking for more advanced resources, the Web has a bounty of educational offerings. In addition, we believe that parent groups will be strong supporters of schools implementing web-based tools that will enable parents to better keep up with their child’s progress through monitoring assignments and grades and communication with teachers.

Page 56 of 107

ELEARNING IN ACTION

Technology for All Although the percentage of schools that have connections to the Internet has skyrocketed over the past several years, there are still schools that have little to no Internet access, putting both students and teachers at a disadvantage. A company called ZapMe! (IZAP), a self-described education-based broadband Internet media network, is installing free computer labs in schools, complete with satellite-delivered broadband Internet, giving teachers, parents and students access to a network of pre-selected resources for teaching and learning. The free equipment and services are funded by corporate sponsors, whose promotions appear on the ZapMe! network. Other companies are on a mission to give kids access to technology, but are taking a slightly different approach: They’re equipping the entire population of a school with rugged laptop computers that have wireless access to the school’s network, including Internet capabilities. Although not a free solution like ZapMe!’s, laptop computers give kids a tool that is with them all day at school and then also at home. Two of the companies in the business of equipping schools with wireless networks are NetSchools and EarthWalk Communications. Websites: www.zapme.com www.netschools.net www.earthwalk.com So, once schools get all this hardware, what are they doing with it? There is certainly no shortage today of companies looking to make the connection between students, teachers, parents and administrators through the use of web-based interfaces. The services of these companies are many and varied, but some of the features include the following. • • • • • •

Guides to help schools line up curriculum with state standards Tools to help teachers integrate technology into the classroom Pre-screened websites students can use for research purposes Tools to allow communication of grades, homework, and other information between teachers, parents and students Calendaring functions that allow interested parties to keep up with school events eCommerce applications that allow parents to purchase supplies needed for school and extracurricular activities

A sample of the companies offering these types of services includes the following. • • • • • • • •

bigchalk.com – www.bigchalk.com Classroom Connect – www.classroomconnect.com iMind education systems – www.imind.com K12Planet.com – www.K12planet.com LearningPays.com – www.learningpays.com Lightspan.com (LSPN) – www.lightspan.com nschool.com – www.nschool.com PowerSchool – www.powerschool.com

We would emphasize that this is certainly not a complete list of all the companies targeting schools with technology-based services designed to bridge the gaps in academic achievement, nor do all of the companies necessarily provide all of the services listed above.

Page 57 of 107

U.S. Government: While parents, students, and even teachers and schools tend to look at education from a smaller, more individual point of view, the federal government in general sees the nation’s educational system through the statistics it generates, which are all too often not very encouraging. Although education has long been a hot-button issue in political circles, helping to pave the way for achieving nearly universal participation in education at the secondary level in the U.S., overall student achievement has failed to live up to expectations. Results of the Third International Mathematics and Science Study (conducted in 1995) showed that as students in the U.S. progress through primary and secondary school, they fall behind international standards. In both mathematics and science, U.S. students scored above the international averages in grade 4, close to the international averages in grade 8, and considerably below the averages at the end of secondary school.

Chart 12.a

International vs. U.S. Science Scores (in the Third International Mathematics and Science Study - 1995) 560

545 534

540

529 516

Test score

520

500

International Average

500

480

US Average

480 460 440 Grade 4

Grade 8

Grade 12

Source: Third International Mathematics and Science Study

Chart 12.b

International vs. U.S. Math Scores (in the Third International Mathematics and Science Study - 1995)

580

565

560 Test score

540

524

520

513 500

International Average

500

500

US Average

480

461

460 440 Grade 4

Grade 8

Grade 12

Source: Third International Mathematics and Science Study

Page 58 of 107

Likewise, the NCES publication, Overview of the Condition of Education, 1999, reports that there has been little change in long-term trends in students’ reading performance since the early 1970s. Also, in addition to moral concerns about the lingering discrepancy, it is alarming that minorities have continued to underperform whites academically, given their growing importance to the overall workforce. Government leaders realize that if the U.S. is to remain the leader in the knowledge-based economy, all members of society must participate actively, and that means that overall outcomes, and the equality of outcomes, from the public education system must be improved. Implications for eLearning: Government has always been a proponent of incentive programs to get and keep people in school. Tax credits, scholarships and grants have all been tools used in the quest to better educate America. In recent years, though, government efforts to improve education have taken a digital bent. Much emphasis has been placed recently on “bridging the digital divide”, a term that is synonymous with getting more technology into more hands, particularly in poorer areas of the country. With programs like E-Rate, which has committed $3.65 billion in its first two years of existence to connecting one million public school classrooms to modern telecommunications networks, government leaders have demonstrated their willingness to spend money in order to ensure that all American children grow up tech-savvy. ELEARNING IN ACTION

Although the E-Rate program gets the biggest headlines considering the large sums of money it is dishing out to schools in an attempt to “bridge the digital divide”, it’s not the only K-12 education technology-related program that the U.S. government has ventured into. • • •

•

The Congressional Web-Based Education Commission will advise policymakers on the potential for learning through technology. The Department of Education has given grants to train 400,000 teachers in the use of technology in the classroom. The Academy of Information Technology program, which is a joint effort of the federal government and the business community, is working to prepare high school students for careers in information technology fields.

Business: Last, but certainly not least in terms of financial support of education, is the American business community. For businesses, supporting education is as much a business strategy as it is community service. Business leaders realize that the workforce of tomorrow is sitting in the classrooms of today, giving corporations a vested interest in ensuring that students are receiving the best education possible. (Plus, the positive PR that is generated by doling out cash or equipment to schools doesn’t hurt either.) Implications for eLearning: Much of the support that the business community (particularly from members of the high tech industry) is giving to the education community these days comes in the form of technology. The cable industry’s deployment of free, high-speed cable modem Internet access to almost 6,000 schools and public libraries, AOL’s recent announcement that it will provide free Internet service to schools, and Oracle’s intent to donate more than 1,100 of its U.S. businesses know new simplified computers to schools in Dallas are all good examples of that in order to business getting involved in education. Not only do these “charitable” retain their actions provide benefits to schools, but they also generate goodwill among leadership positions potential customer bases and serve as powerful marketing tools for in the world market, products and services. Technology companies such as Intel and Microsoft their future have launched major initiatives to get technology into schools through employees must get donations of hardware and software, and also (and perhaps more an early start in importantly) to train teachers to use the new tools in the classroom. U.S. learning how to use businesses know that in order to retain their leadership positions in the technology. world market, their future employees must get an early start in learning how to use technology.

Page 59 of 107

Higher Education Current Size: Over the period from 1985 to 1999, total higher education enrollments grew by 21.5% to 14.9 million, and if you go back another 15 years to 1970, enrollments are up more than 73%. Enrollment figures increased mainly because more high school graduates went on to college and more older women made the decision to go back to school. Overall expenditures in 1998 were $246.7 billion, representing approximately 2.9% of GDP. Chart 13

Total U.S. Higher Education Enrollments 18 Millions of enrollments

16 14 12 10 8 6 4 2 0 1970

1975

1980

1985

1990

1995

2000E

2005E

2009E

Source: National Center for Education Statistics, U.S. Dept. of Education

Projected Growth Rate: Over the coming decade, the U.S. Department of Education looks for college enrollments to grow by another 10% mainly as a result of an increasing college-age population. In an article entitled “Crosscurrents and Riptides” that was published in the January/February 1999 issue of Change, author Clifford Adelman analyzes several scenarios that take into account not only the growing population, but also increased enrollments due to better preparation of high school students for college, more aid for students in taking the steps necessary We believe that the to continue education past high school, and higher college retention and financial degree completion rates. Under these scenarios, he believes that the repercussions of not postsecondary student rate of entry could actually grow in the 20-30% range being adequately over the next seven to eight years. educated will continue to grow, Growth Drivers: While the U.S. government’s baseline expectations for leading to greater growth in the postsecondary education market take into account only increases participation in in the college-age population, we believe that there will be other factors, postsecondary including those mentioned by Adelman, that will drive growth in the number education. of people participating in some form of postsecondary education. In the knowledge economy a good education is a worker’s greatest asset, and the divide between those with an education and those without is growing larger every day. Between 1971 and 1998 the employment rate of males aged 25-34 with a bachelor’s degree stayed at a steady 93%. On the other hand, over the same period, the employment rate of high school dropouts fell from 88% to 79%. Similarly, although the employment rate for females who dropped out of high school increased by 12 percentage points over this time period, it increased by 27 points for female college graduates. The income disparity between college graduates and non-college graduates has also continued to ramp up. The NCES reports that the “earnings advantage” of a male bachelor’s degree holder over a male high school completer was 19% in 1980, but had grown to 50% in 1997. We believe that the financial repercussions of not being adequately educated will continue to grow, leading to greater participation in postsecondary education, particularly by adults who need to “refresh” educations that have grown stale in the knowledge-based economy.

Page 60 of 107

Chart 14

Earnings and Unemployment for Full-Time, Year-Round Workers Age 25 and Older $80,000

8.0%

$70,000

7.0%

$60,000

6.0%

$50,000

5.0%

$40,000

4.0%

$30,000

3.0%

$20,000

2.0%

$10,000

1.0%

$-

0.0% Less than high High school Some college, school graduate no degree diploma

Associate Degree

Bachelor’s Degree

Median annual earnings, 1997

Master’s Degree

Doctorate

Professional Degree

Unemployment Rate, 1998

Source: U.S. Dept. of Labor, Bureau of Labor Statistics

Implications for eLearning in Higher Ed: Distance learning has, in the past several years, already begun to see fairly dramatic growth: Public four-year institutions saw the number of enrollments in all distance education courses approximately triple from the 1994-1995 school year to the 1997-1998 school year according to the NCES publication Distance Education at Postsecondary Education Institutions: 1997-98. We would expect to see a similarly large jump if this information were gathered again today.

Chart 15

Enrollment in Distance Education Courses (by size of institution) 1800000

No. of students

1500000 801570

1200000 900000 600000

404570

300000

232750

0

116320 1995

476900

10,000 or more students 3,000 to 9,999 students Less than 3,000 students

353870 1997-98

Source: National Center for Education Statistics, U.S. Dept. of Education

Although other means of delivery besides the Web are counted in these numbers, no other delivery medium (audio, video, or CD-ROM) has seen an increase in usage over the time period. The percentage of two- and four-year institutions using asynchronous Internet delivery, on the other hand, grew from 22% to 60%.

Page 61 of 107

Chart 16

Plans to Start or Increase Use of Technologies in Distance Education (Percentage of institutions using or planning to offer distance education in 1997-1998) 1 82% 0.8 61%

60%

0.6 35%

0.4

31%

30% 17%

0.2

14%

9%

9%

3%

A sy nc hr on ou sI nt er Tw ne otc w ou ay rs i es nt Sy er nc a ct hr iv on ev ou id sI eo n O t e ne rn et -w co ay ur pr se er s ec or de d vi de o CD O M -R ne ul O -w tiM m ay od vi ep de ac o w ka ith ge s tw ow ay O au ne di -w Tw o ay oliv w ay ev au id d eo i O o ne tr a -w ns ay m iss au io di n o tr a ns m iss O th io er n te ch no lo gi es

0

Source: National Center for Education Statistics, U.S. Dept. of Education

Scant traditional resources and more government support will push students onto the Web while the flexibility and focus of the Internet will pull adult learners, international students and those seeking technical expertise. Larger Population of Adult Learners: From 1980 to 1996, the number of college students over the age of 25 grew by 34.7%. This non-traditional student population has a lot more baggage in terms of work and family obligations, and therefore needs more flexible options for getting an education. Chart 17

Fall Enrollment in Institutions of Higher Education by Student Age

16 Millions of Students

•

14 12 10 8 6 4 2 0 1980

1990

1996

19 years and younger

20 and 21 years

22 to 24 years

25 years and older

Source: National Center for Education Statistics, U.S. Dept. of Education

Page 62 of 107

For these types of students, we believe that eLearning provides a viable alternative in terms of being able to take classes on a less rigid schedule and in more convenient locations than traditional classes. In addition, eliminating many of the constraints of time and distance from the equation by taking an online class allows students a much broader selection of classes to choose from. Even if the local university does not offer the class a student is looking for, there is nothing to stop him from signing up for an online class offered by an institution anywhere in the world. ELEARNING IN ACTION

Earn a Degree on Your Home Computer The choices for a person wanting to work on a degree via the Internet are growing daily. Below are just a few of the options. •

University of Phoenix: UoP is the adult education school of the for-profit Apollo Group (APOL). In recent years, the school has seen its online enrollments growing faster than traditional enrollments, with enrollments growing more than 43% in 1999 and reaching approximately 13,800 students today. The online division, which has actually been in existence since 1989, offers a number of undergraduate and graduate programs, and even one doctorate program, but only for working adults – students must be at least 23 years of age and a member of the workforce. UoP is accredited by the North Central Association of Colleges and Schools (NCA).

•

Jones International University: Differing from UoP in that it is a fully online program (no physical campus exists), JIU offers several business-related degree and certificate programs, although students can also choose just to take an individual class to brush up on a particular subject. JIU is accredited by the NCA.

•

Capella University: Capella is also a fully online school and is targeting people in the workforce whose companies will pick up the cost of the student’s education. The school offers a number of traditional degree and certificate programs, as well as some more suited to eBusiness. The Capella site is home to its online campus, complete with an alumni center, a bookstore, online course tutorials and other learning resources, and (our favorite) the “cybrary”. Capella University is accredited by the NCA.

•

Pensare: While Pensare does not yet have any programs underway, last fall the company announced a strategic alliance with Duke University’s Fuqua School of Business to co-produce and deliver an accredited Duke MBA program. In addition to developing the Duke MBA program the partnership will work to create a design process for other business schools to offer similar programs.

•

UNext.com: Taking a slightly different approach to offering eLearning opportunities using content from top business schools is UNext.com. The company has created Cardean University, an online learning community for people in the field of business that delivers courses created by the all-star faculties of such prestigious business schools as Columbia University, the University of Chicago, Stanford University, The London School of Economics and Political Science, and Carnegie Mellon University. Cardean currently does not offer full degree programs, and in fact, is not even open to the public for enrollment yet, targeting mainly large corporate customers at this time.

•

NYUOnline: NYUOnline is a for-profit arm of New York University offering accredited, asynchronous courses and certificate programs targeting career-oriented areas. The school also serves as a consultant to businesses who seek to align learning with day-to-day activities. NYUOnline is based on the resources and work of faculty in the NYU School of Continuing and Professional Studies.

•

KaplanCollege.com: The same company that helped get you through the SAT in high school is now offering fully online degree programs, including among other things, a law degree (although graduates are currently only eligible for to sit for the bar examination in California).

Page 63 of 107

•

International Demand for U.S. Higher Ed: And speaking of taking classes anywhere in the world, we believe that distance education will be popular among international learners. Although we do believe that there will still be large numbers of international students who will want to physically attend classes in the U.S. for the cultural aspects the experience provides, we also know that there are many more international students for whom finances are a barrier to studying in the U.S. We believe that institutions will begin to focus on tailoring online academic programs for these audiences in a bid to take advantage of the international desire for a U.S. education.

•

Capacity in Postsecondary Institutions Getting Tighter: In a number of states, capacity at institutions of higher education is growing tighter every year. In Washington, for example, the state’s Higher Education Coordinating Board is projecting that an additional 70,000 students (the equivalent of two more Universities of Washington) will enroll in the state’s colleges and universities over the next ten years. In order to avoid having to construct new buildings or campuses to support the growth, the board is asking the state legislature to increase spending on online education. By doing so, they believe that eventually students will take an average of 1.5 hours worth of classes online out of the 15 course-hours normally taken in a semester. Similar measures are being undertaken in states such as Texas and California to alleviate capacity constraints. While some may view this as a poor substitute for face-to-face interaction in the classroom, research suggests that students themselves are already leading the trend by enrolling in online classes in addition to their traditional classes. At the State University of New York, as many as 80% of students in the school’s online program were either fullor part-time students on campus.

ELEARNING IN ACTION

Universities Fight Back Not to be upstaged by their for-profit counterparts, many institutions are taking their course offerings online. Even for classes that are not offered in a purely online format, schools are beginning to realize that the benefits of using technology to supplement in-class lectures are too good to pass up. Giving courses an online component allows greater personalized communication between students and the instructor, gives the instructor the ability to use technology-based materials to provide supplementary instruction, and allows instructors to track and report student progress. Whether they actually create the online courses for a school or if they provide schools with the platform and tools needed to do it themselves, the following companies help colleges and universities make the jump to technology-enhanced learning. • • •

Blackboard.com – www.blackboard.com Convene.com – www.convene.com eCollege.com – www.ecollege.com

Another provider of web-based course tools, WebCT, recently announced an alliance with SCT (SCTC) and Campus Pipeline to provide institutions of higher education with an end-to-end solution for integrating administrative services, online learning resources, the campus intranet and other community tools into one system requiring only a single login. SCT’s enterprise information systems is combined with WebCT’s eLearning platform and Campus Pipeline’s Internet infrastructure for campuses to create this integrated system. Websites: www.webct.com www.sctcorp.com www.campuspipeline.com

Page 64 of 107

•

Students’ Need for Technological Fluency in Job Market: The U.S. Department of Labor recently identified the 54 jobs with the highest growth potential between now and 2005 – only eight of them do not require technological fluency. The challenge then becomes finding the people to fill these jobs, as it is estimated that 60% of the jobs now We believe that using available require skills currently held by only 20% of the workforce. education technology While companies will certainly spend money to train and retrain their will become a prime current workforces, they will look to the nation’s colleges and way of delivering universities to turn out a fresh supply of tech-savvy graduates every year. technology education The shortfall is compounded by the desertion of qualified teachers to to more students with industry. Therefore, we believe that using education technology will fewer full-time become a prime way of delivering technology education to more faculty members. students with fewer full-time faculty members.

•

Increased Government Support for eLearning: As it has in the primary and secondary education arenas, the federal government has come out as a proponent of using online learning to supplement (or even replace) traditional higher education experiences. A couple of Department of Education programs deserve mention. The Distance Education Demonstration Project, which will relax restrictions on using financial aid for distance education, is a change from the previous policy that reigned from days when online learning opportunities were often seen as scams. In a further step, the Learning Anytime Anywhere Program will encourage the development of distance learning programs by providing grants to universities to get new online programs started. We believe that policymakers foresee the coming (and in many cases, present) shortage of knowledge workers as well as industry does, and is attempting to create as many educational avenues as possible to keep the U.S. workforce up to speed with changing marketplace dynamics.

ELEARNING IN ACTION

Playing to the College Demographic eMarketers are falling over each other to capture the current crop of wired and wealthy college students. The average student spends approximately 5.6 hours per week online and as a group spends about $105 billion per year according to Student Monitor. Several companies have popped up on the web hawking goods such as textbooks and electronics, or simply providing affiliation portals targeted directly at the college-age demographic. However, besides simply selling goods and creating communities, these sites serve as prime advertising real estate for other businesses that target the college demographic but that may not be natural destination sites (e.g., financial institutions or apparel retailers). Some of the players include the following. • CollegeClub.com – www.collegeclub.com • eCampus.com – www.ecampus.com • Mascot Network – www.mascotnetwork.com • VarsityBooks.com (VSTY) – www.varsitybooks.com

Page 65 of 107

THE CORPORATE MARKET The obvious candidates to include in a profile of the learning market are students. Today, however, students (in the conventional sense) only represent a small portion of learners. As we have already pointed out, learning has become an essential part of our existence throughout our lives, particularly within our jobs. Consider this: Each year General Electric spends $500 million on training and education. GE is not alone; corporate America is a huge investor in intellectual, or human, capital. Each year General While the corporate training market is not nearly as big as the academic market Electric spends $500 in the U.S., it is still large and continues to grow. In addition, corporate million on training America’s adoption of eLearning has come at a much more rapid pace. We and education. GE is believe that this trend has been driven by the simple fact that companies are not alone; corporate finding it is the only way that they are able to keep their workforces up-toAmerica is a huge speed in a business environment in which an organization must be able to turn investor in on a dime. We would again emphasize that we do not believe that eLearning intellectual, or will (or should) ever completely replace the more traditional methods of human, capital. learning (classroom, text, etc.), but it is increasingly being used to a significant degree as a supplemental form of instruction. Current Size: While counting the number of people who are actually involved in workplace-related training of some sort is virtually impossible, it is a little easier to come up with a dollar figure for the size of the market. According to Training magazine’s 1999 Industry Report, approximately $62.5 billion was budgeted for formal training by U.S. organizations, which was about 24% higher than it was in 1993. Of this, approximately 44% is spent on trainer salaries, 24% goes to outside providers of training products and services, and the rest is spent on things such as facilities, materials, hardware, seminars and conferences. The main part that we are concerned about, of course, is the 24% that is outsourced, which currently represents about a $15-$17 billion market. More specifically, we are looking at the eLearning component, which totaled a little over $1 billion in 1999.

Chart 18

1999 Corporate Training Budgets

Ouside services 4% Facilities/overhead Custom materials 7% 3% Off-the-shelf materials 4% Hardware 7% Seminars and conferences 7% Total outside expenditures 24%

Source: Training Magazine

Page 66 of 107

Training staff salaries 44%

Projected Growth: IDC is currently predicting that spending on outsourced services, content and technology for training will grow from approximately $14.9 billion in 1998 to $33.7 billion in 2004. While information technology (IT) training currently dominates the mix, outsourced business skills training is expected to reach parity by 2004. IDC is currently projecting the corporate eLearning market to grow to $11.4 billion in 2003, representing an 83% CAGR since 1997.

Chart 19

Total U.S. External Education and Training Revenue, 1998-2004E 40 35

$Billions

30 25 20 15 10 5 0 1998

1999

2000E

2001E

IT training

2002E

2003E

2004E

2002E

2003E

Business skills training

Source: IDC

Chart 20

U.S. Corporate eLearning Revenues by Component

($Billions)

12 10

Delivery Solutions

8

Learning services

6

Content

4 2 0 1997

1998

1999

2000E

Source: IDC

Page 67 of 107

2001E

Growth Drivers: Underlying these growth forecasts are assumptions about a continued increase in the need for skilled employees and increasing levels of outsourced training. We believe that growth in overall training expenditures will continue to be driven by the increased importance of knowledge in the economy. It seems like a simple statement, but we believe it represents a fairly dramatic change from the past as far as training needs are concerned. As management guru Peter Drucker stated in a recent article in Forbes, “For most of human history a skilled worker had learned what he needed to learn by the time his apprenticeship was finished at 18 or 19. Not so with the We believe that modern knowledge worker. Physicians, medical technicians in the pathology growth in overall lab, computer repair people, lawyers, and human resource managers can training expenditures scarcely keep up with developments in their fields.” We believe Mr. Drucker will continue to be has hit the nail on the head in explaining training’s importance to the driven by the knowledge economy. increased importance of knowledge in the Implications for eLearning: All indications suggest that eLearning is economy. gaining on traditional instructor-led training (ILT) in the corporate environment. Although ILT currently represents more than 70% of delivered training, this percentage is expected to fall to 35-40% by 2004. Replacing it is technology-based training, the largest component of which will be eLearning. Radical improvements in offerings, an insatiable demand for IT skills, the extension of the enterprise, and government sponsorship will each spark the growth of eLearning in corporations.

Page 68 of 107

ELEARNING IN ACTION

The Wide, Wild World of Corporate eLearning If you’re a corporate trainer looking at implementing eLearning for your organization, the good news is that your options are vast and varied. The bad news is that the wide array of options is creating a great deal of confusion in the marketplace for corporate eLearning. Some eLearning vendors provide training portals that are external to the company, while others may help an organization develop an integrated learning platform for its own personal use. Some actually do both and some provide solutions somewhere in between the two. Below we take our best shot at breaking the group down into two main choices and then give a few examples of each. Training Portals We define a training portal as a company that provides a central location for purchasers to browse a wide variety of eLearning products. While a portal may sell some internally-developed content, it is generally a marketplace for content developed by third parties. Today the value added by a training portal is somewhat limited given that most content developers deliver only full courses. However, we believe that content will increasingly be developed in a learning object format, allowing highly-customized courses to be created for a learner using content components from multiple vendors. When the industry reaches this stage, we believe that portals (if they prove to be up to the task) will be able to truly add value to the eLearning purchase by creating these customized courses from their repositories of content. Some examples include the following. Headlight.com – www.headlight.com TrainSeek.com – www.trainseek.com

THINQ – www.thinq.com

Customized Learning Platform Defining a customized learning platform is quite tricky. Probably the only characteristics common among all of the providers are company-specific, web-based front ends that give access to some sort of repository of learning materials. A vendor is also likely to offer the option of hosting the platform for the customer. The rest is pretty up in the air, but some of the components of a customized learning platform might include the following. • • • • • • •

Content (preferably in learning object form, although this is rare today) A content management system that serves as a repository for content A content delivery platform Learner tracking, assessment, and reporting capabilities (ability to align training with job performance) Web authoring tools that can be used to create custom content Web-based collaboration tools Integration capabilities (with legacy applications)

We would hesitate to say that any of the vendors offer a system that lives up to the full promise of a customized learning platform yet. We believe that several are making great strides toward that goal, while others are relying on dated architectures. Some examples of companies that offer various combinations of the above capabilities include the following. click2learn.com (CLKS) – www.click2learn.com Learnframe – www.learnframe.com MindLever.com – www.mindlever.com Saba Software (SABA) – www.saba.com VCampus (VCMP) – www.vcampus.com

Docent – www.docent.com Lotus Development Corp. – www.lotus.com Pathlore Software – www.pathlore.com SmartForce (SMTF) – www.smartforce.com

Page 69 of 107

IT Training: In 1999, core IT occupations (which includes computer scientists and engineers, systems analysts and computer programmers) numbered more than 2.2 million in the United States, up from less than 750,000 just 15 years earlier. By 2008, this field is expected to grow to 3.2 million workers. These figures indicate that core IT specialties are not only the fastest growing occupations in the country, but also compose the largest groups in absolute size, comparable to nursing or engineering. When you add to the picture “non-core” IT jobs (as the Information Technology Association of America did in a recent study), today’s overall IT workforce grows to around 10 million. The study indicates that roughly 1.6 million new positions have been or will be created in 2000, and half of those will go unfilled.

Chart 21

Projected Growth in IT Employment 1,200

New Jobs

1,000

Net Replacements 800 (in thousands)

•

1996 Base Year Employment

520 34 129

600

177

19

15

400 249

235 568

506

471

200

391 212

193

216

201

0

1996

2006E Computer Scientists

1996

2006E Computer Engineers

1996

2006E Systems Analysts

1996 2006E Computer Programmers

Source: Bureau of Labor Statistics, U.S. Dept. of Labor

Although Training magazine reports that “fully a third of all employer-sponsored training in the United States is devoted to teaching people about computers,” the apparent shortage of IT workers is still an issue of great concern for many companies. The disparity between the still-growing demand for IT-savvy employees and the growth rate of the overall labor force highlights the need for the fast, effective training that eLearning provides. IDC is currently predicting that technology-based IT training revenues in the U.S. will grow from approximately $2.3 billion in 1999 to $9.6 billion in 2004, or a 33.4% CAGR. While eLearning is currently a small part of this market in comparison to CDROM delivery, it is expected to represent more than 80% by 2004. Perhaps what is most surprising, though, is that it is live (or synchronous) eLearning experiences that are expected to dominate the medium, as opposed to self-paced (or asynchronous) courses. We believe that both will have a place in the market, as some students are attracted to the flexibility of asynchronous learning and others are attracted to the interactivity of synchronous learning.

Page 70 of 107

Chart 22

Billions

U.S. Technology-Delivered IT Training Revenue Share by Segment, 1999 and 2004E $9 $8 $7 $6 $5 $4 $3 $2 $1 $0

1999 2004E

Satellite video broadcast

Videotape

eLearning

CD-ROM

Source: IDC

ELEARNING IN ACTION

Are You Certifiable? Want to be a part of the Internet revolution, but don’t have the skills? Not to worry – two companies, ProsoftTraining.com (POSO) and iGeneration (formerly HyCurve), are vying to be the dominant providers of Internet-related education to prepare people for technical jobs. Both companies also offer vendor-neutral certifications in various Internet job roles and provide the courseware for test preparation. While both companies rely more heavily on instructor-led training, they also offer instruction via an online environment. •

Business Skills Training: We think improvements in the range and quality of eLearning offerings will help drive the demand for business skills training, bringing expenditures for these products and services to parity with IT training. While much of the business skills training that is done today is inhouse, costs, time pressures and distance constraints are leading many companies to turn Basic Blue: IBM’s Venture Into eLearning to outside vendors. Another growing limitation Who: IBM’s 30,000 first-line managers to training management from within is the What: “Basic Blue”, a 12-month blended increase in Baby Boomer retirements; when online (75%) and classroom (25%) learning they leave, they often take a vast store of program management experience and institutional When: Deployed in 1999, Basic Blue is memory with them, leaving younger workers to available 24 hours a day, 7 days a week pick up the reins of managing the business. For Where: On every manager’s desktop or laptop many companies, the solution to training a How: Just-in-time information and insights, large and spread-out workforce in areas such as worksheets and tools, IBM and external web customer service, sales, and leadership (to resources, search features, a manager’s name just a few) is eLearning. Again, IDC is glossary, simulation modules, collaboration predicting significant growth in technologytools, in-person action-learning workshops based business skills training, with revenues Why: The company is able to provide “five reaching $10.4 billion in 2004 (a 46% CAGR) times the learning at one third the cost” and eLearning representing upwards of 80% of those dollars.

Page 71 of 107

Chart 23

U.S. Business Skills Training Revenue Share by Delivery Segment, 1998-2004E (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Text-based training Technologybased training Instructor-led training

1998

1999

2000E

2001E

2002E

2003E

2004E

Source: IDC

Customer Training: Some of the most valuable training that a company pays for may be directed not toward its employees, but rather its customers. GartnerGroup predicts that by 2003, 40% of eLearning activities will be aimed at customers. Surprised? Think about it. Aren’t you as a consumer more likely to make a purchase (especially a large or complex one) when you’re more informed about the product or service? And wouldn’t you be more willing to spend the time to take a course if it’s on someone else’s nickel? A number of companies offering free online education, like Dell Computer Corp., 3Com Corp., and Charles Schwab, are betting that you will be. Each company offers extensive learning opportunities through their websites that are designed to make customers more comfortable with their purchase. Even those courses that are not directly aimed at selling a product or service benefit the company by strengthening brand names and creating goodwill among clients (or potential clients) by virtue of offering free educational opportunities. As products and services grow increasingly complicated, we believe that learning (and eLearning more specifically) will become a large component of developing brands and maintaining customer relationships. ELEARNING IN ACTION

Smart Customers So who’s behind the advent of customer-focused training? While several larger eLearning vendors offer services related to developing customer-focused content in addition to their other services (e.g., Digital Think, SmartForce), two smaller companies in particular specialize in educating the consumer. • •

LearningBrands – www.learningbrands.com notHarvard.com – www.notharvard.com

notHarvard.com gives customer training a 21st century moniker by calling it “eduCommerce”. company uses the following characteristics to define the term.

The

eduCommerce: (1) The next big thing. (2) Using free education as a powerful acquisition tool – enhancing your customer value proposition. (3) Free online education as a sales and marketing weapon to drive greater stickiness, deeper customer intimacy and higher brand loyalty resulting in incremental revenue. (4) Because sellers need to teach and buyers want to learn. Source: notHarvard.com

Page 72 of 107

•

Government Training: As we have mentioned previously, the federal government has been a strong proponent of integrating technology into the classroom for the kids of the nation, but what about educating their own in the workplace? Have they embraced eLearning for the training of government workers? Actually, yes. In what some would consider a rare case of practicing what they preach, the federal government is increasingly adopting eLearning-based education and training for its employees. As a huge employer, the federal government spends a great deal on educating and training its ranks every year, and although only a small portion of it is currently being delivered online, eLearning is a solution that certain arms of the government are turning to. The Department of Defense, for example, which has to provide critical training for forces around the globe, has been one of the earliest adopters of technology-based learning. In fact, the Advanced Distributed Learning initiative (which is cosponsored by the DOD and the White House Office of Science and Technology Policy, but involves commercial and academic members as well) is one of the groups on the cutting edge of instructional object-based eLearning. The ADL recently published one of the first workable models for implementing sharable learning objects. Suffice it to say that the federal government is a little more on top of the eLearning game than you might expect.

Page 73 of 107

THE CONSUMER MARKET The size of the consumer learning market is harder to pin down than the academic or corporate markets. However, we believe that in time it could actually prove to be one of the largest targets for eLearning vendors. Lifelong Learners The group that immediately comes to mind when thinking about participants in the consumer market are “lifelong learners”, or those who are pursuing learning opportunities that relate to their personal hobbies or interests. While many of these people are currently participating in informal learning activities on the Internet, we believe that some lifelong learners are turning to more formal learning experiences in the form of courses as these types of resources become more abundant and sophisticated. Whether people want to learn how to cook, get a refresher on Shakespearean literature, or read a primer on the wildlife in a particular region, the Internet is likely to have a multitude of offerings. We believe that as broadband Internet connections become more prevalent in households, enabling more interactive learning experiences, this type of recreational learning will become more commonplace, for entertainment as well as educational purposes. We do believe that it is important to realize that as this type of learning is generally avocational, the prices consumers are willing to pay will likely be lower than for “required” work- or academic-related online learning. In fact, we believe that much of the eLearning that consumers end up participating in will be provided by businesses at little or no charge to them. We are increasingly seeing learning opportunities being used as a marketing tool by companies to promote their products or services. Whether it’s L.L. Bean giving tips on fly-fishing or Dell Computer offering courses on programming languages, businesses realize that informed customers are likely to be better customers. Gartner Group is currently predicting that by 2003 there will be an $8 billion market in customer-directed eLearning.

ELEARNING IN ACTION

Everything You Always Wanted to Know About . . . Everything! Probably the most common way for consumers to find online courses on subjects of interest to them is through a learning portal. Within these portals, customers can browse through listings of courses by subject or do a search for a particular topic. Prices for courses vary widely, from free to several hundred dollars. In addition to providing eLearning opportunities, many portals also offer customers the opportunity to buy books or other physical media that relate to their topic of interest. We would also note that most portals offer more than just avocational learning opportunities; they often feature academic or professional development courses as well. • • • •

About.com (BOUT) – www.about.com Hungry Minds – www.hungryminds.com Learn2.com (LTWO) – www.learn2.com SmartPlanet – www.smartplanet.com

Continuing Education In addition to general “lifelong learning” opportunities, we are including professional continuing education in the consumer market because we believe that although continuing education is typically work-related, those participating in it are, in most cases, personally responsible for the purchase and completion of the courses. That is to say, even though they may be reimbursed by an employer, people taking continuing education are typically professionals of some kind who do not necessarily work in an organization that has a separate training department. Therefore, these individuals are likely to make purchase decisions based on their own unique needs and circumstances (e.g., learning styles, schedules, etc.).

Page 74 of 107

We believe that education (not to be confused with job-specific training) within the context of professional advancement will continue to grow. Currently, continuing education is required for 25 professions in the U.S. Continuing education is not only mandated by many states, but is also taken by many professionals voluntarily in order to improve “Every year, 10 million seats their own marketability within an industry. As we have continually for sporting events are sold, 97 stressed in this report, we believe that the economy is increasingly million airline tickets are growing more dependent on knowledge and knowledge workers. purchased and 200 million Job roles tend to change more often and even in the short term, new continuing education courses information must be incorporated into one’s work. Even if there is are taken.” no further growth in the amount of state-required continuing Jeff Creighton, education, we believe that professionals will begin to see education founder and chairman of as more and more of a necessity as we head into the 21st century. EduPoint.com Continuing ed is arguably the fastest growing segment of the education market. Professionals That Require Continuing Education Accounting Architects Banking Certified financial planners Chiropractors Clinical lab technicians Dental hygienists Dentists Doctors Funeral directors Insurance professionals Land surveyors Lawyers

Nursing Optometrists Pharmacists Physical therapists Psychologists Radiographic technicians Real estate Securities Social workers Speech pathologists Veterinarians Engineer professionals

Source: IDC

Because continuing education is, by definition, work done in addition to a job, we believe that flexibility is a key issue for people making purchasing decisions, making eLearning a natural alternative to traveling to a course or conference, or even doing continuing Ed by mail. Certainly, some professions have a set number of hours that have to be completed in person, but we believe that there is certainly room for a significant portion of the continuing ed market to be offered in an eLearning format. ELEARNING IN ACTION

Never Stop Learning Whether they’re taking courses to meet official continuing education requirements or tapping online information repositories for the latest research on a particular subject in their field, we believe that professionals will increasingly rely on Internet resources to keep themselves up to date with new information related to their jobs. Some of the websites that hope to become key destination sites for continuing education include the following. • Acadio – www.acadio.com • CLEonline.com – www.cleonline.com • HealthStream (HSTM) – www.healthstream.com • Medschool.com – www.medschool.com • MedCases – www.medcases.com • NetCE – www.netce.com • WebCE.com – www.webce.com • WebEd – www.webed.com

Page 75 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 76 of 107

SECTION IV:

LEARNING TECHNOLOGIES In this section: •

The evolution of learning technologies

•

Evolving technologies that will transform eLearning

•

eLearning standards

Page 77 of 107

FROM ABACUS TO LMS: THE EVOLUTION OF LEARNING TECHNOLOGIES As the eLearning industry begins to mature, we are seeing product offerings that are far beyond the simple click-and-read courses that have characterized the industry to date. However, long before education migrated to the Web even in its most rudimentary form, learners were using technology to enhance educational experiences. Most recently, CD-ROMs were the delivery medium of choice, but even before that, distance learning was accomplished through the use of video- and audiotapes in learning experiences when being there in person wasn’t an option. Although the absolute costs of these latter technologies may be low in comparison to the networked technologies being introduced today, we would argue that limitations in their effectiveness and scalability make them more expensive solutions over the long run. The chart below, which was developed by SRI Consulting’s Learning on Demand group, illustrates the changes that learning technologies are undergoing and the effect of those changes on the effective delivery cost.

Page 78 of 107

The early days of CBT: Early versions of computer-based training relied mainly on CD-ROM. One of the main benefits of this type of CBT is that it does not face the bandwidth problems that web-based training (WBT) does. Because of its large storage capacity, a CD-ROM can deliver rich multimedia presentations without clogging up a network by downloading large audio or video files. Many would even argue that the presentation of content has taken a step backward as it has migrated from CD-ROM to the Internet because of the relative lack of multimedia components. The downside of training on a CD-ROM, though, is its static nature. Once produced and distributed the content on the CD-ROM cannot be changed no matter how fast it becomes outdated. Organizations that utilize CD-ROMs for training soon find that they have invested in a library of titles that quickly reach the point of obsolescence. In addition, it is extremely difficult for organizations to track users’ performance with CD-ROM-based training (if, indeed, they’re using it at all). Baby Steps onto the Web: The early stages of Internet acceptance in the mid 1990s provided education and training providers with a natural platform on which to offer learning opportunities. Distance education offerings sprouted up on the Web, sometimes offered by accredited academic institutions or reputable training providers, but more often as the products of no-name providers. While some of the unbranded content was no doubt of high quality, the programs that were not (equivalents of the “Can you draw me?” tests in the back of magazines that led to an art “degree”) left a bad taste in the mouths of consumers and educators alike. The term “digital diploma mill” entered our lexicon for the first time, and subsequent eLearning providers faced a significant credibility hurdle. In terms of technology, online courses were primarily comprised of various hyperlinked web pages through which the learner advanced by clicking. Collaboration with other learners or the instructor was generally limited to what could be accomplished via e-mail. And, as almost all users accessed the Web via dial-up connections, multimedia components were virtually non-existent. Where We Are Today: While the vast majority of learning opportunities on the Web are still of the fairly dull “read-and-click to next page” variety, we would deem 1999 as a breakout year for advances both in content and technology related to eLearning. Today, the tools to author and publish courses are much more readily available to creators of content. Content delivery tools are growing in sophistication. Web collaboration tools are ready for prime time, and learning management systems (LMS) have been developed that can track, manage, and tie together We believe future an entire enterprise-wide program of learning. A number of vendors have manifestations of begun to bundle all of these tools together into one package to create eLearning will allow integrated learning systems that can either be hosted by the customer or the the learner to be vendor (in an application service provider, or ASP, model) to address more in control of organizational learning needs. Bandwidth limitations still hamper the his own learning widespread use of multimedia applications, but the growing base of experience, thus subscribers to broadband technologies is alleviating this problem and creating making it more more demand for interactive content that goes beyond the boring “read-andtimely and relevant, click” model. both to the individual and to the Where We’re Going Tomorrow: Although the past several years have been organization. characterized by eLearning that looks a lot like traditional learning slapped on a Web site and decorated with a few bells and whistles, we believe that the coming years will see fundamental changes to the learning model, enabled by networked technology. We would again stress that we believe future manifestations of eLearning will allow the learner more control over his own learning experience, thus making it more timely and relevant, both to the individual and to the organization. The following are some of the major developments we expect in eLearning.

Page 79 of 107

• • •

•

Highly relevant content will be easy to find, purchase, and deliver through an organization’s learning platform. More sophisticated content management tools will be able to create highly customized courses on the fly for learners, using reusable learning object technology. Learning management systems will monitor and adjust an individual’s learning program, taking into account the learner’s existing proficiencies, job role, learning objectives, learning style, and preferred delivery method. The LMS will also be able to carefully track and analyze a user’s progress in programs of learning over long periods of time. Training will be linked to performance on both an individual and organization-wide level, so that the return on the investment in learning can be more accurately measured.

Vendors are already touting features like these in their product offerings today, but we believe that today’s “integrated learning systems” will pale in comparison to the powerful capabilities of the ILSs that will be available in as little as five years. The advancements described above may only be fully realized when all eLearning tools and content are based on an accepted set of industry-wide standards, which will allow reusability of content and interoperability of technologies. We will provide a more in-depth discussion of the development of eLearning standards at the end of this section.

We believe that today’s “integrated learning systems” will pale in comparison to the powerful capabilities of the ILSs that will be available in as little as five years.

eLearning from the Learner’s Perspective A number of the developments mentioned above are already becoming reality, and we expect the rest to follow in short order. But these capabilities, for the most part, represent the value-added surrounds of eLearning – that is, the features that make eLearning a valuable organizational asset from the point of view of an administrator or corporate trainer. They don’t actually address the value to the learner. Therefore, let’s now take a look at how an end-user might actually experience eLearning. eLearning today comes in various forms. While you might consider your “Word of the Day” e-mail to be a pretty good form of eLearning (and it is), we will focus this discussion on the more formal types and tools of eLearning currently in use. But first of all, let’s figure out what the world of eLearning looks like from where the learner sits. Before the Internet revolution, anyone wanting to become educated on a particular subject had a few options: • • • •

Take a class at the local university. Attend classes through his employer’s training center or a commercial training center. Take a correspondence class through a distant university. Do independent study.

While attending a class involves face-to-face learning and is likely to provide a quality educational experience, there are a lot of variables at play, particularly for working adults with a very specific learning objective. • • • •

What if the class doesn’t meet when I’m free? What if the class meets in a location far from where I live or work? What if the instructor is bad? What if I’m just wasting my time because the subject of the course does not meet my needs?

Page 80 of 107

If these issues do hinder the learner from taking the class, there’s always the correspondence course option. Because the learner can select a course from a much greater pool of universities, the odds are better that he’ll find one that is closer to what he needs. Plus, he won’t have to worry about traveling and scheduling conflicts because he’ll do his learning in the comfort of his own home. However, we believe that many citizens of the 21st century are likely to be put off by the thought of receiving lessons and sending homework through the mail. The pace of this method of study is not likely to appeal to someone looking to get up to speed on a particular topic quickly. Interaction with the instructor and other students taking the class is also likely to be minimal. The last option, then, is independent study. While this certainly doesn’t solve the problem of being able to collaborate with other learners, it does fit the other criteria of scheduling, relevancy, and speed. The learner can study whenever and whatever he wants, at any pace he feels is appropriate. The problem? No credit. While an academic institution or employer might admire the learner’s initiative in conducting independent study, there is no way of knowing if the learner actually accomplished or learned what he said he did. So, if none of the above options works for the learner, what are his other options? Not long ago, the answer to that question would have been “Not much.” Today, through the Through the emergence emergence and development of networked technologies, learners can and development of participate in a variety of different learning experiences, at least one of networked technologies, which is likely to meet anyone’s requirements for topic, schedule, and learners can participate format. Learning experiences can range from a quick tutorial on how to in a variety of different choose a wine to go with dinner, to a 10-week course on a programming learning experiences, at language, to actually getting an accredited MBA. But how does it work? least one of which is There are basically three formats for eLearning, each of which meets likely to meet anyone’s different needs and uses different technical elements. requirements for topic, schedule, and format. Synchronous Shared Learning (SSL) SSL could probably be most closely compared with a traditional classroom learning experience. The learners and instructor are all logged on to a live, web-based collaborative learning environment and are participating in the class at the same time. This format allows the students to ask questions and receive answers, contribute to a discussion, or ask the professor to alter the pace of the class -- all in real-time. Just as in a live, in-person class, the instructor can quickly adapt his teaching to meet the needs of the students, by going faster or slower, or by following a particular stream of discussion or questions. The main difference is that the students are not all sitting right in front him; they could actually be spread out all over the world. The benefit of SSL is that any group of people with a keen interest in a certain subject can have a shared learning experience, without geography being an obstacle. Some instructors may protest that not being face-to-face makes them unable to pick up body language cues that tell them when the students don’t understand. However, learners who are shy or afraid of sounding unintelligent in an in-person setting may be more likely to participate in class discussions in an online environment. SSL Technical Elements: The SSL experience is likely to take place in the context of a collaborative Web environment. There are a number of vendors that provide this type of collaboration tool for SSL. Depending on the sophistication of the tool, features of SSL might include the following. • Registration: This allows the learner to sign himself up, or an administrator to sign up a large group of people for a session via the Internet. • 1-way Video: This allows the students to see the instructor via live or recorded streaming video. • 1- or 2-way Audio: This allows either the students to hear only the instructor, or (in 2-way audio) for students to be given the floor for discussions. (We are referring here to voice over IP, or VoIP, capabilities. Virtually all SSL experiences will use audio, but if the web collaboration tool is not capable of providing VoIP services, a separate conference call must be set up.) • Application Sharing: Members of the group in different locations can all work on an application (e.g., a spreadsheet) at the same time. • Power Point: Most all applications will allow the instructor to show a Power Point slide show. • Whiteboarding: This feature allows the instructor to make real-time notes or use some type of pointing or highlighting tool on the screen.

Page 81 of 107

• Polling: The instructor can ask the learners a question and receive an immediate response by having the learners choose from a given list of answers. • Hand Raise Feature: A learner who has a question can indicate as such by clicking on a “hand-raise” icon. The learner will then either be given the floor to ask the question audibly if 2-way audio is available, or will be prompted to type in the question. • Web Touring: The instructor can navigate the web within the confines of the collaborative learning environment. • Chat: This allows learners to chat privately with other learners or with the instructor. • Testing: This gives instructors the ability to test the learners on the material presented. • Tracking: This allows the instructor to view the progress of the learner if testing is available as a feature. • Archival Access: This records the collaborative session and stores it for later replay. Asynchronous Shared Learning (ASL) While the SSL format maintains the shared learning aspects that many see as the primary benefit of traditional instruction, it does not address the issue of scheduling. One of the main reasons that a learner may opt for an online course is because of time-constraints associated with work or family obligations. However, if the learner can’t attend an on-campus class at 7:00 on Tuesday nights because of Junior’s soccer games, it’s unlikely that he’ll be able to log on to the online class at that time either. That’s where the benefits of ASL become most evident. Particularly for people who travel frequently, have unusual work schedules, or are just all-around busy (and who isn’t these days?), ASL may make the most sense because they can log on whenever they have free time. Certainly the collaborative dimension of the class is likely to be diminished somewhat, as the main instruction will likely come from reading a lesson or playing video or audio clips, but learners still have the opportunity to interact with other students and the instructor using vehicles like message boards or e-mail. ASL Technical Elements: Because ASL does not take place at a set time, no live (real-time) collaboration tool is necessary. The context of the ASL experience is likely to be a password-protected website that is based on some type of course platform. A variety of different vendors offer this type of platform, and most are geared either for the academic or the corporate market, although we are seeing each type of vendor cross over into the other’s traditional market. Some of the important features of ASL include the following. • Registration: Again, it is important that the learner is able to register online, and that someone who is administering a large group of learners is able to register them as a group. • Tracking: Because the instructor is not interacting directly with and getting immediate feedback from the learner during his learning experience, it is even more important that the instructor be able to keep up with the learner’s progress. This includes tracking how many times the learner logged on, how long he spent on each session, areas where he spent an unusual amount of time, his performance on tests, etc. • Multimedia Capabilities: ASL is likely to be fairly dull if the learner is only given text to read. Sound, video, or animation clips can make for a much richer experience. • Subject Matter Expert (SME) Assistance: Because in an ASL experience there is no live instructor to answer questions, some ASL setups will have built-in forums where learners can ask questions to an SME that will be answered quickly, if not immediately. • Threaded Discussion: This is a way for members of the ASL “class” to communicate with one another on topics that they are studying. ASL experiences will also likely make use of e-mail to keep in touch with one another and the instructor. • Simulation Exercises / Virtual Labs: This element of ASL is still in its early stages, but we believe it will have strong implications for the reinforcement of learning objectives. Because the learner working in an ASL format is doing so at her own pace, she has more freedom to spend time on putting what she has learned into practice. • Testing: In any eLearning experience, testing of the learner’s understanding of the material will be a critical component if results of the learning experience are to be tied to changes in performance.

Page 82 of 107

Independent eLearning (IEL) IEL is just what it sounds like. The learner is not a part of a “class” with other students, and most likely does not have an instructor. It is more likely that the course will be offered by a commercial vendor, rather than by a university, although this is not always the case. Whenever the learner realizes that she needs to brush-up on a certain subject, she can simply find the course she needs from an online catalog and take it at her leisure. She can go at her own pace when learning the material, focusing on the sections she needs particular help in. The IEL format can also be more of a “just-in-time” experience; in other words, the learner does not have to operate on the time frame dictated by the course provider, as she would in a shared learning experience. We believe that courses taken in an IEL format will be better suited to take advantage of a modular learning object-based structure that will allow the learner to receive a truly personalized learning experience. Using pre-assessment tests and the learner’s digital profile, the learning management system will be able to construct the optimal course for the learner. Despite what we see as the many benefits of shared learning experiences, as described in preceding paragraphs, we believe that the IEL format may become one of the most We believe that the IEL frequently used means of learning via networked technology because of its format may become one just-in-time nature and customizability. of the most frequently used means of learning IEL Technical Elements: A course taken in an IEL format will have via networked technology many of the same features as a course in the ASL format. However, because of its just-in-time because there will generally not be an instructor in an IEL experience, the nature and learning management system should be designed to give feedback to the customizability. learner himself, or his supervisor, that will assist in achieving stated learning objectives. One of the most important features of the LMS will be its ability to conduct pre-assessments so that relevant courses can be built from modular learning objects. We believe technology that allows highly-customized courses to be built on the fly based on a learning profile and learning objectives will become increasingly more sophisticated in the years to come, and will be the “killer app” of the eLearning industry. Again, we would refer readers to our research on eLearning standards at the end of this section.

Page 83 of 107

NEXT ON THE AGENDA FOR ELEARNING? While we believe that current eLearning technologies are exciting, we believe that today’s applications are only scratching the surface of what is possible. Below we talk about some of the advances in technology (from the general to the specific) that we expect will make eLearning an indispensable part of our daily lives in the years to come.

Broadband Options Today, the richness of an eLearning experience is most severely limited by bandwidth constraints. The use of multimedia components such as audio, video, animations, and simulations are only feasible if the learner has ample bandwidth to receive them. However, the ability to include multimedia components is often what makes eLearning options attractive in the first place. According to U.S. Department of Defense data, people have short-term retention of what they hear, 40% retention of what they see and hear, and 75% retention of what they see, hear, and do. Therefore, building in components that allow the learner not only to read and listen to material, but also to practice it using simulations is critical to an effective eLearning experience. We believe that coming high-bandwidth, or broadband, technologies will remove many of the barriers to rich eLearning experiences. While only about 3 million North Americans now have access to broadband services, that We believe that coming number is forecasted to grow by six to eight times in the next three years. high-bandwidth, or Some of the broadband options include the following. broadband, technologies will remove many of the • T1 Line: For most mid-size to large companies that intend to be barriers to rich eLearning heavy users of eLearning, a T1 line will be the likely choice. T1 experiences. lines are digital circuits between a long-distance carrier and the customer, providing access at rates up to 1.54 megabits per second (mbps). Though expensive, a T1 line has the ability to transfer large amounts of information both downstream (to your computer) and upstream (away from your computer), a feature necessary for the transmission of large files. •

Cable Modems: For home-based eLearners, probably the quickest and most affordable Internet connection you can get is a cable modem, delivered to you by the same people who bring you ESPN and CNBC. Although actual rates will depend on who else in your neighborhood is using a cable modem at the same time, cable is capable of delivering downstream access at up to 10 mbps and upstream connectivity at between 200 kbps and 2 mbps. This always-on technology (no dial-up) is a viable solution for learning from the comfort of your own home. IDC predicts that the cable modem subscriber base in the U.S. will grow to 9 million users by 2003. We believe that cable modem access will be big in schools too, where more classrooms today are cable-ready than have phone lines that can be used for dial-up access. The cable industry has already gotten into the education act by installing free cable modem service in more than 5,700 schools and public libraries in the U.S.

•

DSL: Digital subscriber line (DSL) technology is cable’s main competition for delivering broadband access to the home. Provided by the telephone company via the existing copper wire, DSL comes in two flavors: asynchronous (ADSL) and synchronous (SDSL). ADSL is capable of providing downstream access at up to 8 mbps and upstream access of 1.5 mbps, while SDSL provides equally broad bandwidth in both directions. Again, the rates mentioned are maximum rates; actual DSL rates will depend on how far away you are from the phone company’s switching site.

•

Satellite: For rural areas where cable and telephone companies haven’t gotten around to providing broadband service, satellite access is an option. If you have an open view to the southern sky, data can be beamed to your dish and on to your computer at a rate of about 400 kbps. However, because satellite transmissions are one-way, you also have to have a separate ISP connection to send data back upstream. So, if you need to send large homework files to your professor across the country, you may be out of luck with satellite service.

Page 84 of 107

ASP Model Application service providers host software applications on their own servers for clients who can then access them remotely via a Web browser. Particularly for companies implementing enterprise-wide learning systems or educational institutions looking to affordably offer a wide variety of applications to students with minimal management and maintenance effort on the part of the institution, we believe that the ASP model of delivery may make a lot of sense. Although ASPs are not yet used widely, especially in the education and training industries, there are a number of vendors now pursuing this strategy within the eLearning industry. We expect growth in the number of eLearning applications offered via an ASP model for several reasons. •

IT Personnel Shortage: IT staffs at companies and educational institutions all over the world are stretched thin. Outsourcing the day-to-day management and maintenance of learning applications relieves the IT department of that burden.

•

Fast, Affordable Implementation: Using software applications via the ASP model may be the most efficient for a couple of reasons. First, the customer does not have to buy the software or any of the other equipment used to run it (e.g., servers, operating systems, etc.). Second, in the time it might take an organization to install an application in the traditional (client/server) model, an ASP-delivered application can be up and running and being productively used by learners. Third, the customer does not have to deal with the costs of Although the ASP model installing software upgrades in the following years. has several obstacles to overcome in terms of • Ubiquitous Access: Because the application is delivered via a Web bandwidth and user browser, learners are able to access it not only from their desk at the comfort with the security office or the school computer lab, but also from home, their laptop, of outsourcing critical or a Web café. applications, we believe that its time in the Although the ASP model has several obstacles to overcome in terms of marketplace is coming. bandwidth and user comfort with the security of outsourcing critical applications, we believe that its time in the marketplace is coming.

Wireless Technology We believe that one of the main reasons that technology has been integrated into the classroom to a very limited extent in our nation’s K-12 schools is the lack of personal computers for students and teachers. Greg Nadeau, the CTO at the Massachusetts Department of Education, describes in a May 2000 Converge article the consequences of this shortage. In general, he says, students wanting to use a computer at school have to wait their turn. Computers in schools are limited either to the computer lab or a few machines in the back of the classroom. In either case, using technology is often more disruptive for teachers than beneficial because it requires a trip from the classroom to the computer lab and the division of the class into groups that cannot work simultaneously. Those of us in the “grown-up” world, who generally have computers of our own, use them as tools for virtually every work task (writing, calculating, planning, communicating). Few of us would be able to function for even a day without our computers constantly at our fingertips. In schools, on the other hand, computers are usually employed for one-time projects that are often more for the purpose of “edutainment” rather than education. Computers end up serving more as toys than tools. Nadeau says, “While browsing the Web has changed the way students research, the work that results from the research (student achievement) is still pretty much the same.”

Page 85 of 107

So, what exactly does all this have to do with wireless technology? We strongly believe that the integration of wireless personal computing technology into schools goes a long way in We strongly believe that getting students more involved in the work they do and, by association, the integration of wireless making their work better. Why wireless? The simple answer is logistics. personal computing Kids move from classroom to classroom all day and need rugged tools that technology into schools can go where they go, including home at the end of the day. Desktop goes a long way in getting computers certainly don’t fit the bill for portability, and laptops that have to students more involved in be plugged into the network with each class change would cause more than the work they do and, by a little disruption to the typical school day and reduce flexibility. That’s association, making their why we believe that many schools looking for networked computing work better. solutions in the future may turn to wireless solutions. A recently approved high-speed wireless standard has made investing in a system both less risky (less chance of obsolescence), less expensive (fewer access points are required to support the same number of students), and faster (rates up to 11 mbps versus 2 mbps under the old standard). Manufacturers already have equipment on the market that is standards-compliant, and we expect to see more school districts go with a wireless network as these vendors start making their pitches to schools.

ELEARNING IN ACTION

Wireless U Some universities are also starting to take steps toward a wireless campus. This fall at Buena Vista University, which has campuses at multiple locations in Iowa, students and faculty will all be equipped with notebook computers that will be able to connect wirelessly to the campus network through a program called eBVyou. The 130 wireless access points located across campus will allow students to access the network anywhere from classrooms to dorms to the local lake. In similar fashion, the Owen Graduate School of Management at Vanderbilt University started a test run of a wireless network for the business school in January 2000. The incoming MBA class of August 2000 will be required to have an Owen-configured laptop, which will have access to the network throughout the school, into the courtyards and even reaching to local coffee shops. The recent improvements in rates of data transfer and costs have been cited as key reasons the school decided to go with a wireless campus.

Admittedly, the cost today of outfitting younger students with laptops designed to withstand the punishing effects of life with a kid is, in general, still prohibitively high for most schools. However, some schools around the country have already begun implementing such programs, and although there are not yet enough such cases to provide statistical proof of performance improvement, the anecdotal evidence is encouraging. Particularly for students who have not demonstrated academic success in the past, the use of laptops seems to create a better attitude toward and engagement in learning, resulting in improved academic performance. While we do not expect to see laptops on the desks of every middle and high school student in the next couple of years, we do look for this trend to grow over the coming decade. In the meantime, we believe that more schools will invest in temporary wireless solutions, such as mobile carts equipped with laptop computers that connect wirelessly to an access point on the cart that can be wheeled to classrooms when they are needed. However, we believe that personal laptops for students will eventually become a reality with financial support from federal, state, and local government, parents, and also corporations who are increasingly realizing that the development of a tech-ready workforce must begin at a young age.

Page 86 of 107

Internet2 Thought one Internet was more than you could handle? Well, just wait because Internet2 (I2) is on its way. For those of us who get impatient with even the high-speed cable and DSL options, I2 is just what we’ve been waiting for. A record-setting data transmission via I2 was recently clocked at over 900 mbps (more than 1,000 times faster than a typical modem), leaving even the above-mentioned high-speed options solidly in its dust. Perhaps even more impressive is its ability to guarantee that content will arrive at its destination on time and in its proper form, meaning, for example, that transmitted video would come through in a full-screen format completely clearly, without jerkiness or dropped frames; the picture quality will actually be better than today’s television broadcasts. For now, though, access to I2 is limited to a group of universities, corporations, and government agencies who are trying to get back to what the Internet was originally intended for: academic collaboration. Started in 1996 as a university project to allow the transfer of huge amounts of data and streaming video over networks for the purpose of learning and research, I2 went live in February on a $500 million fiberoptic backbone. The possibilities for learning and research over I2 are endless – students working together in a virtual lab, real-time observation of medical procedures in better-than-TV-quality video, eerily real simulations, complete access to vast digital libraries . . . the list goes on. As an example of how I2 is being used today, an announcement was made recently that 11 of the world’s leading astronomical observatories located on the peak of Mauna Kea in Hawaii have been hooked up to I2, allowing greatly enhanced capabilities for remote use of the telescopes. While the main purpose of this connection is certainly for scientific research, there are already plans to share findings with the public via virtual observatory tours that can be transmitted to libraries, planetaria and classrooms all over the world. Plans for I2 are not for it to remain locked in the grip of academia, though. More than 60 corporations and 30 other organizations have joined the team of 170 universities in the I2 project, all hoping to benefit from this joint effort to develop the Internet and, perhaps more importantly, its various applications beyond our wildest imaginations. Recently, the I2 consortium announced that K-12 school districts would also be allowed to partner with universities to participate in the I2 project. We believe that I2 has enormous implications for eLearning down the road, simply because it will make concerns about the capabilities of the technological medium secondary to providing meaningful educational experiences.

We believe that I2 has enormous implications for eLearning down the road, simply because it will make concerns about the capabilities of the technological medium secondary to providing meaningful educational experiences.

Games and Simulation as Training Any parent will attest to the fact that nothing holds a kid’s attention like video games. With their high levels of interactivity, video games present users with numerous (and sometimes complex) sets of decisions and then provide immediate feedback from those decisions. Although the feedback from your Nintendo system may be a little unrealistic, the concept is the same as in eLearning: The user gets to see the outcome of a decision in a virtual setting. This type of training goes straight to the heart of the phrase “practice makes perfect”. Simulation technology can be effectively used not only in business applications (e.g., participating in a virtual contract negotiation), but also for more active jobs, like flying a helicopter. The U.S. military is actually one of the more active users of simulation technology. Since the tasks that members of the military are expected to perform may only arise in the event of an actual conflict, they must have alternative ways to practice their skills in a setting that reduces the possibility of dangerous consequences. Technology-based simulations fit the bill perfectly. While video games and simulations today are much more advanced in the entertainment world than they are in the realm of learning, we look for this to be a big area of growth for content publishers.

Page 87 of 107

Electronic Performance Support Systems (EPSS) If we view the key goal of eLearning as being performance improvement, then electronic performance support systems put us one step closer to that end. Although an EPSS can be defined in several different ways, it is basically a system that allows its user to accomplish a task with little or no previous training and without help from a human. The website epss.com! defines an EPSS as a computer system that “integrates software tools, knowledge and learning experiences to improve business performance by (a) bringing individuals up to speed in their work as quickly as possible and with the minimum of support from other people, and (b) providing an electronic infrastructure to enable organizational learning.” In his article, “EPSS: Expanding the Perspective”, Bill Miller describes an EPSS as software that has the following characteristics. • • •

Process simplification: Reducing the complexity or number of steps required to perform a task Performance information: Providing the information an employee needs to perform a task Decision support: Enables an employee to identify the action that is appropriate for a particular set of conditions

Electronic performance support ranges in scope from the automatic spell-checker on your word processor to wearable computers that create an “augmented reality display” complete with instructions and graphics that appear on the surface of the area on which The beauty of an you’re working. Although we do not believe that an EPSS and an integrated EPSS is that it allows learning system will ever be (or even should be) completely interchangeable the user to learn while technologies, we do believe that they are highly complementary. While actually accomplishing traditional learning experiences, and even eLearning experiences, can the task at hand. In provide a solid base of understanding for performing a task, we believe that other words, EPSS most people agree that the best way to learn is by doing. The beauty of an allows just-in-time EPSS is that it allows the user to learn while actually accomplishing the task learning at its best. at hand. In other words, EPSS allows just-in-time learning at its best. In addition, while much of our discussion thus far in this report has focused on eLearning as it relates to what we call “knowledge workers”, EPSSs also have important applications in jobs that require more manual labor. In an article entitled “Wearable Training” in the April 2000 issue of Inside Technology Training, author Kim Kiser describes the wearable computer that Florida postal clerks can use to fix sorting equipment. The system is comprised of a tiny computer, a holster with a 4-inch monitor, a battery pack, and an audio transmitter. When faced with broken equipment, the user can connect to the server in order to retrieve diagnostic and repair information about the machine in question. Similar systems have been designed for auto mechanics who are increasingly dealing with unfamiliar computerized equipment in the cars they work on. Instead of having to constantly refer to a growing stack of manuals, the necessary information was loaded onto wearable, voice-activated computers that could retrieve and display sophisticated diagnostic help on the attached monitor. Kiser goes on to describe coming advances in touch screens, speech recognition software, and displays that are integrated into eyeglasses that will enhance the usability of a wearable EPSS.

Page 88 of 107

ELEARNING STANDARDS:

CREATING A BLUEPRINT FOR THE FUTURE

To put it as simply as we can, we believe that learning standards will allow for the interoperability of the various products and services offered by eLearning vendors, and the interoperability of these components will enable the customization of learning programs to the learner’s needs. We do not think it is too strong a statement to say that learning standards are the Holy Grail of the eLearning industry. What follows, as promised, is our in-depth explanation of these learning standards we have been mentioning. Frankly, we believe that this report places more emphasis on the issue of open, industry-wide standards as it relates to eLearning than many other investment-oriented reports have, but there is a reason that we are focusing on it. While it can be a confusing topic, particularly in light of the still-developing standards environment, and may seem to be Companies that are not more of an academic than financial discussion at this point, we believe it is on board with the crucial to understand. We believe that the widespread adoption of a set of standards issue early in learning standards will be a critical turning point for eLearning and will the process will, we mark the inflection point of dramatic growth for the industry. Companies believe, be at a significant that are not on board with the standards issue early in the process will, we competitive disadvantage. believe, be at a significant competitive disadvantage. We make the above statements without apology for their scope. We will spend considerable time reviewing the specifics of the emerging set of learning standards, but we believe that the truth in our assertion of the importance of standards has been proven in innumerable other areas throughout history. Imagine, for example, a railroad system without standards for track width, or stereos without a standard for the CDs we play in them, or the Internet without standards such as TCP/IP, HTTP, and HTML. When it comes right down to it, standards are an integral part of virtually everything. There is a reason that we don’t worry about whether the copy of The Godfather we rent at Blockbuster will play on our VCR at home or if the size 8 shoes we order on the Internet will fit. The reason is that just about everything, from home video technology to shoe sizes, is based on accepted sets of standards. Whether the standards were developed through a formal process (de jure) or simply evolved through time (de facto), the existence of standards is largely responsible for the relative ease with which we accomplish most tasks in our daily lives.

eLearning Takes on the Standards Challenge Given this argument, it is relatively easy to understand why a set of standards for the eLearning environment are essential. If I want to run course content authored by one vendor on a learning system from another vendor and then assess my performance with a test from yet another vendor, then it only makes sense that there should be some set of operational standards on which they are all based, making these separate components interoperable. In fact, we do not believe that a mature eLearning economy can develop without the existence of such standards. It may come as a surprise then, that such a set of formal standards does not yet exist. We believe it is because of this lack of standards that the industry is as fragmented and immature as it is today. We strongly believe that once a set of standards exists in a workable form and consumers are educated on their merits, purchasers will begin demanding We believe it is because of standards-compliant products, and the industry will undergo a dramatic the lack of standards that transformation in terms of organization and efficiency. Although the next the industry is as couple of years will be characterized by overt efforts to implement fragmented and immature learning standards, the ultimate result will be that everyone will be using as it is today. standards-based products without even thinking about it. (When was the last time you gave much thought to why your VCR works, no matter what video you put in it?)

Page 89 of 107

The key benefits that we believe will result from the industry-wide adoption of a set of learning standards are best summed up in the following list of “abilities.” The “ABILITIES” list of content enablers Accessibility: Access instructional components from one remote location and deliver them to many other locations. Interoperability: Use instructional components developed in one location with one set of tools or platform in another location with a different set of tools or platform. Adaptability: Tailor instruction to individual and situational needs. Reusability: Incorporate instructional components into multiple applications. Durability: Operate instructional components when base technology changes, without redesign or recording. Affordability: Increase learning effectiveness significantly while reducing time and costs. Source: M. Parmentier, 1999

Virtually all of these “abilities” deal with the issues of efficiency and effectiveness – efficiency and effectiveness in design, in development, in finding, in purchasing, and in using. As product life cycles grow shorter and shorter, companies are We believe that the increasingly searching for quick, inexpensive ways of getting their need for speed is one employees, suppliers, and customers up to speed on the latest of the key factors that developments. We believe that this need for speed is one of the key factors is driving demand for that is driving demand for eLearning, and only through the use of standards eLearning. will eLearning vendors be able to deliver the products and services that will meet that demand. However, the standards must first be developed. Who’s Who in the Standards World Fortunately, for all parties involved (vendors and purchasers alike), the process of creating standards for learning is well underway, and, for certain standards, is nearly complete. There are a number of groups, each comprised of various participants from business, academic and government domains, that have been hard at work for the past several years on the development of specifications (the precursors to standards) for learning. Some of the key groups involved in the effort have been the Aviation Industry CBT Committee (AICC), EDUCAUSE’s Instructional Management System (IMS) Project, the U.S. government’s Advanced Distributed Learning (ADL) initiative, the Alliance of Remote Instructional Authoring and Distribution Networks for Europe (ARIADNE), and others. Each group has a somewhat different agenda and, in some cases, a vastly different constituency. However, even without discussing who is involved or what their specific agendas are, we can appreciate the fact that these groups have invested the time they have in the specification development process for a reason. That reason is that the members of these groups see a critical need for a uniform way of creating, publishing, indexing, distributing, finding, buying or selling, and using learning content and tools. While it may seem that the involvement of so many groups in the development of learning standards may result in a “too many cooks spoil the broth” kind of situation, we believe that just the opposite is happening. Each of these groups is working to develop specifications (again note the contrast to standards) which address the needs of its particular constituency. The outcome of all these efforts is a comprehensive body of work that is now converging in order to create an accredited set of standards through a process being conducted by the Institute of Electrical and Electronics Engineers (IEEE) Learning Technology Standards Committee (LTSC). The members of the original specs development groups will eventually take back to their domain the components of the set of standards that apply to their unique work, but what will be left behind is a (generally) comprehensive set of learning standards that they all work from. We are aware that this is confusing and would be happy to discuss the details of the standards development process further with anyone who is interested. However, we believe that at this point it should be sufficient for investors to know that an accredited set of standards, developed by many parties with a stake in its existence, is well on its way to becoming reality.

Page 90 of 107

Learning Objects: What the Standards are Standardizing The next question you should be asking yourself, “So what exactly is this alphabet soup of groups trying to standardize?” Glad you asked, because this is where it gets good. Everything that we’ve been saying in this report that eLearning will be capable of – customizing courses, tracking progress, offering “just-intime” learning opportunities – will only be feasible if the basic infrastructure of an eLearning component is designed to be interoperable and communicate with components from a variety of sources. Within the context of this discussion on standards, these elemental units can be called “learning objects” and are the basis for the standardization We predict that, within a movement. There are numerous definitions of a learning object, but it is few years, much of the basically a small “chunk” of learning content that focuses on a specific content that is created for learning objective. These learning objects can contain one or many the eLearning components, or “information objects”, including text, images, video, or environment will be in the like. Reusability will be supported both at the learning object and object form. information object levels, and because of the standardized way in which these objects will be built and indexed, both learning objects and information objects will be easy to find and use. We predict that, within a few years, much of the content that is created for the eLearning environment will be in object form. Why? Developers recognize that content available in “chunked” form is more likely to be purchased and used for a variety of different contexts by a much broader audience. Also, this granulization of content will allow content providers incredible leverage of their knowledge repositories. Again, let’s return to our video example. Imagine if the VCR you bought was only designed to play movies released by Miramax. You may like Miramax’s edgy style, but every now and then, you feel the need to see something that’s a little more on the sappy side, which is not exactly up Miramax’s alley. Because your VCR only played Miramax videos, you would have to invest valuable time and money in the purchase and set up of a completely different VCR before you could watch Titanic. Companies would face similar but far greater problems if they invested in the purchase and implementation of an enterprise-wide learning system only to figure out later that they couldn't use much of the available training content because it wasn't compatible with their system. You can see why interoperability of eLearning products and services is such a huge issue and why customers who understand it will demand that eLearning products comply with the relevant learning standards.

Page 91 of 107

Cisco’s RIO Strategy As a specific example of how learning standards might be put into use in actual application, we offer the learning object model developed by Cisco, called the Reusable Information Object (RIO) Strategy. Cisco defines an information object as a “granular, reusable chunk of information that is media independent,” whereas the reusable learning object (RLO) is the “wrapper” that is put around a group of 7 +/- 2 RIOs (see diagram). An RLO can best be thought of as a complete lesson that contains an overview that introduces and presents the objective of the lesson, several RIOs, and a summary, which will review the RLO and provide a transition to the next step in the learning program.

Each RIO has a learning objective that supports the RLO's overall objective, and is made up of content items that are used to communicate knowledge, practice items that allow the learner to apply the knowledge, and assessment items that measure the learner’s competency with regard to the content. The following are types of RIOs and examples of each. Concept – What is a car? What are the different types of cars? Fact – That car is a 1999 Honda Accord. An Accord can get X miles per gallon on the highway. Procedure – How to change the oil in an Accord. Process – How an engine works. Principle – Guidelines for taking care of your Accord. We believe that the development and refinement of strategies like this will make an object-based learning economy a reality in the years to come.

Page 92 of 107

Finally . . . The Learning Standards In order to structure our description of the standards that are being created in a way that makes sense with the development efforts that are currently underway, we will simply describe the topics that the various study and working groups in the IEEE LTSC are focusing on. These groups will not necessarily represent the totality of the standards development effort, but certainly comprise the most comprehensive list as of now. Without further ado, let’s delve right into the key stuff that’s being standardized. Data and Metadata: Metadata is best defined as information about information. The metadata that will describe learning objects will include such attributes as author, subject, date, price, etc. Going back to our video example, you can think of metadata as the information provided on the video’s box – things like its title, producer, cast, length, rating, etc. If the video tapes were put on the shelves without their boxes, we would have a much more difficult time finding the movie we wanted to see. Likewise, metadata will enable learning objects to be more easily indexed and stored in content repositories, and subsequently found and retrieved. The standards in this area will • • • •

Metadata will enable learning objects to be more easily indexed and stored in content repositories, and subsequently found and retrieved.

specify the syntax and semantics of learning object metadata, so that the objects can be described in a standardized format that is independent of the content itself. The standard will specify the fields to be used when describing learning objects; facilitate the translation of human languages (to repurpose content for use in different cultures); define a semantic framework that allows the integration of legacy and developing data exchange formats; and provide a common lightweight protocol (like FTP or HTTP) for exchanging data among clients, servers, and peers.

Content Related: Standards related to the content used in learning will exist basically to inform users (and the systems they’re using) of what they’re getting, how they’re getting it, and the best way to use it. Think of these standards as the “How-to” manual for learning content. The specific standards will focus on • the language used to describe and reference the various media components (e.g., audio, video, animations) of CBT. This will be useful in establishing the means for the portability of the components from one system or tool to another; • a mechanism for managing and adapting the presentation of lessons according to the needs of the learner in order to dynamically create customized instructional experiences; and • the packaging (format, coding, encoding, environment, attributes, and interactions) of learning content. This type of standardization will allow simple transmission and activation of learning content. Learning Management Systems and Applications: Learning management systems will play an important role in the facilitation of a learning object strategy. The management system will serve as a type of gateway where content enters, is assembled into meaningful lessons based on the learner’s profile, and is presented to the learner, whose progress is then tracked by the management system. It is crucial, therefore, that the system be able to operate with content and tools from multiple sources. The standards developed in this category will • • •

allow lessons and courses to move from one computer managed instruction (CMI) system to another, while maintaining its ease of use and functionality; make it easier for learning technologies to be implemented on various types of browsers and operating systems; and establish a protocol that aids in the communication between the software tools (e.g., spreadsheets and text editors) that a learner is using and the instructional software agents that provide guidance to the learner.

Page 93 of 107

Learner Related: The main purpose of the movement to develop learning standards is to create a more effective and efficient way for people to learn using technology. The learner-related standards focus on creating a connection between the learner and the technology (and its developers). The working and study groups involved in this effort are working to create standards that will aid in characterizing, identifying, and tracking learners, and in profiling their competencies. The availability of this information will enable the development of more appropriate instruction for the learner. More specifically, the standards will deal with •

• •

the language used in a “Learner Model” that will maintain a characterization of the learner, including such attributes as knowledge, skills, abilities, learning styles, records, and personal information. This will create a sort of electronic learning portfolio that can be used by the learner throughout his lifetime to enhance learning experiences; a means for identifying learners for sign-on and record-keeping purposes; and the components of a user-centered system that will aid in the process of managing life-long learning. It will help with goal-setting, planning, execution, tracking, and documentation in order to provide learners with guidance that will help them achieve independence in reaching learning goals, as well as provide documentation of achieved competencies.

But Don’t Forget the Technical Standards Everything we have discussed thus far has been in relation to learning standards, but also critical to the adoption of industry-wide learning standards are the technical standards on which they will be based. The standard that is emerging as the format for the exchange of eLearning information over the Internet is XML (Extensible Markup Language). Whereas HTML (Hypertext Markup Language), the publishing language of the Web, tells a system how to present (format) content on a page, it is unable to tell the system what the content is. For example, HTML can’t pick out the name of the author or the price of the course from a Web-based eLearning catalog. XML, on the other hand, uses tags that describe the various elements of a page’s content. In other words, XML enables the separation of content from its formatting. XML could, for example, allow a search of the contents of all the various eLearning catalogs from different vendors, no matter how they were formatted, and XML is key to the return a list of all of the courses on a certain subject, along with their reusability and prices and other information. As another, and probably more powerful, customization aspects of example, a piece of content from one course, say a simulation exercise, eLearning. can be plucked out and reused in a different course. XML is key to the reusability and customization aspects of eLearning. We should specify, however, that XML is not unique to the eLearning industry, but rather has been developed by the W3C consortium as a standard that can be adapted by various industries for their particular needs. We emphasize that XML is a standard for creating a specified markup language and is not a language itself. The key goal of XML is to enable the automation of information exchange, and is particularly suited to business-to-business transactions and integration of data. Any entity with a need to exchange data among its members (e.g., a company, a supply chain, or an industry) can establish a common “vocabulary” that is used to tag information. Many groups, including the ones involved in the development of eLearning specifications, have already begun this process, creating languages for the exchange of information on everything from genealogy to chemistry. Because XML is relatively simple and inexpensive to use (in terms of both programming and implementation), we believe that it will experience adoption levels above those of some of its predecessors that were designed for similar purposes.

Page 94 of 107

Learning Standards Summary Just to review, we believe that the key benefits of the emerging learning standards are the following. • •

Tagging material with metadata will make it much easier to find and deploy the appropriate learning material and to track its use. Standardization will allow you to use instructional material in any management system.

•

Standardization will enable the granularization of content (its breakdown into smaller learning objects) so that content can be reused in various customized courses.

•

Standards can help make courses richer and more effective by allowing the instructor to track and adjust the courses immediately based on student performance.

•

Standardization can help create a commercial infrastructure for the development, sale and distribution of instructional material throughout the world.

We believe that each of these issues is critical to the large-scale commercial implementation and acceptance of eLearning. Fortunately, learning standards are well on their way to becoming a reality and some vendors are already incorporating the specifications on which they’ll be based into their products. The next major hurdle for the industry is to increase the awareness of learning standards among potential customers. We believe that customers who understand the significance of standards and the related issue of interoperability will be much more willing buyers of eLearning.

Page 95 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 96 of 107

CONCLUSION

Page 97 of 107

CONCLUSION In this report we have presented an in-depth examination of the eLearning industry with an eye to uncovering the exciting investment opportunities it offers. We first argued that with powerful growth in demand for eLearning products and services, exceptional leveraging opportunities, and with thorny issues of valuation notwithstanding, the eLearning space should provide excellent returns for investors. We then established a system of classification for companies in this space and divided the public and private players accordingly in terms of the principal markets served, core offerings, and revenue models. In the third section we discussed our projections for the academic, corporate, and consumer markets. In the final section, we explored the technology behind this industry--past, present and future--and discussed the crucial issue of industry standards. While we believe it is important for investors to have a thorough understanding of all these issues, the bottom line is that we are recommending investments in the eLearning industry because we believe that the learning industry is set for rapid growth and that technology will transform this industry, as it has many others. eLearning Addresses the Learning Needs of the 21st Century We believe that eLearning stands at the crossroads of the information economy and the knowledge economy. While the Internet generates an unwieldy excess of information, it also enables products that can empower workers, students, and private individuals to harness this information. We expect networked technology to transform learning just as it has virtually every other technology. •

eLearning is not simply a new way to carry out the same old education and training activities that have driven the learning process for centuries, but rather is a fundamentally more efficient and effective way to organize and deliver knowledge resources to businesses and individuals competing in the knowledge economy.

•

For organizations that need to deliver learning resources, eLearning allows scalability, accessibility and timeliness – issues that are critical to global enterprises operating on Internet time.

•

For learners, eLearning provides a learning experience that is personalized, interactive, just-in-time, current and user-centric.

eLearning Will Experience Powerful Growth We expect that eLearning companies will spearhead the growth of the learning industry that was kicked off during the late 20th century. The eLearning industry will be pivotal to the economy and society as the ability to learn becomes the core and defining capacity of organizations and individuals. •

Comprised of academic, corporate and consumer sectors, the learning market is huge.

•

Growth of the learning industry has occurred because the products and services it offers address the large (and rapidly growing) demand for human capital. Human capital is the key to success in the knowledge economy.

•

The for-profit eLearning companies that are targeting these sectors have only cornered a minute portion of the market but capture a rapidly expanding share of this growth industry.

The information contained herein is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed. The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of every material fact respecting any company, industry or security. Morgan Keegan & Company, Inc. and its officers, directors, shareholders, employees and affiliates and members of their families may make investments in a company or securities mentioned herein before, after or concurrently with the publication of this report. Morgan Keegan & Company, Inc. may from time to time perform or seek to perform investment banking or other services for, or solicit investment banking or other services from any company, person or entities mentioned herein. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any security.

Page 98 of 107

PUBLIC COMPANIES MENTIONED IN THIS REPORT NOT ELSEWHERE PRICED (Price as of 7/5/00) 3Com (COMS - $57 9/16) Advantage Learning Systems (ALSI - $16 3/4) Amazon.com (AMZN - $36 1/2) America Online (AOL - $54 3/4) American Education Corp. (AEDU - $0.5625) Apollo Group (APOL - $30 3/16) Arel (ARLCF - $10 1/8) Aris (ARSC - $2 7/8) Caliber Learning Network, Inc. (CLBR - $4 1/8) Charles Schwab Corp. (SCH - $32 11/16) Cinar Corp. (CINRE- $7) Cisco Systems (CSCO - $61 7/8) Dell Computer Corp. (DELL - $47 7/16) Eduverse.com (EDUV - $0.5001) eKnowledge Group (EKNO - $3) FatBrain.com (FATB - $6 13/16) Futurmedia PLC (FMDAY - $1 1/2) General Electric (GE - $49 13/16) HealthStream (HSTM - $5 13/32) IBM (IBM - $104) Infonautics (INFO - $4 5/8) Intel Corp. (INTC - $131 5/8) Lands’ End (LE - $34 7/16) Microsoft Corp. (MSFT - $78 1/2) National Computer Systems (NLCS - $48 5/16) Oracle Corp. (ORCL - $72 5/16) PLATO (TUTR - $14) Riverdeep (RVDP - $19 3/8) Scientific Learning (SCIL - $21 13/16) Sun Microsystems (SUNW - $86 1/2) Yahoo Inc. (YHOO - $120 13/16) Youthline USA, Inc. (YLNE - $3)

Page 99 of 107

Page 100 of 107

Page 101 of 107

Page 102 of 107

Page 103 of 107

Page 104 of 107

Page 105 of 107

MORGAN KEEGAN

ELEARNING INDUSTRY REPORT

Page 106 of 107

RESEARCH STAFF David M. Guthrie, CFA – Director of Research (901) 529-5430 Geoffrey D. Check, CFA – Assistant to the Director (901) 579-3525 CONSUMER SERVICES Retailing John R. Lawrence Kevin C. Sowers – Associate Analyst

(901) 579-4203 (901) 531-3227

Softlines Rick L. Snyder Leah M. Hollstein – Associate Analyst

(901) 531-3261 (901) 531-3397

Leisure and Recreation Robert DeLean William R. Renovich – Associate Analyst

(901) 524-4191 (901) 579-4451

REAL ESTATE Manufactured Housing and Real Estate David H. Tannehill, CFA Jennifer M. Russell – Associate Analyst

TECHNOLOGY Telecommunications / Transaction Processing Ramkrishna P. Kasargod, CFA (901) 579-4246 Tavis C. McCourt (901) 579-4545 Ajay P. Kasargod – Associate Analyst (901) 531-3331 Laura A. Champine – Associate Analyst (901) 531-3370 Harold L. Goetsch

Restaurants Lynne L. Collier Michael D. Carney – Associate Analyst

(214) 706-7504 (214) 706-7508

DIGITAL MEDIA AND ENTERTAINMENT Murray J. Arenson (214) 706-7502 B. Michael Poustovoi – Associate Analyst (214) 706-7503 ENERGY Oil Service W. Neal McAtee, CFA Amy K. Dobson – Associate Analyst Will E. McKinney – Associate Analyst

(901) 529-5316 (901) 531-3407 (901) 531-3366

Shipbuilding and Offshore Construction Brent D. Rakers, CFA Kevin M. Carlucci – Associate Analyst

(901) 579-4427 (901) 531-3345

Exploration & Production Subash Chandra, CFA P. Donatello Pitts – Associate Analyst

(713) 402-3718 (713) 402-3717

FINANCIAL SERVICES Financial Institutions Christopher T. Kelley, CFA Letitia M. Thompson – Associate Analyst J. Cory Shipman – Associate Analyst W. Gustav Johnson – Associate Analyst

(901) 579-4559 (901) 579-3521 (901) 531-3417 (901) 531-3350

HEALTHCARE Healthcare Services Kelly R. Crowe Theresa L. Womble – Associate Analyst

(901) 579-4301 (901) 531-3365 WEB ADDRESS: WATS:

(901) 579-4534 (901) 579-3520

(901) 579-4560

E-Services D. Andrew Shipman, CFA Clare C. Hodge III – Associate Analyst

(901) 579-4292 (901) 531-3278

System Area Networks Robert M. Montague Steven L. Denegri Thomas H. Curlin – Associate Analyst Brian S. Freed – Research Assistant

(901) 579-4311 (901) 579-4916 (901) 531-3260 (901) 531-3327

TECHNOLOGY DISTRIBUTION David C. Childe, CFA Michael J. Coleman – Associate Analyst

(901) 531-3242 (901) 531-3348

John R. Lawrence Kevin C. Sowers – Associate Analyst

(901) 579-4203 (901) 531-3227

TRANSPORTATION TL Carriers/LTL Carriers/Special Situations Douglas L. Col (901) 579-3547 L. David Traywick - Associate Analyst (901) 531-3377 Air Freight/Railroads Arthur W. Hatfield Danna E. Wright – Associate Analyst

(901) 579-4868 (901) 531-3461

www.morgankeegan.com U.S.: 1-800-366-7426 U.K.: 0-800-892-028 Canadian: 1-800-654-4528

MORGAN KEEGAN was founded in 1969 to provide sound investments for investors and to raise capital and provide advisory services to corporations, governments and institutions. As a result of the success of this original mission, Morgan Keegan has developed an international business with specific focus in the following industry sectors: consumer, energy, healthcare, transportation services, technology, real estate and financial institutions. Morgan Keegan has focused its research, investment banking and trading resources in these sectors and will continue to build depth of service in these sectors for the benefit of investors, corporations and institutions.

Page 107 of 107