Facts, Figures &
Forces Behind
e-Learning
Compiled and prepared by
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Table of Contents
Executive Summary.................................................................................................................... 3
About This Document ............................................................................................................. 4
PART I What Is e-Learning & What Are The Driving Forces Behind e-Learning....................... 5
What Is e-Learning?.................................................................................................................... 6
E-Learners Maximize The Medium ......................................................................................... 6
e-Learning vs. Online Learning ............................................................................................... 7
New Way of Learning ............................................................................................................. 7
The e-Learning Value Pyramid................................................................................................ 8
Benefits of e-Learning........................................................................................................... 10
Driving Forces Behind e-learning.............................................................................................. 13
New Economy Megatrends.................................................................................................... 13
Megatrend #1: Changing Demographics ................................................................................ 13
Megatrend #2: The Technology Revolution ........................................................................... 16
Megatrend #3: Globalization ................................................................................................. 19
Megatrend #4: Branding........................................................................................................ 20
Megatrend #5: Consolidation................................................................................................. 21
Megatrend #6: Outsourcing and Privatization ........................................................................ 22
Drilling Down Into Computer & Web Trends ........................................................................ 24
Notable Internet Trends ......................................................................................................... 27
Driving Forces ...................................................................................................................... 31
Need For e-Learning?............................................................................................................ 33
Key Trends 鈥? The End Of Learning As We Know IT............................................................. 35
Next Generation of Workers.................................................................................................. 37
Corporate Workforce Pressures ............................................................................................. 40
Technical Industry Forces 鈥? The Giants (AOL, AT&T, IBM, Microsoft 鈥?) .......................... 42
Continued Effort to Reduce Costs and Improve ROI.............................................................. 48
PART II How Big Is The e-Learning Market............................................................................ 51
How Big Is The Market?........................................................................................................... 52
World Wide Education Market .............................................................................................. 52
Consumer/Home Education Products and Services ................................................................ 54
K-12 Market.......................................................................................................................... 61
Post-Secondary ..................................................................................................................... 63
Corporate Training ................................................................................................................ 67
IT Training Industry .............................................................................................................. 74
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
EXECUTIVE SUMMARY
e-Learning is the convergence of the web and learning on all levels, whether it be elementary
school, college, or business. Knowledge is now considered a competitive advantage and a
company鈥檚 most important asset. Many facts, figures, and forces behind e-Learning are not only
causing excitement in boardrooms across the world but are also making Wall Street and the
investment community take a closer look.
e-Learning is made up of several methods of learning, which are enhanced or facilitated by
technology. As a component of e-Learning, web-based or online learning is likely to be the
fastest-growing method for delivering education and training.
Megatrends in areas such as demographics, technology, globalization, branding,
consolidation/privatization, and outsourcing will greatly affect the way we learn. These
megatrends will affect all learning markets including early education, K-12 education, post-
secondary education, corporate training, and consumer products and services. The dearth of
skilled labor in the corporate world will only increase the need for e-Learning.
One of the biggest trends affecting the size of the e-Learning market is the astounding growth on
the Internet. In the next three years, devices on the Internet are expected to grow from 147.4
million to 345.6 million. In the four-year period between 1998 and 2002, 223 million new users
will be online worldwide. By 2002, 21.9 million more kids and 16.6 million more teens will be on
the Web. Global online ad spending will reach $33 billion by 2004 and e-Commerce is expected
to top the $1 trillion mark by 2003.
Many giants in the technology world are investing in and providing advanced products for
and services tailored to the learning market. These companies, which are expected to make
great inroads into e-Learning, include AOL, Yahoo, Microsoft, IBM, AT&T, Sun Microsystems,
Oracle, and Harcourt.
The global education and training market is a $2 trillion industry, with $740 billion in the U.S.
Approximately 10% of the $740 billion is 鈥渇or-profit鈥? business. The growth rate for the different
education and training markets is projected at 10-15% but, at least in the corporate sector, e-
Learning will far outstrip classroom training over the next few years, claiming almost half of the
overall corporate training market.
Educational trends include home schooling, which is growing at 15% ($1.3 billion market). Ten
percent of students are attending private schools ($2.6 billion market). The number of high school
graduates is expected to increase 20% by 2008, while working adults represent nearly half of all
post-secondary students.
Educational software was a $7 billion market in 1997 and is expected to grow by 14% over the
next few years; $2.5 billion of the $6.1 billion supplemental educational materials market is sold
to consumers, and educational toys are the fastest growing segment of the toy market. All these
trends seem to reflect both demographic and societal movements toward providing a better
education for anyone who wants to learn.
In the lifelong learner market, self-help books grew at a 21% rate from 1993-1997, and 87% of
people that go online do so to pursue information about a hobby or lifelong interest.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
By 2003, corporate training will expand to $62.5 billion with $15 billion in outsourced
training. Currently, small- to medium-sized businesses are being overlooked in the emerging e-
Learning space but probably not for long. Nearly 60% of the workforce is employed by small- to
medium-sized businesses and employees of these smaller businesses are more likely to turn to the
web for training resources.
About This Document
This document is an abridgement of several documents from various investment groups that are
investigating e-Learning and expecting it to be one of the next big things to be revolutionized by
the Internet. The investment groups represented in this document include Merrill Lynch, Banc of
America Securities, USbancorp 鈥? Piper Jaffray, SunTrust Equitable, WR Hambrecht + Co,
Thomas Weisel Partners, and Dain Rauscher Inc.
This document is broken into two parts. The first part answers the question, 鈥淲hat is e-
Learning?鈥? and focuses on the trends and forces behind e-Learning. The second part of the
document addresses the numbers and the size of the learning market. Although the numbers
mentioned in the various e-Learning reports differ, the opportunities remain extensive.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
PART I
WHAT IS E-LEARNING?
&
WHAT ARE THE DRIVING FORCES BEHIND
E-LEARNING?
5
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
WHAT IS E-LEARNING?
You can find nearly as many definitions of e-Learning as you can people willing to pontificate
about any major industry, perhaps because learning is becoming so important to so many. The
following are a few of the definitions of e-Learning:
e-Learning is the convergence of learning and the Internet. 鈥? Banc of America Securities
e-Learning is the use of network technology to design, deliver, select, administer, and extend
LEARNING. 鈥? Elliott Masie, The Masie Center
We define e-Learning companies as those that leverage various Internet and Web technologies to
create, enable, deliver, and/or facilitate lifelong learning. 鈥? Robert Peterson, Piper Jaffray
e-Learning is Internet-enabled learning. Components can include content delivery in multiple
formats, management of the learning experience, and a networked community of learners, content
developers and experts. e-Learning provides faster learning at reduced costs, increased access to
learning, and clear accountability for all participants in the learning process. In today's fast-paced
culture, organizations that implement e-Learning provide their work force with the ability to turn
change into an advantage. 鈥? Cisco Systems
E-Learners Maximize the Medium
In a USbancorp 鈥? Piper Jaffray report titled Helping Investors Climb the e-Learning Curve,
Robert W. Peterson, Mark A. Marostica, and Lisa M. Callahan define the 鈥渆鈥? in e-Learning from
the perspective of the user1:
What The 鈥渆鈥? Is About
exploration e-Learners use the Web as an exploratory tool to
access a plethora of information and resources.
experience The Web offers e-Learners a total learning
experience, from synchronous learning to
threaded discussions to self-paced study.
engagement The Web captivates learners by enabling creative
approaches to learning that foster collaboration
and a sense of community.
ease of use Not only is the Web easy to use for learners who
are already familiar with the navigation
capabilities of the medium, but to learning
providers as well, as they can easily make content
immediately available to learners across all
technical platforms (Windows, N4AC, Unix, etc.).
empowerment The Web puts learners in the driver's seat with a
set of tools that enables personalization of content
and allows learners to choose the way in which
1
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 13.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
they best learn.
e-Learning vs. Online Learning
The Corporate e-Learning: Exploring a New Frontier report by WR Hambrecht +Co clearly
identifies the differences between e-Learning and online learning2. e-Learning represents the
whole category of technology-based learning, while online learning is synonymous with web-
based learning. In this case, online learning is actually a subset of e-Learning.
e-Learning = Technology-based Learning
The term e-learning covers a wide set of applications and processes, including computer-
based learning, Web-based learning, virtual classrooms, and digital collaboration.
We define e-learning as the delivery of content via all electronic media, including the Internet,
intranets, extranets, satellite broadcast, audio/video tape, interactive TV, and CD-ROM. Yet, e-
learning is defined more narrowly than distance learning, which would include text-based learning
and courses conducted via written correspondence. For the purpose of this report, the term e-
learning is used synonymously with technology-based learning. Terms like e-learning,
technology-based learning, and Web-based learning are defined and used differently by different
organizations and user groups. Moreover, use of these terms is constantly changing, as the world
of e-learning evolves.
Online Learning = Web-based Learning
Online learning constitutes just one part of technology-based learning and describes learning
via Internet, intranet, and extranet.
Levels of sophistication of online learning vary. A basic online learning program includes the text
and graphics of the course, exercises, testing, and record keeping, such as test scores and
bookmarks. A sophisticated online learning program includes animations, simulations, audio and
video sequences, peer and expert discussion groups, online mentoring, links to material on a
corporate intranet or the Web, and communications with corporate education records. In this
report, the term online learning is used synonymously with Web-based learning or Internet-based
learning.
New Way of Learning
In a SunTrust Equitable Securities report, titled e-Learning and Knowledge Technology, Richard
C. Close, Rob Humphrys, and Brian W. Ruttenbur explain how important e-Learning will
become3:
Technology is increasingly changing our lives. First, it was the emergence of the desktop
computer, now it is the Internet. It enables the ordinary person to have access to never-ending
quantities of information and knowledge. Technology and the Internet empower individuals and
facilitate a more active role in the educational process. As previously mentioned, the Internet has
transformed the way people shop (B2C) and the manner in which businesses conduct transactions
2
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 8.
3
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 9.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
with each other (B2B). Over the last several months, we have seen the evolution of a third area
that we believe can have the most significant impact on all our lives. The e-Learning sector is just
beginning to emerge. Just as the Internet has transformed the retail market, we remain confident
that it will also transform the education and knowledge markets. As stated in a New York Times
article summarizing John Chambers' (CEO Cisco Systems) comments at 1999's COMDEX
Conference, 鈥淭he next big killer application for the Internet is going to be education. Education
over the Internet is going to be so big it is going to make e-mail look like a rounding error." As
more individuals become connected, the Internet will penetrate deeper into our everyday activities,
including the way we learn.
The Internet has the ability to level the learning playing field. Whether it is a high school student
seeking assistance with a geometry question or a father at home in Iowa who wants to get an MBA
from Duke University鈥檚 Fuqua School of Management's distance education program. Individuals
now have the power to learn on their own time and at their own pace. E-learning technologies
allow for the real-time performance, thus enabling individuals to spend time on their deficiencies
rather than spending time on areas that they have already mastered. Not only will e-learning
improve the achievement of students from kindergarten to high school, but also the productivity of
Corporate America's workforce. We believe that the e-learning market will realize substantial
growth over the next five to ten years. Moreover, we believe that as bandwidth, video, and voice
technology continue to improve, the demand for e-learning products and services will grow
exponentially.
SunTrust Equitable also points out that the trends indicate there is no stopping the new
e-Learning and knowledge markets.
IDC projects that a substantial percentage of the U.S. population will be active Internet users.
Notably, IDC also forecasts nearly 60% of the U.S. population will actively use the Internet by
2003, up from just 15% in 1996. Although the rate of growth of individuals online is expected to
stabilize somewhat, the actual numbers of individuals expected to become connected remains
impressive.
In 1996, there were an estimated 38 million individuals connected to the Internet. By 1998, the
number of users increased to 82 million, growth of 116% over two years. IDC forecasts that the
Internet population will grow to 158 million by 2003. The 23% compound annual growth rate in
users from 1996 to 2003 is significant. Again, although the rate of growth in users should
experience some deceleration, we believe that the time spent online per individual will expand.
Based on a greater amount of time spent online, we remain confident that the growth in e-
commerce revenue can meet current projections. The growth in users and the amount of time
spent online is favorable for emerging areas such as the e-learning and knowledge markets.
There is no stopping the revolution. The number of daily activities impacted by the Internet will
continue to rise. However, as more individuals connect and become accustomed to the benefits
created by the Internet, its presence will become commonplace. Therefore, the e-learning
experience will be second nature to the growing Internet population.4
The e-Learning Value Pyramid
The SunTrust Equitable report breaks down the different learning markets and then build up what
they perceive to be the value chain in e-Learning in the form of a pyramid.
The opportunities in the education and knowledge arena are impressive. With U.S. spending on
education estimated at more than $700 billion, the industry is the second largest, behind
4
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 9.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
healthcare. As we look at technology product and service providers focused on the education and
knowledge markets, we have divided the industry into four sectors based on the customers
targeted. These include K-12 (K-12), post-secondary (P2), corporate training (CT), and lifelong
learning (LL).
The opportunities in each sector are striking. Spending on the K-12 marketplace has surpassed
$380 billion, with more than $30 billion spent annually on childcare and $352 billion spent on K-
12 education. By our estimates, this is the largest of the four sectors. Although smaller than the K-
12 market, the post-secondary sector eclipsed $230 billion in 1997-98. The Internet is already
changing the landscape of the P2 sector. Despite being significantly smaller than the K-12 and P2
segments, we believe that e-learning will penetrate the corporate training market at a faster rate
than the K-12 and P2 sectors. An increasing amount of education is provided in the workplace.
The CT market has realized substantial growth, reaching an estimated $62.5 billion in 1999
compared to $60.7 billion in 1998. Notably, this excludes the estimated $40-plus billion spent by
the government on training. The newest arrival to the education industry is the lifelong learner.
This market size is much more difficult to quantify than the segments mentioned above. It would
include individuals who purchase self-help books, participate in seminars (in person or online), or
are just seeking to acquire new information or knowledge. We look for the LL sector to develop
into a prominent segment within the e-learning marketplace as the Internet encompasses a
larger presence in our daily activity.
Given the tremendous opportunities that exist in the education and knowledge marketplaces, there
has been a surge in companies targeting these markets. A tidal wave of capital has crashed upon
the providers of e-Learning technology products and services. Specifically, we have identified
more than $1.2 billion distributed to e-learning companies and more than $302 million in public
equity raised during 1999. With roughly $300 million raised so far in 2000 and a current backlog
of nearly $370 million in equity expected over the next several months, it appears that the e-
learning public equity market is just beginning to emerge. At this time, we have identified more
than 100 companies focused on the learning and knowledge markets. These companies provide a
wide array of products and services to the four customer segments of the education and knowledge
industry. In an attempt to evaluate the dynamics of the e-learning and knowledge technology
market, we have divided the industry into five categories. These include: Content/Publishing,
Tool-R/Enablers, Learning Service Providers (LSPs), Knowledge Hubs/Portals, and Educational
e-Tailers. Although we have segmented the industry, in many cases companies fall into several of
the categories mentioned above. For example, a company that provides a web-based learning
program to a client may also have supplied the content and the platform.
The e-Learning Value Pyramid
Less
Critical
e-Tail
Hubs
LSP
More
Critical Tools/Enablers
Content
Source: SunTrust Equitable Securities
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Of the five segments focused on the learning and knowledge markets, we believe that content is
the most critical component of learning through the Internet. In order for skeptics to be swayed to
use the Internet as a tool to enhance learning, they must become comfortable that its content does
not distract individuals, but increases the enthusiasm for knowledge. Learning tools and enablers
are also important in the process. Providers of learning platforms and knowledge management
systems are instrumental in the effective delivery of content. These companies supply the
infrastructure needed to deliver content. The knowledge hub, e-Portals and learning service
providers are the distribution channels for content providers. They distribute content through a
platform to the end user. In order to be successful, these knowledge hubs and LSPs must make
painstaking efforts to ensure that their customers consistently receive fresh content; otherwise they
will fail to expand their customer base. Completing our pyramid of e-learning are companies
focused on educational entailing. In many cases, representatives of the other categories also
partake in entailing as a complement to their primary product or service. There are, however,
single focused e-tailers as well. Companies such as bigwords.com and ecampus.com cater to the
P2 sector through online textbook sales.5
Benefits of e-Learning
The WR Hambrecht report lists some general e-Learning benefits as seen from the corporate side
of e-Learning6.
Benefits of e-Learning
Benefits Description
The need to transform how organizations learn points to a more
Technology has
modern, efficient, and flexible alternative: e-learning. The
revolutionized business; now
it must revolutionize learning. mission of corporate e-learning is to supply the workforce with
an up-to-date and cost-effective program that yields motivated,
skilled, and loyal knowledge workers.
We estimate that approximately 80% of the professional
Anywhere, anytime, anyone.
workforce already uses computers on the job. Technical
obstacles, such as access, standards, infrastructure, and
bandwidth, will not be an issue two years from now. The
growth of the World Wide Web, high-capacity corporate
networks, and high-speed desktop computers will make
learning available to people 24 hours a day, seven days a week
around the globe. This will enable businesses to distribute
training and critical information to multiple locations easily and
conveniently. Employees can then access training when it is
convenient for them, at home or in the office.
The biggest benefit of e-learning, however, is that it eliminates
Substantial cost savings due
the expense and inconvenience of getting the instructor and
to elimination of travel
expenses. students in the same place. According to Training Magazine,
corporations save between 50鈥?70% when replacing instructor-
led training with electronic content delivery. Opting for e-
training also means that courses can be pared into shorter
sessions and spread out over several days or weeks so that the
business would not lose an employee for entire days at a time.
Web-based products allow instructors to update lessons and
Just-in-time access to timely
5
Ibid., 11.
6
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 6.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
information. materials across the entire network instantly. This keeps
content fresh and consistent and gives students immediate
access to the most current data. Information can be retrieved
just before it is required, rather than being learned once in a
classroom and subsequently forgotten. Training Magazine
reported that technology-based training has proven to have a
50鈥?60% better consistency of learning than traditional
classroom learning (c-learning).
Since they can customize the learning material to their own
Higher retention of content
needs, students have more control over their learning process
through personalized
learning. and can better understand the material, leading to a 60% faster
learning curve, compared to instructor-led training. The
delivery of content in smaller units, called 鈥渃hunks,鈥?
contributes further to a more lasting learning effect. Whereas
the average content retention rate for an instructor-led class is
only 58%, the more intensive e-learning experience enhances
the retention rate by 25 鈥? 60%.
Teaching and communication techniques which create an
Improved collaboration and
interactivity among students. interactive online environment include case studies, story-
telling, demonstrations, role-playing, simulations, streamed
videos, online references, personalized coaching and
mentoring, discussion groups, project teams, chat rooms, e-
mail, bulletin boards, tips, tutorials, FAQs, and wizards.
Distance education can be more stimulating and encourage
more critical reasoning than a traditional large instructor-led
class because it allows the kind of interaction that takes place
most fully in small group settings. Another study found that
online students had more peer contact with others in the class,
enjoyed it more, spent more time on class work, understood the
material better, and performed, on average, 20% better than
students who were taught in the traditional classroom.
Students taking an online course enter a risk-free environment
Online training is less
in which they can try new things and make mistakes without
intimidating than instructor-
led courses. exposing themselves. This characteristic is particularly
valuable when trying to learn soft skills, such as leadership and
decision-making. A good learning program shows the
consequences of students鈥? actions and where/why they went
wrong. After a failure, students can go back and try again. This
type of learning experience eliminates the embarrassment of
failure in front of a group.
The SunTrust Equitable report also specifies benefits that are more specific to the learner and the
content provider 7.
Additional Benefits of e-Learning
Benefits Description
7
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 12.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Additional Benefits of e-Learning
Benefits Description
Learner Controlled Technology has given the individual greater authority over the learning
environment. Learning does not have to occur in a classroom. It may occur at
one's own desk or the home.
Self-Paced An individual may proceed through a course or program as the information is
fully comprehended. Students can convert information to knowledge on their
own timetable.
Uniformity of Content The information delivered can be consistent to all users, therefore reducing the
possibility for misinterpretations.
Customizable Content Information can be developed with individual users in mind. Courses and
programs can be created to deal with each individual's strengths and
weaknesses.
Content Updated Product and procedural changes can be updated and delivered in real-time.
Quickly This increases the rate at which knowledge is acquired, which is especially
important in the corporate market.
Source: Technology-Based Learning and STES
Howard Block, PhD, and Brandon Dobell, in a Banc of America report titled The e-Bang Theory,
add a few more e-Learning benefits that are more technical or managerial in nature8.
Learning Management Benefits of e-Learning
Benefits Description
Modularity of The content鈥檚 architecture is modular, which facilitates different construction
presentation of learning events, both in design and length.
Manageable structure The electronic infrastructure supports managed (and measurable) interaction
between advisors and learners.
Ability to measure the E-learning software empowers administrators to track performance and
effectiveness of measure ROI. In addition, monitoring usage by learners is simpler; i.e., the
program number of downloads per user can be measured. This helps training managers
evaluate cost-effectiveness and provides assistance with license negotiations
based on estimated usage.
Simpler data The rapid rate with which new learning products are introduced and older
management products become obsolete create a challenge for individuals charged with
updating libraries. However, if a single version of each product is kept on a
host, users get instantaneous access to updated components.
Greater storage The Internet host has much greater capacity than most physical locations or a
capacity user鈥檚 hard drive. This allows learners access to more products and lets the
advisor mix and match courseware activities to fit specific needs. Learners can
8
Banc of America Securities, The e-Bang Theory (Sept. 1999), 8.
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Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Learning Management Benefits of e-Learning
Benefits Description
preview presentations of different courses prior to selecting one, or they can
access a specific slide from thousands.
Individual education As students progress, information is delivered based on what they鈥檝e learned
programs (IEPs) can be and how they鈥檝e performed. For example, a student would log onto the
generated from a learning server and a customized course would be generated from the content
combination of the database that knows which courses the learner took, how well she did, what
historical record of the her job description is, what problem is most pressing. This dimension serves to
students鈥? prior learning focus the curriculum only on skill gaps, saving organizations both time and
(from monitored usage) money. A byproduct of IEPs, in our view, is increased motivation from the
self-centered nature of the experience.
Source: Technology-Based Learning and STES
DRIVING FORCES BEHIND E-LEARNING
Several trends and forces are pushing toward e-Learning. Some are based on societal issues and
demographics; others stem from the technological factors and shear critical mass. The areas that
will be addressed in the following section include Megatrends, computer and Internet technology,
corporate drivers, giants in the technology industry, and the continual drive to reduce the cost of
business and improve return on investment.
New Economy Megatrends
Six major trends or megatrends are affecting education according to Michael T. Moe, Kathleen
Bailey, and Rhoda Lau in the Merrill Lynch report titled, The Book of Knowledge 鈥? Investing in
the Growing Education and Training Industry.9 The megatrends are occurring in demographics,
technology, globalization, branding, consolidation/privatization, and outsourcing.
Each megatrend is summarized. The summary is followed by a table depicting the megatrend鈥檚
impact on each of the following learning categories: Early Education, K-12 Education, Post-
Secondary, Corporate Training, and Consumer.
Megatrend #1: Changing Demographics
American society has undergone seismic shifts in the past few decades, dramatically changing the nature of
our families, our workplaces and a myriad other aspects of our lives. These fundamental changes have come
in five major areas: our ages, our families, our economic status, our ethnic makeup and our educational
achievement.
The 20th Century鈥檚 Tectonic Shifts in the Demographic Landscape
Demographic Measure Change
Age The Baby Boom is probably the most significant demographic phenomenon of
the 20th century, shaping all aspects of our economic lives. The aging of the 76
million Baby Boomers has major implications not only for them, but for the
9
Merrill Lynch, The Book Of Knowledge 鈥? Investing in the Growing Education and Training Industry
(Apr. 1999), 36-53.
13
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
following generations of workers who must support them as they retire.
Family Status The 鈥渄isintegration鈥? of the nuclear family began in 1970 and has only begun to
stabilize. The rise in single parent families has, unfortunately, been a major
factor in rising child poverty rates; over 20% of young children are poor.
Educational Educational achievement has trailed the demand for knowledge-based skills.
Achievement But now adults are heading back to school in record numbers.
Ethnic Makeup Our nation is becoming more diverse 鈥? by 2050, 鈥渕inorities鈥? will represent
40% of the population.
Economic Status These factors, coupled with the shift to a knowledge-based economy, have
widened the gap between the haves and the have-nots.
Source: Merrill Lynch
Aging America
The Baby Boom is probably the most significant demographic phenomenon of the 20th Century,
shaping all aspects of our economic lives. This generation of 76 million people born between 1946
and 1964 in many ways built the dynamic economy we have today, although increasingly that
torch is being passed to the much smaller Generation X.
The aging of the Baby Boomers will become 3 significant economic issues, not only for them but
also for following generations.
Competition for jobs at the top of the hierarchy from older baby boomers and, for the rest,
competing with up and coming Generation Xers. In just four years for the first time ever there
will be more workers over 40 than there are workers under 40. As Fortune Magazine notes, "At
some point after 2010, as baby-boomers start to retire, companies will get desperate for workers--
even older workers. But until then, there will be too many highly paid boomers competing for too
few top jobs."
Competing with young and hungry Generation Xers isn't much easier--The harder Gen Xers work,
the more they tend to resent all those 44-year-olds who put in half as many hours and earn more
money.鈥? 'You have to do more for young people because they are likely to turn over more
quickly than older workers. Consequently, a lot of companies are putting young people on the fast
track, so you have 28-year-olds running entire departments that 20 years ago were run by 55-year-
olds,' explains Joe Gibbons, an H.R. consultant at William M. Mercer. 'That's a big change--it's a
sea change.' (Fortune Magazine, Feb. 1, 1999)
Extending the working life of Baby Boomers: Boomers will begin to retire in about ten years, and
with the advances of science, will live longer than any generation before them.
Concerns about our Social Security system are already high on our national agenda--will there be
enough money to pay for a secure retirement for these people? Should we push back the retirement
age? Will older Americans have the skills and flexibility to work in the new economy, and will
they? These questions are key drivers for the growth in the corporate training market.
Making Generations X and Y Hyper-Procedure: Generation X may find itself stuck between a
demographic rock and hard place--in their peak earning years they have to not only provide for
themselves and their children, but also for the retired Boomers. The fundamental drivers of
economic growth are growth in the labor force and productivity gains. Given that the labor force is
14
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
not going to grow in the near term, we need to ensure than both Generations X and Y are as
productive as possible.
Family Status
Over the last 30 years, the nature of the American family has dramatically changed. Today only
7% of families resemble the stereotypical Ozzie-and-Harriet model of a never-divorced working
father and stay-at-home mother. In 1960, only 19% of married mothers with children under age six
worked outside the home.
Combined, an almost unbelievable 80% of U.S. families are either dual-income or single-parent
households. This has significant implications for children in these families. Increasingly, a portion
of the early education that used to take place at home with the child's mother is being outsourced
to a relative or childcare provider. Thus, the need for educationally enriched, high-quality and
affordable childcare has never been greater.
Economic Status
The new phenomenon of dual income families, coupled with great economic times, has masked a
widening gap between the "haves" and "have nots." And the gap is now significant for some of our
citizens. Over 20% of our children, for example, live in poverty, far more than in any other
developed nation.
In our knowledge-based economy, intellectual capital is one of the few determinants
differentiating employees. As such, the correlation between education and compensation has
become crystal clear. The gap between those with college degrees and those without has grown
dramatically, from 50% in 1980, to over 100% today. Put another way, the purchasing power of
a 30-year-old man with a high-school diploma has dropped by over one third over the past two
decades.
What has helped compensate for the dramatic reduction of the purchasing power of the high-
school educated breadwinner has been strong economic conditions and the increase in the
workforce participation of women, up 39% since 1970 to 57% of all women.
Ethnic Diversity
American history has always been characterized by diversity, and the strength of new ideas from
each wave of immigrants has enriched our economy and our culture. This process will continue
into the next century, which, when combined with higher birth rates among certain groups results
in a much more diverse population. By 2050, only 60% of the population will be white, down
from 77% in 1990.
The bulk of the growth in the "minority" population will be the result of a growing Hispanic
presence. California is often a bellwether for the future of the U.S., and in terms of racial diversity,
this is certainly the case. One fourth of California students are limited-English proficient, and in
grades K-3, that percentage is one in three. In many Los Angeles schools, Spanish is the
predominant language. In still others, as many as sixteen languages may be spoken ahead of
English. A push for language training, technology-based education in different languages, and
training in cultural understanding will be important in this environment.
Educational Attainment
Ironically, at a time when education and training are among the few determinants of economic
success, only 21% of American adults over age 25 have a bachelor's or higher degree.
15
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
These economic facts are driving "non-traditional" students back to school in record levels. Adults
age 25 and over represent 43% (6.1 million students) of all post-secondary enrollments, up from
28% in 1970.
Another shift in our educational goals as a population--teens graduating from school are going to
college at rates higher than ever before, creating great opportunity for post-secondary educators.
The impact of demographic shifts on the education and training industry are mammoth and long-
lasting, as described in the following table.
The Impact of Demographic Shifts on Education & Training
Sector Impact
Early Education The childcare sector is growing and professionalizing as more mothers head to
the workforce. Access for children in poverty is still a problem.
K-12 Education Generation Y is working its way through our K-12 institutions. They are more
diverse than ever before, and have the pressures of preparing for a new
economy in old world schools.
Postsecondary Demographics changes create powerful opportunity here. Generation Y is just
starting into its college years, more high-school students are heading to school
than ever before, and, faced with cold economic facts, many Gen Xers (and
even Baby Boomers) are going to school in record numbers.
Continual training and retraining will be essential to prolonging the workplace
Corporate Training longevity of the Baby Boomers, and to ensure that Generations X and Y are as
productive as possible to support the lengthy retirement of the Boomers as well
as provide for their own retirements. (Ask any Generation Xer--they aren't
banking on Social Security in retirement.)
Consumer Parents and, increasingly, grandparents, with money to spend will make
educating children a high priority. Their desire to provide them with every edge
in the new economy will benefit consumer-oriented education products.
Source: Merrill Lynch
Megatrend #2: The Technology Revolution
Technology has transformed our society and economy. The impact on America corporations is
profound and is explicitly evident by the increased investment in technology over the past three
decades. In 1970, approximately 5% of corporate capital expenditures were for computer and data
processing equipment, aimed at improving the productivity of human capital. By 1997, nearly
50% of capital expenditures by corporations were high-tech related.
The PC is as ubiquitous in business as the telephone or filing cabinet. At the corporate level, there
is now one PC for every 1.3 employees. American homes are also embracing PCs. By 2002, 60%
of households are forecasted to have PCs, up from nearly 50% in 1998. Recent studies have
estimated that in families with children, PC Penetration is much higher, perhaps as high as 70%
today.
Technology can take American schools into the 21st Century, but first we need to bring our
schools into the 20th Century. Our K-12 schools have been slower to adopt technology, although
they are beginning to respond to the opportunity. The students-per-computer ratio has improved
from 16 students for every one computer to seven students per computer in the last five years.
16
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
PCs have achieved remarkable penetration compared to other technological innovations in the
U.S., reaching a 25% market share in 15 years, versus 35 years for the telephone and 30 years for
the microwave. But even more dramatic has been the wildfire rate of adoption of the Internet,
which has reached 25% of the population in only seven years.
The explosion in Internet usage, achieving the most rapid rate of technological adoption ever
experienced in this technology-hungry century, will continue. According to International Data
Corporation (IDC), Internet access is forecasted to grow to 320 million users in 2002, up from 14
million in 1995. Moreover, e-commerce is expected to reach $400 billion by year 2002 from $8
billion in 1998.
Technology platforms such as the Internet have created tremendous opportunities for new business
and education paradigms, ushering in a "New Economy" driven by knowledge and access to
information.
The Emergence of a New Economy
Old Economy New Economy
A Skill Life Long Learning
Labor vs. Management Teams
Business vs. Environment Encourage Growth
Security Risk Taking
Monopolies Competition
Job Preservation Job Creation
Wages Ownership, Options
Plant, Equipment Intellectual Property
National Global
Status Quo Speed, Change
Standardization Custom, Choice
Top-Down Distributed
Hierarchical Networked
Regulation Public/Private Partnerships
Zero Sum Win-Win
Sues Invests
Standing Still Moving Ahead
Source: Merrill Lynch
Where the resources of the physically-based economy were coal, oil, and steel, the resources of the
new, knowledge-based economy are brainpower and the ability to effectively acquire, deliver and
17
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
process information. Those who are effectively educated and trained will be the ones who will be
able to economically survive and thrive in our global, knowledge-based economy. Those who
don't will be rendered economically obsolete.
As a consequence, education has become critical for both individuals and employers. In today's
economy a four-year degree is just a prerequisite to participating in the industries of the future.
Lifelong learning is now required for survival and economic longevity and technology such as the
Internet, video-conferencing and satellite systems makes this possible.
The pace of change is dramatic. Under Moore's Law, the capacity of a computer chip doubles
every 18 months, enabling more powerful hardware and software applications to emerge, and
changing the requirements of the typical job.
Several factors are driving rapid change in the demands on human capital. The shift is obvious
enough in information technology occupations where the focus is on the design, programming,
maintenance and repair of the computing and communications infrastructure. These positions
require a four-year undergraduate degree, advanced training or a graduate degree in a field such as
science, mathematics or engineering. The changes in human capital demands may not be as
obvious in positions at non-technology companies. However, as new technology-based ways of
doing business, such as e-commerce, become more widespread, it will drive changes at even the
most traditional of companies, and with it the composition of the labor force required to produce,
service, and deliver goods and services.
Even labor-intensive manufacturing jobs are becoming highly automated and require higher-
skilled employees to work sophisticated computerized machinery. Forty-two percent of production
and non-supervisory employees in manufacturing and service establishments now use computers.
Just think, a car mechanic's job is no longer as simple as looking under the hood. Mechanics now
are required to understand complex onboard computers systems, as well as operate sophisticated
diagnostic computers. As Vice President Gore recently observed, "A Ford Taurus has more
computing power than the Apollo II that took us to the moon."
The impact of the digital revolution on all sectors of the education and training industry is
significant, as summarized in the following table.
The Digital Revolution鈥檚 Impact on Education & Training
Sector Impact
Child care will always require the human touch, although technology
Early Education
has helped us learn how children's brains develop, thus enabling us to
improve early education. Also, computers (are) the second language of
the New Economy, computer literacy is increasingly part of the early
education equations.
Kids love computers. They help children learn new things in new ways
K-12 Education
and allow them to access the resources of the whole wired world.
Technology also helps teachers manage the instruction process so they
can tailor each child's education.
Technology can democratize education, making it accessible and
Post-secondary
affordable for millions of adults, enabling them to study anywhere,
anytime in schools without walls.
Through technology, training can be integrated into the workday,
Corporate Training
increasing its relevance and reducing its costs. Technology-delivered
18
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
training is being adopted so quickly that by 2002, 55% of corporate
training will take place that way, up from approximately 20% today.
50% of households now have PCs, and the percentage in families with
Consumer
children is even higher. Educational software is the second most used
function of the home PC (behind games) providing opportunity for
educational software and online services growth.
Source: Merrill Lynch
Megatrend #3: Globalization
Our world is smaller than ever before, creating both stress and opportunity for corporations and
the employees that work for them. International trade, the volume of international air flights and
telephone calls and the percentage of corporate income that comes from overseas is higher now
than at any time in our history.
Information technology has created new opportunities for how business is conducted, with one of
the largest opportunities allowing businesses to participate in global commerce. Businesses can
now enter foreign markets virtually overnight, as well as deploy resources and operations around
the world to support these new markets. Information regarding new product introductions, sales
patterns, input requirements and local market requirements all can be shared with any other
division of the business instantaneously through companies' information networks. America's
leading companies earn 30-65% of revenues from international markets.
For workers in these "virtual-global" businesses, this means that traditional in-store employees
who provide sales, inventory and customer services can largely be replaced by information
management systems, with knowledge workers servicing the "store." However, with these
opportunities come great challenges. Economies that have an inefficient supply of skilled
knowledge workers will see high-skilled, high-paying jobs lost to countries that can supply the
needed skills. Those that have a surplus will find job opportunities opening up for their workers in
business abroad.
The impact of globalization on the education and training industry will be to create tremendous
opportunity, both here and abroad.
Globalization's Impact on Education & Training
Sector Impact
Increasing recognition of the benefits of early education are driving a
Early Education
more thoughtful approach to early education, getting young children
ready for school.
Preparing our kids to compete in a global economy means making our
K-12 Education
schools the best in the world. And with our children performing at or
near the bottom of international comparisons, we have a ways to go.
Our post-secondary institutions are the best in the world. They have an
Post-secondary
opportunity, even responsibility, to ensure that adults in the U.S. (and
perhaps abroad) have access to the ideas that have made our economy
so powerful.
Corporations need consistent multi-lingual training that is accessible
Corporate Training
globally. Workers must also take responsibility for their own
19
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
development, taking advantage of the training offered by their
companies as well as using their own time to develop skills relevant in a
global economy.
Growing importance of education is universal, providing opportunity
Consumer
for global brands to evolve, particularly in supplemental products and
services for consumers.
Source: Merrill Lynch
Megatrend #4: Branding
Branding will become increasingly important in the education industry, just as it has become a
predominant means of building companies in other industries. In the education industry of
yesterday, brands were built by delivering an exceptional education to an exclusive set of students.
These brands have a dominant force in the education industry of today, with names like Harvard,
Stanford, Princeton and Yale carrying significant authority as we enter a new world where
education is delivered in a variety of forms.
In the knowledge economy there is opportunity for education brands to be built through
inclusiveness and accessibility (not exclusivity and inaccessibility) when coupled with high-
quality programs that have a consistent, positive impact on educational achievement.
Educational providers can form very deep, trust-based relationships with their students (and, when
serving young children, their parents, too). Successful providers have intensely loyal customers,
providing opportunity for these companies to extend that relationship through other products and
services. Other "deep" brands include Disney, Nike and Mercedes-Benz. With Americans busier
than ever before (evident by both parents working), we are increasingly making product decisions
based on brands. Branding has become a short cut to identify quality and consistency.
Brands With Highest Level of Customer Commitment
鈥? Apple Computer
鈥? Disney
鈥? Body Shop
鈥? Harley-Davidson
鈥? Mercedes-Benz
鈥? Nike
鈥? McDonalds
Interbrand describes deep brands as those that "have developed intimate relationships with
their customers, usually on the basis of shared 'central' or 'higher' values. These brands might
not always have dominant market shares, but they have real power to influence their customers."
We believe in the next several years we will see a strengthening in educational brands, as well as
through expanding the breadth of educational content along these lines.
20
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Moreover, as lifetime learning becomes a necessity, the value of branded franchises will increase
as students return again and again to the knowledge well.
Branding's Impact on Education & Training
Sector Impact
With increased understanding of the importance of early education on a
Early Education
child's learning potential, parents are increasingly looking for quality
care for their toddlers, identified by a strong education brand or
NAECY accreditation.
Infusing our schools with the characteristics of the new economy, in
K-12 Education
particular, subjecting them to the discipline of the free market, where
they provide results or are not paid, will be a positive change.
As choices proliferate in the post-secondary market, particularly
Post-secondary
through technology-based programs, students will associate Education
with brands that signify strength in the areas they plan to develop
expertise.
As corporations look to outside organizations to manage their training
Corporate Training
programs, branding will be a factor in the early selection process.
Companies themselves are also branding their own training content
whether for internal or external use, to, for example, extend training to
their channel organizations or end-users around the world.
Branding has become a short cut for parents and students to identify
Consumer
quality educational products and services.
Source: Merrill Lynch
Megatrend #5: Consolidation
Consolidation is a strong global trend, as merger and acquisition activity hits record levels. In
1998, mega-mergers in the financial services, automotive production, pharmaceuticals and oil
industries drove the total volume of M&A to upwards of $1.7 trillion, or not quite 20% of GDP.
Technology-delivered training is being adopted so quickly that by 2002, 55% of corporate training
will take place that way, up from approximately 20% today. These mergers happen for both
strategic and financial reasons. They open up new markets and provide greater services to
customers and leverage in research & development and marketing functions. At the same, time,
most seek to reduce "overhead" costs, everything from top management to back office jobs that
can be, for example, more effectively conducted using one merger partner's IT systems.
While consolidation used to be the hallmark of a mature industry, this is no longer the case,
particularly in technology, where small start-up companies are acquired for technology and, as
important, talented people. In some cases, acquiring a competitor is faster and easier than hiring
and training scarce computer programmers, sales people and executive management. The hiring
and retention of human capital is increasingly a priority for companies of all types.
Consolidation can also provide scale, and in the education industry, scale matters. The most
visible example of this is Apollo Group, whose margins shot up from 2% in 1993 to nearly 20% in
1998 starting when revenues hit a critical mass of $100 million. Sylvan Learning Systems is a
second example, with margins (including pooled acquisitions) expanding from 2% in 1993 to 15%
in 1997. ITT Educational Services is currently enjoying this phenomenon, as well as Bright
Horizons Family Solutions. This scale enables leverage on R&D, curriculum development, sales
21
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
efforts and SG&A. Scale can be achieved through organic growth or acquisitions or both, and (you
can) expect consolidation in this sector for that reason.
A second driver of consolidation in this sector specifically is the desire of large, well-capitalized
companies to enter this fast-growing and attractive industry. Mattel's pending acquisition of The
Learning Company is the most recent example of this phenomenon hoping to expand on owned
assets in the education arena. Publishing, corporate and staffing services and other companies are
also buying into this sector.
Impact of Consolidation on the Education & Training Industry
Sector Impact
As parents shift their children to center-based care, choosing providers
Early Education
with high-quality educational content and brand names, we believe
consolidation will finally come to the highly fragmented child-care
industry.
The challenge of developing an effective sales channel into schools will
K-12 Education
be an asset and barrier to entry that will drive consolidation in this
segment.
The ability to access 'best-in-class' education from anywhere at any time
Post-secondary
will challenge existing colleges and universities. Look for more
specialization and consolidation as a result.
The ability to offer a complete training solution to corporations taking a
Corporate Training
more comprehensive and proactive approach to training will encourage
consolidation.
Competition for retail shelf space and consumer mind share will drive
Consumer
consolidation and partnering in consumer products and services.
Source: Merrill Lynch
Megatrend #6: Outsourcing and Privatization
Changes in the structure of our organizations are impacting the need for education and training as
well as the emerging education industry itself. The hierarchical organizational structure of a
company is increasingly a relic of the past, falling out of favor with the ascendance of teams, and
kiretsus, "business ecosystems." Rather than manage all aspects internally within a corporation,
increasingly companies are developing a web of suppliers, customers and outsourcing partners that
can provide specific expertise at the necessary time. Not only are the lines of authority blurred and
changing within many organizations, the exact point at which a company starts and stops may
become fuzzy, with intranets linking groups of related people and organizations.
In such an environment, companies are increasingly focusing on what they do best, partnering
with other companies as needed to accomplish business objectives. Outsourcing may be a bane
for workers filling these jobs in these companies, but it has created tremendous opportunities for
other companies (and their employees). Nearly 90% of multinational firms outsourced some
business in 1995 versus only 60% in 1992.
Total revenues in the outsourcing market are expected to grow from $100 billion in 1996 to nearly
$300 billion in 2001. This illustrates the need for workers to continually update their skills, think
strategically about their careers and their businesses, and in so doing, create value for both.
22
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Navigation and deregulation are also creating competition where none existed before, increasing
requirements for accountability and results, customer service and cost management. Financial
services, airlines, telephone service, gas distribution and now electric utilities, have all undergone
fundamental changes in their governing structure.
Major Industries Have Been Deregulated
Sector Year of Major Deregulation
Airlines 1978
Financial Services 1980
Telecommunications 1982,1996
Natural Gas Distribution 1992
Cable TV 1996
In most cases, the result has been more innovation, better service and lower costs. There are many,
many cases in our economy of how the discipline of the market has increased the dynamism of
and improved the products of an industry. Our K-12 schools may be one of the few remaining
institutions that have not undergone this change. While it can be wrenching, we believe that a
reasoned introduction of market forces into the education of our children will result in very
positive change.
Outsourcing/Privatization鈥檚 Impact on Education & Training Industry
Sector Impact
As the knowledge worker is increasingly freed from the corporate
Early Education
organization, companies seeking to attract and retain the mobile
knowledge worker by providing family-friendly benefits such as
corporate child care.
Schools will increasingly look to outsource a portion of services as
K-12 Education
quality providers begin to offer measurable educational results at the
same cost. Private management of public schools and charter schools
should prompt a rethinking of what schools must do.
These institutions will need to become more nimble and customer-
Post-secondary
responsive, perhaps increasing the degree of specialization and
Education partnering with other universities as well as corporations to
develop needed curricula. Students will increasingly demand relevant
work-related skills.
As corporations focus on core competencies, we expect training will be
Corporate Training
increasingly outsourced to one or a few high-quality solutions
providers.
Busy working parents are outsourcing a portion of children's education
Consumer
to private providers.
Source: Merrill Lynch
23
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
The Big Boom 鈥? Megatrends At-a-Glance10
Megatrend Early Education K-12 Education Postsecondary Corporate & IT Consumer
Training Products &
Services
60% of moms Enrollment in K- More high school Continual More children
Demographics
with children 12 has increased students heading retraining of baby with parents 鈥? and
work 15% this decade to college than boomers grandparents 鈥?
with Generation ever before as concerned about
Y well as increase in their education
working adult futures
students
Computer literacy Kids love Technology can Increasing access 50% of
Technology
is today鈥檚 second computers/ democratize and relevance households have
language valuable school education while reducing PCs-up to 70% of
tool costs households with
kids
Recognition of Preparing Opening our post- Consistent, multi- Parental concern
Globalization
importance of children to secondary schools lingual training for children鈥檚
early education compete in to the that is accessible education
worldwide today鈥檚 global international globally increasingly
economy market universal
NAECY As charter schools Best brands will Brand name Brands enable
Branding
accreditation is and voucher capture mind content is king 鈥榮hort cut鈥?
the hallmark for programs share decision making
quality proliferate, brands for parents
will serve as
differentiating
factor
Need for sales Scale matters Convenience of Competition for
Consolidation/
force will fuel one-stop shopping shelf space and
Privatization
consolidation in demanded marketing mind
the K-12 industry share
Accountability Students need Focus on core Busy parents look
Outsourcing
will push schools post-secondary competencies to outside tutors
to providers of schools to have creates and products to
best practices effective, career- opportunity for help educate their
oriented training providers children
education
Source: Merrill Lynch
Drilling Down into Computer and Web Trends
The greatest driver in the technology megatrend is the use of the Internet, and it is starting to have
a great impact on everyone. USbancorp 鈥? Piper Jaffray points out the incredible growth in devices
being connected to the Internet.
The explosion of the Web has drawn an enormous amount of media attention in recent
months. With an estimated 72.6 million American adults already wired to the Internet, and an
additional 40 million planning to go online, the Web has become a staple of our daily lives.
Roughly one-third of American Internet users go online and one-quarter of the U.S. adult
10
Merrill Lynch, The Book of Knowledge (Apr. 1999), 53.
24
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
population use e-mail every day. At the end of 1998, approximately 37 million U.S. adults used
the Internet from home on a daily basis, compared to only 19 million in mid-1997.11
WWW Devices are Taking Over the
Business World
345.6
350
300
Number of Devices (Mil)
257.4
250
199.3
200
147.4
150
104.9
100 66.5
39
50 15.6
4.8
0
1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IDC 2000
Internet Factors Driving Growth and e-Commerce
The SunTrust Equitable report concludes this overview of the Internet鈥檚 impact with this
statement: 鈥溾?ltimately we believe the improvements on how we learn will be the single
greatest change that the Internet has on our lives.鈥?
The emergence of the Internet is to the nineties what the advent of radio and television were to the
twenties and fifties; however, the Internet's influence on our daily activities will be far greater. The
Internet has emerged as the most powerful commerce, communication, and information medium
of all time. International Data Corporation (IDC) forecasts that there will be 320 million Internet
users worldwide by the end of 2002, up from 97 million at the end of 1998. Several factors are
facilitating this substantial growth:
鈥? A large and growing base of installed computers in the home and workplace.
鈥? Network security, infrastructure, and bandwidth improvements.
鈥? Advances in the speed of personal computers and modem performance.
鈥? Cheaper and more reliable access to the Internet.
鈥? Consumer acceptance of online commerce.
In the Internet's short history, we have seen the opportunities it has created for businesses focused
on consumers, the B2C market. Now, we are in the midst of the witnessing the changes the
11
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 24.
25
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Internet will have on the way in which businesses interact. The opportunities for B2B commerce
are yet to be fully recognized. Although the Internet鈥檚 impact on commerce in both the B2B and
B2C areas will be notable, ultimately we believe the improvements on how we learn will be the
single greatest change that the Internet has on our lives.12
Announcing the Arrival of e-Learning
USbancorp 鈥? Piper Jaffray identifies the association between technology and web growth and the
opportunity that emerging with e-Learning.
鈥? The Internet has established itself as the technology development of this decade:
鈥? An estimated 72.6 million American adults are already wired to the Internet, and an
additional 40 million are planning to go online.
鈥? Worldwide, 350 million Web users are expected by 2003.
鈥? By 2002 the number of kids on the Web is expected to increase to 21.9 million followed
by the number of teens at 16.6 million.
鈥? Global online ad spending is expected to reach $33 billion by 2004.
鈥? By 2003, e-Commerce is expected to grow to over $1 trillion.
鈥? The Web has electrified learning by helping organizations create, enable, deliver, and/or
facilitate lifelong learning. We believe e-Learning will prove to be the "killer app" on the Internet.
鈥? From a macro level standpoint, the time is right for e-Learning:
鈥? Companies and individuals everywhere are moving to the Web as the vehicle for life-
long learning, and no one dominant player can lay claim to the lifelong learning
marketplace.
鈥? The e-Learning market opportunity is huge.
鈥? Our economy has become knowledge-based.
鈥? Changing demographics have heightened the demand for learning services.
鈥? Political winds are blowing toward the need for a stronger focus on learning.
鈥? The rapid growth and ubiquity of the Web have morphed it into a powerful learning
platform.13
12
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 5.
13
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 7.
26
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Notable Internet Trends
Several Internet trends indicate that the environment is ripe for e-Learning. Among the trends
(reflected in the following graphs) 14 is the increasing use of computers, both at home and at the
office, to access the Internet.
Primary Use for Home Computers
Other
13%
Games/
Internet
Entertain
46%
18%
Home Office
23%
Soure: Internetstats.com
US Business PCs Using WWW
1997-2002
86%
77%
68%
59%
44%
33%
1997 1998 1999 2000 2001 2002
Source: IDC's Global Market Forecast for Internet Usage and Commerce
Both the education levels and the ages of Internet surfers is fairly diverse, indicating that a wide
range of learning needs and dynamics are at, or could be at, play in e-Learning15.
14
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 25 and 81.
15
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 25.
27
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Education Levels of U.S. Surfers
Post
High School
Graduate
or Less
18%
27%
College
Graduate
23% Some
College
Soure: Internetstats.com
32%
Age Breakdown: % of Total U.S.
Internet Users
65+ 18-24
50-64
5% 18%
14%
25-29
14%
40-49
26%
30-39
23%
Soure: Internetstats.com
International Markets to Propel Growth of the Web
The United States and other English-speaking countries dominate the Internet; however, the trend
will move more to an international community. English will still maintain its dominance as the
preferred language, but the other international web trends indicate that the international market
will eventually overshadow the United States16.
16
Ibid., 26.
17
Ibid., 26.
28
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Leading Languages Online:
# of Users (millions)
Chinese
German 4
Swedish
5
3
French
Korean
6
Japanese 3
7
English
92
Soure: Internetstats.com
In addition to the Web's dramatic growth in the United States, international markets hold promise
for further, rapid growth of the Internet. According to IDC, the percentage of non-U.S. Web users
will grow from 56% in 1998 to 65% in 2003. Europe, in particular, has the potential to become a
larger Internet market than the United States.18
Worldwide Web Users: 1998 and 2003
44%
50%
35% 34%
40% 29% 31%
27%
30%
20%
10%
0%
United States Western Europe Other
1998 2003
Source: IDC
SunTrust Equitable also refers to IDC in the following graph to indicate the number and growth
of PC shipments worldwide. 19
18
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 26.
19
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 7.
29
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Worldwide PC Shipments
70
60
50
Units (Millions)
United States
Western Europe
40
Asia/Pacific
30 Japan
20 ROW
10
0
1997 1999 2001 2003
Increased Internet Usage
In the Dain Rauscher report titled eServices 鈥? When Every Minute Counts, Theresa A. Matacia
presents the case that increased Internet use throughout the world will continue to grow the
opportunities for e-commerce, e-business and e-Learning.
With the pervasiveness of the Internet and the emergence of attractive service offerings, there is a
burgeoning movement among consumers to get connected. According to the Computer Industry
Almanac, Internet access among the North American population is expected to climb significantly
from 28% of the population in 1998 to just under 50% by the end of next year. By 2005, it is
estimated that almost three-quarters of the North American population will be Internet subscribers.
Growth outside of North America is expected to be even more significant over the next several
years. These projections could prove conservative once high-speed, broadband connections
become widely available, driving an even greater proportion of consumers online.
Greater connectivity should drive more transaction business over the Web. As more
consumers get connected and opt for the speed and flexibility of broadband access, we believe that
they likely will expect the same from their Internet transactions. With more than 9 million online
shoppers, organizations cannot afford to delay their ecommerce strategies. Forrester Research
anticipates exponential growth in business-to-consumer ecommerce, from about $8 billion in 1998
to $108 billion by 2003.20
Percentage of the Population Online
1995 1998 2000 2005
8.9% 27.6% 47.9% 71.5%
North America
2.2% 8.8% 21.7% 50.1%
West Europe
0.1% 1.0% 3.3% 15.2%
East Europe
20
Dain Rauscher Wessels, eServices 鈥? When Every Minute Counts (Dec. 1999), 16-17.
30
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Percentage of the Population Online
1995 1998 2000 2005
0.1% 0.7% 1.7% 4.6%
Asia-Pacific
0.1% 0.5% 2.1% 7.9%
South/Central America
0.0% 0.3% 0.7% 2.4%
Middle East/Africa
Users Worldwide 0.7% 2.5% 5.2% 11.1%
Source: Computer Industry Almanac
Percentage of the Population Online
1995-1998 1998-2000 2000-2005
46% 32% 8%
North America
59% 58% 18%
West Europe
101% 79% 36%
East Europe
87% 51% 23%
Asia-Pacific
107% 96% 30%
South/Central America
82% 58% 27%
Middle East/Africa
54% 44% 16%
Users Worldwide
Source: Computer Industry Almanac
Driving Forces
With the megatrends in mind, USbancorp 鈥? Piper Jaffray provides an overview of the societal and
technological changes. Among the foreseen changes are those that will affect general education in
the United States. Already, various states have taken up initiatives to elevate scholastic results.
e-Learning is an outgrowth of a number of far-reaching societal and technological changes that
have been evolving over the last several years. Knowledge is now the raw material that fuels our
economy, as the demand for skilled workers reaches all-time highs. Coupled with the increasing
demand for skilled workers is the well-documented fact that prosperity is a close cousin of
education--America pays a premium to the well-educated. We are seeing a number of key
demographic trends come together to increase the demand for education and training. The baby
boom echo is spawning the next generation of high school students. Working adults are going
back to school in record numbers. Many Americans have come to realize that in order to
continue to have something to offer the workplace, learning must be a lifelong activity, not just
something we did back in school. Political winds are blowing, too, raising education to the
forefront as a national priority. Emphasis on accountability in education has made assessment
and testing a hot button across the United States. Federal and state programs seek to reduce the
class size, solve the teacher shortage crisis, attract and retain the best and brightest teachers, and
fund programs that enhance the overall educational experience. The changes we are seeing in
society are converging at lightning speed with advancements in technology. One of the most
31
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
powerful technological advancements that has hit the scene in recent history is the Internet, which
in a few short years has become the bedrock for information, communication, and commerce. The
collision of the Internet and America's thirst for knowledge has given birth to a new industry that
we call "e-Learning." The e-Learning industry is marked by a host of business models, some of
which never before existed, with no one player dominating the competitive landscape.
Information and knowledge are the thermonuclear competitive weapons of our time. Knowledge is
more valuable and more powerful than natural resources, big factories, or fat bankrolls.
-Tom Stewart, Intellectual Capital21
With the understanding that web-based training is a subset of the overall e-Learning market, web-
based training is the fastest growing, and soon to be dominant, delivery mechanism for e-
Learning. According to the Dain Rauscher Wessels report,
We expect a shift toward Web-based training. Due to the growing demand for employee training
coupled with time and budgetary constraints, managers are looking for a more convenient and
efficient alternative to classroom-based instruction. Technology-based training has been a viable
alternative to classroom training over the past couple of years. Web-based training is a rapidly
growing part of technology-based training. As mentioned, due to the rapid pace of technological
change, organizations are faced with the ongoing challenge of retooling their workforce. Many
organizations are having difficulty keeping up with IT training demand and are beginning to
recognize the advantages of on-demand, Web-based training options.
Several players in the IT training market are pioneering the development of new learning tools that
deliver training in a convenient, cost-efficient manner. The emerging delivery mechanism for
these learning tools is through the training company's Web site or through the client's corporate
intranet. We believe that this type of delivery model has the potential to transform the corporate
learning process by bringing an extended platform of coursework to a much larger and
geographically dispersed number of students. The overwhelming economic benefits should
accelerate demand for Web-based training over the next several years. Within the IT training
market, Web-based training is projected to grow from 5% in 1998 to 40% by the year 2003.
鈥e anticipate a more robust demand environment going forward based on the following factors,
among others:
鈥? Advancements in Internet strategies and technologies;
鈥? Maturation of corporate infrastructures to handle Web-based deployment;
鈥? Increased acceptance by senior managements of the soundness of Internet-based training;
鈥? Increased buyer willingness based on a greater understanding of Web-based training-
options; and
鈥? Greater provider understanding of the buyer鈥檚 requirements.
Based on these factors, the market for e-learning is projected to exceed $7 billion in 2002
compared to $234 million in 1997. This represents an annual compound growth rate of 98% over
21
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 10.
32
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
the five-year period. The forecast represents incremental growth in Web-based training content,
services, and tools, as well as ongoing revenue from the shift in technology-based delivery to
Web-based delivery. 22
Need for e-Learning?
WR Hambrecht outlines several needs that are driving the move to e-Learning in the corporate
environment. The needs are mostly related to changing technology, lack of necessary skills,
competition, demographics, and other changes in the workplace.
鈥淪ocial, technological, and economic drivers are transforming education around the world. As
globalization encompasses local economies like never before, the development of a skilled
workforce becomes a genuinely international concern. And as human capital becomes the chief
source of economic value, education and training become lifelong endeavors for the vast majority
of workers.鈥?
- Peter J. Stokes, Eduventures.com, 1999
Economy is evolving to a knowledge-based economy
In the last four decades, economic and technological forces have transformed the U.S. economy
from a production-based economy to a service-based economy. In the old economy, corporate
value and value creation were defined primarily through physical and financial assets. The new
economy puts a premium on intellectual capital. However, the life of knowledge and human skills
today is shorter than ever, increasing the pressure to remain at the forefront of education and
training throughout a career. In the midst of globalization and technological revolution, four-year
degrees are just the beginning of a forty-year continuing education. Life-long learning may be
considered merely a buzzword today, but it is quickly becoming an imperative.
A paradigm shift in the way education is viewed and delivered
At the beginning of the new millennium, corporations view learning increasingly as a competitive
weapon rather than an annoying cost factor. Business success depends more and more on high-
quality employee performance, which in turn requires high-quality training. Corporate executives
are beginning to understand that enhancing employee skills is key to creating a sustainable
competitive advantage. In the quest to remain competitive in today鈥檚 labor-tight market,
companies are exploiting advances in technology to train employees more rapidly, more
effectively, and at less expense than in the past.
Huge knowledge gaps demand educational system reform
The new global economy poses more complex challenges to workers, requiring higher levels of
education, computer literacy, critical thinking, information analysis, and synthesizing skills.
However, educational deficiencies have brought America to the edge of a widening knowledge
gap. The U.S. is lagging behind educational levels of other industrial nations in several key
indicators. U.S. students, for example, still trail students from other developed countries in
mathematics and science achievement, according to the U.S. Department of Education. Even more
alarming is that the literacy proficiency of a substantial proportion of the U.S. labor force is
limited. More than forty percent of the labor force perform at the two lowest levels on government
literacy scales, suggesting that many workers lack the skills needed to interpret, integrate, and
compare information using written materials common to the home or workplace. The chasm
between the higher demands of a knowledge economy and the educational status of the
22
Dain Rauscher Wessels, eServices 鈥? When Every Minute Counts (Dec. 1999), 76-77.
33
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
workforce is deep and must be addressed if the U.S. is to remain competitive internationally. A
thorough reexamination of curriculum and teaching methods as they relate to labor market
preparation is needed. Academic and corporate environments must be redesigned to adequately
prepare people to function in an information society.
Globalization of business is resulting in manifold challenges
Advances in information technology and falling trade barriers facilitate business around the globe.
As borders become less meaningful, global competition intensifies. International expansion and
accelerating M&A activity have led to larger and more complex corporations. Today鈥檚 businesses
have more locations in different time zones and employ larger numbers of workers with diverse
cultural backgrounds and educational levels than ever. Thus, more information has to be delivered
in increasingly larger organizations, challenging internal planning, logistics, and distribution.
Corporations worldwide are now seeking more innovative and efficient ways to deliver training to
their geographically dispersed workforce.
Social and demographic changes direct education toward older target groups
Organizations and training providers need to evaluate whom they train and how. Today, traditional
students in higher education 鈥? age 18 to 22 鈥? make up less than 20% of all students. The fastest
growing group attending higher education institutions are working, part-time students older
than 25. This new group of 鈥渓earning adults鈥? is seeking education principally to advance their
careers and increase their salaries. For universities and business-to-consumer (B2C) training
providers, these individuals are excellent candidates for education delivered to their homes or
offices. Declining birth rates, aging population, and lack of skilled labor also require an objective
evaluation of the training needs of older age groups. In the new economy, even senior workers,
including those nearing retirement, need to be trained. Broader acceptance of new training
delivery options among older workers should facilitate the training process. Americans over 50
years old are already the fastest growing user group of the Internet today.
Learning has become a continual process rather than a distinct event
In the new economy, corporations face major challenges in keeping their workforce current and
competent. Many past training practices are unable to meet these challenges. Traditional training
is often unrelated to new business initiatives or key technology drivers. In 鈥渏ust-in-case鈥? fashion,
courses are given and then forgotten, often without improving the performance of workers. While
learning is not a one-time activity, training has traditionally been treated as such. To retain their
competitive edge, organizations have started to investigate which training techniques and delivery
methods enhance motivation, performance, collaboration, innovation, and a commitment to life-
long learning.
Explosive growth of the Internet provides delivery vehicle for education
The emergence of online education is not only a matter of economic and social change, but also of
access. IDC estimates that, by 2003, the number of Internet users worldwide will grow to about
502 million, up from 87 million in 1997, representing a CAGR of 34%. With an estimated 103
million users in 2000 鈥? or 40% of the projected 2000 total 鈥? the U.S. has the largest share and
highest penetration of the Internet. The U.S. is also the leading nation in ecommerce. By 2003,
one-fourth of all U.S. business-to-business purchasing will be done online, as predicted by The
Boston Consulting Group. The increasing integration of the Web and American culture is also
evidenced by tremendous annual user growth. In 1997, only 15% of the U.S. population used the
Internet 鈥? then mostly a domain of educational institutions and businesses. A stunning 63% of
Americans will be surfing the Web in 2003, more than doubling the usage in 1999. Through its
increasing reach and simplicity of use, the Internet has opened the door to a global market where
language and geographic barriers for many training products have been erased.23
23
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 2-5.
34
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Key Trends 鈥? The End of Learning As We Know It
WR Hambrecht identifies several trends that will impact learning. Among the trends are
branding, changes in strategy for the established training companies, partnering, outsourcing,
competition, and changes in other areas related to the development of web-based training
materials, such as reusable learning objects.
Branding: Quality Is Key
With new content providers, technology suppliers, and service vendors emerging on a weekly
basis, it is becoming more difficult for corporations to decide which training provider to choose.
Quality, price, and sophistication of courses and technology vary widely. Today, a corporate
training department that wants to purchase an online course on leadership, for example, has no
efficient means to compare dozens or even hundreds of leadership courses from different vendors.
Low market transparency and limited knowledge of e-learning products will likely represent
serious challenges for corporate customers in the next several years. We believe companies will
increasingly prefer the 鈥渟afe choice鈥? and retain providers with established brand names. Brand
is and will continue to be the most important factor influencing the competitive landscape.
Corporate buyers will be willing to pay a premium for a quality product to avoid even costlier
mistakes. E-learning providers are currently addressing the main factors constituting a brand, such
as quality, consistency, competency, reputation, and a loyal and recognized customer base. We
believe that the players that successfully create a brand that implies trust with corporate buyers in
2000 and perhaps the first half of 2001 will be the winners in this market.
Traditional Training Companies Adding the 鈥渆鈥? to Learning
Heavily classroom-learning focused players, such as Provant, DeVry, New Horizons Worldwide,
ExecuTrain, Global Knowledge Network, and SMG, have been adjusting their strategies and
moving quickly into the hot technology-based training market to secure a piece of the pie.
Companies that do not enter the e-learning business now will become footnotes in the competitive
landscape. Traditional content providers are facing the problem of deciding how much of their
product line should remain in c-learning and how much should be moved into e-learning,
reflecting the change in learning habits of their customers. While only about 20% of corporate
training took place electronically in 1999, the number is estimated to rise to 40% by 2003. 8 This
development mirrors the dramatic change in revenue sources of major players between 1997 and
1999. Until last year, on-site training accounted for the lion鈥檚 share of revenues for most
traditional c-learning companies. For those who decided to test new waters with both feet,
however, revenues from online training have caught up quickly and should rise further.
E-Learning Partnerships Are Increasingly Common
Publishers of content are entering into strategic alliances and partnerships with education
technology vendors, training services suppliers, or other content providers to enhance their product
offerings, expand their distribution channels, explore new market segments, and capture a larger
share of the fast-growing IT and soft skills training markets. Others team up with learning portals
or even diversified ecommerce sites, leveraging their distribution capabilities in order to reach a
broader audience. Since partnerships are critical in growing an Internet business, we should see
many more of them in the year ahead. However, part of the value of a partnership is its
exclusivity. Currently all the players appear to be partnering with each other. Partnerships that are
easily replicable do not necessarily carry a significant value proposition.
Outsourcing 鈥? Slowly but Surely
An increasing number of companies are outsourcing part or all of their training activities to
outside consulting firms or training companies in order to reduce their overall education training
and administration costs. In 1999, 24% of all corporate training was outsourced, with IT training
making up the largest share by far, accounting for 63% of the total. 9 However, with only 5% year-
35
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
over-year growth, the trend towards outsourcing training is moving more slowly than expected,
most likely because of the lack of quality content in the market. A study conducted by Training
Magazine in the fall of 1999 even concluded that the trend towards outsourcing does not seem to
exist. We view this as only a temporary pause until supply and demand for training content,
technology, and services are more balanced. Competitive pressures and cost-cutting should force
corporations to continue outsourcing their training activities, leading to the double-digit growth
rates we have seen in previous years.
Competition Should Pick Up
We anticipate competition in the corporate e-training market to heat up over the next few years,
especially in the IT training industry, where lack of customized and high-quality content is not
such an issue. Strong market growth and relatively low barriers to entry are attracting new market
entrants in both product segments (soft skills and IT training), including competitors from related
business areas such as the consulting industry. As new players appear on the scene and more
enterprises outsource their training activities, we expect training suppliers to compete more
vigorously for market leadership on the basis of brands. We also think that, in this early-stage
market, prices for brand products will be relatively unaffected by the battle for market share and
may even increase.
World of Training Is Converging
The trend towards convergence in corporate training can be observed in different areas: 1) Since
corporate customers no longer want to employ several different content, services, and technology
providers to meet their educational needs, training companies have started to play on all three
fronts; 2) Many IT and computer-training vendors are expanding their product lines with
management and soft skills training, while soft skills training providers are eyeing the technical
arena; 3) A number of major corporations have started to centralize their training operations,
which entails shutting down their stand-alone IT training departments and integrating them into
their core corporate training groups; and 4) Corporate trainers report that e-learning and c-
learning are blending rather than one ruling out the other. That is, the strongest use of online
learning seems to be an extension of rather than a replacement for classroom learning.
Development Cycles Will Collapse
Not too long ago, content developers had four to six months to create an average two-hour
learning program. Increasing competition and the velocity of the new economy no longer allow e-
learning companies to spend six months or even six weeks on the development of a course. In the
IT and software industries, for example, R&D cycles have accelerated with staggering speed, and
user software has been commoditized. Similar developments can be expected in the e-learning
industry. Development cycles are predicted to shorten by 20% every year to two or three weeks by
2004. 11 This imperative will drive more template-based designs and fewer custom graphics.
Learning objects will be created in smaller chunks and reusable formats. As a consequence, the
industry will become more efficient and competitive.
Technology Making Quantum Leaps and Standards Emerging
Technology infrastructure, especially for bandwidth, varies widely in corporate America. Lack of
compatibility between existing learning technologies and current IS infrastructure is one of the
main barriers to adopting Web-based training. We are convinced that the move to define open
standards is crucial to the continuing successful adoption of e-learning, especially as it begins to
transition beyond early adopters into the rapid growth phase of the market. Authoring tools will
need to operate across different platforms and communicate with other tools used to build learning
systems. Content and courseware must be reusable, interoperable, and easily manageable at many
different levels of complexity throughout the online instructional environment. Enterprise learning
systems have to accommodate numerous and varied learner requirements, needs, and objectives.
Corporate customers need to be able to easily track content created by multiple content providers
through one training management system and search vast local or distributed catalogs of content to
36
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
identify learning objects or modules on a particular topic. The race for education technology
standards is on. Advances in a wide range of technologies supporting diverse education and
training tasks are currently being made. Issues such as content interoperability, metadata tagging,
and bandwidth are being addressed. But the industry still has some homework to do to create the
flexible, adaptive, and integrated learning systems needed to push e-learning into the mainstream.
Market Share of Live Web-based Course Delivery Expected to Surge
Less than a third of all Internet-based training purchases currently include synchronous course
delivery. As new technological standards and increasingly robust and interactive e-learning
solutions emerge, we expect to see the arena of live online collaboration move forward
dramatically. One reason is people鈥檚 desire to interact while learning. Students want to sense the
online presence of their teachers and peers and to communicate with them in real-time. Once such
technology is widely available and increasingly user-friendly, corporations are likely to make
increasing use of virtual classrooms for employee training. Another likely reason for adoption is
the cost efficiency and convenience provided by synchronous content delivery. Real-time
collaboration technology offers many deployment opportunities beyond employee training.
Traditional in-person meetings, such as executive briefings, new product roll-outs, client
presentations, and sales force briefings, can be held online without loss of auditory/visual inputs
and 360-degree interaction. We expect companies that offer easy-to-use online collaboration
technology and integrate voice communication, content and application sharing, conferencing,
instant messaging, and other collaboration tools supporting real-time interaction to enjoy strong
growth in the next few years.
Stronger Demand for 鈥淪urrounds鈥? of Instructor-Led Classes Should Spur Growth
One of the hottest growth areas in online learning is the creation of Internet/intranet meeting
places (鈥渟urrounds鈥?) for instructor-led classes to provide community, communication, and
supplemental materials online. An increasing number of educational institutions and corporations
are utilizing online authoring and delivery systems to build surrounds supporting the learning
process. This new learning model facilitates studying, note taking, class discussions, and 鈥渃atching
up,鈥? all of which enhance classroom instruction. Surrounds also help to overcome anxiety and
reservations, especially among older age groups, and build learner acceptance and familiarity with
online learning. In our view, this step-by-step solution should make more learners willing to take
pure Web-delivered classes, contributing to the rapid growth of the industry.24
Next Generation of Workers
Not only is it important to understand the changes in the demographics, we must also understand
the expectations of the next generation of workers. Within five to ten years, the generation
entering the workforce will have spent most of their youth in the Internet era. What will their
expectations be as to learning? How will they find the answers to the challenges they face?
K-12 鈥? Kids and Teens
USbancorp 鈥? Piper Jaffray describes the increase numbers of kids and teens using the Internet.
And it is not just adults. Today's kids and teens view the Internet as a preferred tool for in-
formation gathering. The two largest growth sectors on the Internet, kids (ages 5-12) and teens
(ages 13-18) are expected to grow dramatically over the next few years. The number of kids on the
Web is expected to grow to 21.9 million in 2002 from 8.6 million in 1998, a CAGR of roughly
26%. The number of teens on the Web is also expected to grow rapidly to 16.6 million in 2002
from 8.4 million in 1998, a CAGR of approximately 19%. Moreover, by 2002, Jupiter
24
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 10.
37
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Communications predicts that teens will account for $1.2 billion and kids will account for $100
million of the e-Commerce dollars spent.25
Kids and Teens on the Internet
1998 2002 Percent Increase
Kids 8.6 million 21.9 million 155%
Teens 8.4 million 16.6 million 97%
Note: Kids are ages 5-12; teens are ages 13-18
Source: Jupiter Communications
The following graph indicates the locations from which children are accessing the Internet26.
Kids on the Web (millions)
1995 1996 1997 1998 1999 2000 2001 2002
Children who use from home only 1.5 2.6 3.8 5.2 6.7 7.3 9.5 10.1
0.6 1.4 2.9 4.2 5.8 7.1 7.8 10.1
Children who use from home and
school
Children who use from school only -- 0.1 0.3 1.0 2.5 4.7 7.8 10.1
Total online children (2-17) 2.1 4.1 7.0 10.5 14.9 19.2 25.0 30.3
Source: Jupiter Communications, The 1997 Online Kids Report
Higher Education
The following snapshot of higher education by USbancorp 鈥? Piper Jaffray shows the type of
changes expected in the post-secondary market:
The U.S. higher education market consists of 3,700 educational institutions and accounts for $225
billion in expenditures.
鈥? Enrollment in institutions of higher education was over 14 million students in the 1996-
1997 school year, and is expected to increase to 16 million by 2008.
鈥? There are 6.6 million adults (persons aged 25 and older) projected to enroll in higher
education by 2007.
鈥? The number of high school graduates is expected to increase 20% from 1995 to 2008
(from 2.5 million to 3.0 million).
鈥? Sixty-five percent of all high school graduates go on to college.
25
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 24.
26
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 39.
38
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
鈥? The number of students enrolled in distance education is expected to grow from 753,640
in 1998 to 2.2 million by 2002. (Source: NCES, IDC)
鈥? By 2003, over 50% of all higher educational institutions globally will be offering e-
Learning programs to students. (Source: Gartner Group)27
Almost every college student has access to the Internet, according to IDC:
Computer usage in colleges and universities is almost a requirement at this point. Some
universities require students to have a PC upon enrollment. According to the IDC:
鈥? 92.3% of four- and two-year college students use a PC at school.
鈥? 86.6% of students at four-year colleges and 56.6% of students at two-year colleges use
the Internet.28
USbancorp 鈥? Piper Jaffray refers to several different sources that discuss the integration of the
Internet in the lives and pocketbooks of college students.
It is more than just learning online though. The Internet has become a daily staple for many
college students today. Over 60% of college students check out the Web daily and almost 85%
own computers. (Source: USA Today) Also, of the $105 billion university students are expected
to spend on everything from books to clothes to rent, $700 million will be spent online. (Source:
Student Monitor) Moreover, college student spending over the Web is expected to reach $4
billion by 2002. (Source: Jupiter Communications) No doubt, the Web is wired into the daily lives
of college students, creating huge opportunities for companies that offer products and services to
students online.29
Other Notable Education Drivers for e-Learning
USbancorp 鈥? Piper Jaffray denotes several other drivers for change that lead to e-Learning. The
following points cover drivers from parents to K-12 students to college students:
鈥? e-Learning is now broadly recognized as a viable learning vehicle in higher education.
This recognition is furthered by the scores of renowned educational institutions that now
offer e-Learning programs, such as Wharton, Harvard, Stanford, and UCLA.
鈥? Today's high school graduates are more technology savvy than at any other time in
history. Often referred to as the "Net" generation, these graduates grew up with PCs and
the Internet and thus are more technology savvy than their counterparts of the past.
Approximately 31% of high school students rated "expert" or "highly proficient" in their
computing or technical skills. (Source: Student Monitor LLC) The growing number of
technology savvy high school graduates will clearly be a boon to higher education c-
Learning. Today's college students grew up with the Web and are comfortable extending
its usage into their college education.
27
Ibid., 47.
28
Banc of America Securities, The e-Bang Theory (Sept. 1999), 7.
29
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 54.
39
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
鈥? Parents and students are looking for lower cost educational solutions. In an effort to meet
the demands of their communities, educational institutions feel it is necessary to offer
low-cost education. Public institutions, for example, which generally have a more
community-oriented focus than their private counterparts, offer a greater number of e-
Learning courses.
鈥? Lifelong learning is as germane to the American culture as baseball and apple pie.
Americans have realized that competitiveness in the job market and continual learning
are strongly correlated. The Internet represents the underlying bedrock that makes life-
long learning a reachable goal for all.
鈥? Less than 33% of college students are categorized as "traditional" full-time students.
鈥? e-Learning tears down the classroom walls. With the addition of more students, higher
education institutions face capacity issues as the need for more classroom space in-
creases.
鈥? Educational institutions look to e-Learning as a way to leverage their investment in IT
technology, thus making IT infrastructure expenditures less of an overhead item and
more of a direct cost of doing the business of education. e-Learning can be viewed as a
natural by-product of higher education's investment in IT infrastructure.
鈥? The United States government has recently demonstrated a greater commitment to e-
Learning. Examples include the DOE's $30 million competitive grant program to sup-
port e-Learning and its Learning Anytime Anywhere Partnership Program, which
encourages educational institutions and businesses to offer learning solutions to those
constrained by time and place.
鈥? e-Learning enables colleges to extend their reach to learners who would otherwise not
have the time or opportunity to attend college.30
Corporate Workforce Pressures
WR Hambrecht identifies several driving factors that, from the corporate standpoint, are at the
forefront of the e-Learning movement:
Technological changes increase complexity and velocity of work environment
Technology has changed the way we live, work, think, and learn. Today鈥檚 workforce has to
process more information in a shorter amount of time. New products and services are emerging
with accelerating speed. As production cycles and life spans of products continue to shorten,
information and training quickly become obsolete. Training managers feel the urgency to deliver
knowledge and skills more rapidly and efficiently whenever and wherever needed. In the age of
just-in-time production, just-in-time training becomes a critical element to organizational success.
Lack of skilled labor drives need for learning
With unemployment rates at historic lows and a widening skills gap among the workforce,
corporations compete fiercely for skilled workers. According to PriceWaterhouseCoopers, 70% of
Fortune 1000 companies cite lack of trained employees as their number-one barrier to sustaining
growth. Business managers realize that corporations that offer ongoing education and training
enjoy a higher rate of employee retention and the benefits of a better-skilled workforce. As a result
30
Ibid., 55-56.
40
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
of the rising importance of training, an increasing number of corporations have hired Chief
Knowledge Officers (CKOs) or Chief Learning Officers (CLOs) to plan and coordinate training
programs.
Fierce competition in most industries leads to increasing cost pressures
With traditional training methods, companies generally spend more money on transporting and
housing trainees than on actual training programs. Approximately two-thirds of training costs are
allotted to travel expenses, which represents a major drain on bottom-line profitability. In
today鈥檚 competitive environment, organizations can no longer afford to inflate training budgets
with extensive travel and lodging. If opportunity cost is taken into account, the actual costs of
training are even higher. Time spent away from the job traveling or sitting in a classroom reduces
per-employee productivity and revenue tremendously.
Knowledge workers require greater flexibility in the workplace
Globalization, competition, and labor shortages cause employees to work longer, harder, and
travel more than previous generations did. At the same time, these workers require more
independence and responsibility in their jobs and dislike close supervision. Today鈥檚 knowledge
workers have a non-traditional orientation to time and space, believing that as long as the job gets
done on time, it is not important where or when it gets done. By the same token, they want the
opportunity to allocate time for learning as needed. Modern training methods need to reflect these
changes in lifestyle.31
The biggest issues have to do with hiring qualified employees and improving and maintaining
knowledge workers鈥? skills. According to SunTrust and IDC, these human resource issues are on
every CEO鈥檚 or employer鈥檚 mind:
The IT workforce shortage is a key factor in the increased need for corporate training. The current
shortage is due to the rapid rate at which computer-based technologies for commerce and business
applications has grown, and is also due to the insufficient development of workers with technical
understanding. In the United States alone, there is a current shortage of 722,000 IT workers. IDC
forecasts this number is expected to reach 847,000 by 2000. As a result, an increasing amount of
corporate training is associated with IT skills. In 1999, TRAINING magazine stated that 33% of
employer-sponsored training pertained to IT skills. Further, IT training is expanding, having
increased from 25% in 1993.
In the U.S., the issue of skills development and continuous learning for IT workers is always the
first or second most important concern of employers and employees alike (IDC). Because of the
rapid rate of new technology adoption and the economic growth over the last decade, staying
competent has become one of the most important issues of the IT workforce.32
USbancorp 鈥? Piper Jaffray addresses the skills gap with a comparison of skills that are needed
and the training that is currently available:33
Percentage of Companies Recognizing Need for Skills Versus Training Offered by Training Category
Skills Gap Training Offered Gap
Need for
Enhancement
31
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 3-5.
32
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 51.
33
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 73.
41
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
82% 75% 7%
Basic Computer
78% 35% 43%
Written Communication
77% 64% 13%
Interpersonal Communication
71% 72% -1%
Organizational
69% 60% 9%
Customer Service
62% 55% 7%
Quality Awareness
61% 22% 39%
Cross-Cultural Communication
51% 43% 8%
Sales/Marketing
46% 14% 32%
Basic Math
45% 10% 35%
Reading Comprehension
Source: Adapted from Olsten Corporation, Skills for Success, The ASTD Training Data Book, and
USbancorp Piper Jaffray
Merrill Lynch also identifies the corporate needs for a more highly skilled workforce and the
trend in Internet-based training as the outcome34.
Skill Deficiencies In Workforce
28%
Ability to Work in Teams
30%
Compute Skills
48%
Technical Skills
Language Skills 55%
60%
Basic Math Skills
0% 10% 20% 30% 40% 50% 60%
Source: Forbes Magazine, July
Technical Industry Forces 鈥? The Giants (AOL, AT&T, IBM, Microsoft 鈥?)
It happens in every market--larger companies seize opportunities and have the resources to
dominate. The giants in the technology industries will make a strong play to gain mind share and
market share in e-Learning. This is already evident with the recent announcement of the LRN
34
Merrill Lynch, The Book of Knowledge (Apr. 1999), 137.
42
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
(XML) proposed standard from Microsoft and Mindspan Solutions from IBM/Lotus. Others are
expected to create similar initiatives related to their particular areas of technology.
History teaches us that large, deep-pocketed companies can make a significant impact on a market
in a relatively short amount of time. We believe e-learning is ripe for a similar play by the Giants.
The incentives are obvious:
鈥? An enormous market with annual expenditures potentially reaching trillions.
鈥? An inefficient and fragmented market.
鈥? The likelihood that technology will improve efficiency and consolidate the market.
鈥? Exciting opportunities to create lifetime brands for young consumers.
Companies such as IBM/Lotus, Sun, Microsoft, Harcourt and others have the mettle to
dominate the e-learning world. One of their core competencies is their ability to develop new
technologies and adapt them to different marketplaces, then use their substantial marketing power
to quickly dominate the market. The Giants usually possess the key ingredients to dominate a new
market:
鈥? A recognized brand.
鈥? The financial resources to lose money until critical mass or significant market share is
captured, particularly by supporting a massive marketing budget.
鈥? Superior reputations for quality, service and innovation.
鈥? A large installed base of users.
Where Will the Giants Frolic?
We thought it would be instructive to provide a brief look at some of the giants鈥? current e-learning
initiatives. We believe the technology giants will focus on systems support and infrastructure for
e-learning. We believe they will flex their muscles by developing, marketing, installing and
maintaining systems that bring learners together including:
鈥? Collaboration software and hardware.
鈥? Search technologies.
鈥? Networks and bandwidth enhancement.
鈥? Oodles of content.
43
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
The Portal Giants
The decline in computer prices has enabled millions of Americans to go online. According to the
IDC, in 1998, 44.5% of all households owned at least one PC. Of those homes with PCs, 55.3% of
them were connected to the Internet. We believe as consumer access to the Internet expands,
major Internet portals could become strong players in e-learning.
Education is the second-most-popular application for family households, which shows the
potential for the Internet to be used in the area of education. In our view, AOL and Yahoo!
have the brand names (and thus the site traffic), financial resources, marketing prowess and
sales organization to draw both consumers and vendors to their sites, thereby becoming leading
e-learning portals.
America Online (AOL)
We believe AOL may be a prominent player in the e-learning world, primarily driven by its huge
membership base (now upwards of 17 million people). AOL offers consumers access to learning
content, support services, chat rooms and more through its Research and Learn web center. In
AOL鈥檚 Research and Learn web center there are links to a variety of education topics such as
science, history, legal, reading and literature, as well as links to top education sites such as Family
Education Network, the college boards, Learn2.com and more.
Content could be developed in house, privately labeled for AOL (and thus branded AOL
education) or resold by AOL for content developers and authors. In any scenario, AOL would
derive revenues from product sales and increased advertising as learners would spend time on the
AOL Research and Learn site doing research, taking classes, preparing for tests and completing
assignments.
Yahoo! (YHOO)
Yahoo!鈥檚 education center provides a link to a wide variety of education-related topics such as
instructional technology, K-12, distance learning and standards and testing. Each category is
further broken down by market or topic, providing links to vendors in the specific subject area.
Yahoo!鈥檚 home page includes an education 鈥渃enter鈥? and a separate web guide for children called
Yahooligans! Yahooligans! is a search engine specifically for kids. The site provides links to a
plethora of online learning resources and other sites that are appealing to children. Some of the
links include:
鈥? Teachers Guide to teaching with Yahooligans!, which provides resources to help teachers
use the Internet and Yahooligans! in their classrooms.
鈥? School Bell links to resources that are specifically school related. Links to sites that help
with homework, various subjects, reference and information on clubs, programs and
careers.
As with AOL above, we believe Yahoo! could be a prominent player in e-learning, but most
likely as a content aggregator e-learning portal. We do not believe teaching or advising students
or teachers will be a long-term core competency for the company, but given its brand name and
tremendous site traffic, Yahoo鈥檚 future in e-learning may be something to yell about.
Microsoft (MSFT)
In 1995-1996, industry observers pilloried Microsoft for their lack of an Internet strategy. Upstart
Netscape rolled out their Navigator web browser and dominated the consumer and corporate
markets. Microsoft did not panic. Nor should it have, because it had the resources and economic
44
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
clout to strike back. When it seemed appropriate in their eyes, Bill Gates and Microsoft shifted
energy and resources toward the Internet.
The Microsoft barrage included:
鈥? An Internet browser (Microsoft Internet Explorer).
鈥? An online provider (Microsoft Network-MSN).
鈥? A partnership with media/content/broadcasting giant NBC (MSNBC).
鈥? E-commerce sites (Expedia, carpoint, etc.).
鈥? Investments in cable (TCI), broadband and content.
鈥? Microsoft remains the dominant PC-centric software provider, yet now it is an online
force, too.
Of course, Microsoft鈥檚 strategy was aided by its own brand name and its appeal to Microsoft
partners (see MSN and MSNBC). In short, we view Microsoft鈥檚 online move as a classic in the
Land of the Giants: Use might to get into an attractive market when it is believed that the dust is
settling, then use vast marketing clout to ensure the effort receives support from key players in the
technology, media/content and consumer worlds.
We are confident that Microsoft will soon release a robust enterprise-level management product to
manage the learning module of the enterprise. The company already owns other assets that are
germane to e-learning, including:
鈥? NetMeeting, a collaboration and conferencing tool that allows users to interact across the
Internet in real time. Products include video and audio conferencing capabilities, chat,
whiteboard and file transfer to facilitate document sharing.
鈥? Microsoft BackOffice, a suite of products designed to help network administrators
manage a single server or a distributed network of multiple servers.
鈥? Internet Explorer, a web browser that allows users to access the Internet, allows
developers to construct high-quality content and allows administrators to roll out multiple
access point with minimal administration.
鈥? Microsoft WebTV, an e-appliance that allows users to access the Internet through their
television. Users can send and receive e-mail, access interactive television programs or
just surf the Net.
AT&T (T)
AT&T, historically a voice and data transmission company, looked into the crystal ball and saw
the singular convergence of voice, data, entertainment content, billing and services at the back of
the consumer鈥檚 cable-connected television. AT&T also saw something else in that crystal ball--a
weaker AT&T. So, Giant AT&T responded. It recently became one of the largest cable TV players
virtually overnight with the purchase of TCI Inc. and the pending buyout of MediaOne Group.
45
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
AT&T鈥檚 strategy was extremely bold, one that few participants in the telecommunications or cable
industries could even have considered. Nonetheless, given AT&T鈥檚 financial position, installed
customer base and brand name, the combination looks like a winner. Successful execution still
looms as a significant question mark, but the probability is high that AT&T will dominate or at
least wield significant influence in the new telecom world.
IBM (IBM)
We believe IBM will walk among the giants as the e-learning universe takes shape, driven by its
experience with its external training division (Catapult, focused on software training), its internal
education efforts (Global Learning) and Lotus LearningSpace (a dominant platform for
collaborative learning). Global Learning was launched in 1997 and now trains more than 125,000
employees across the globe. Catapult boasts more than $300 million in revenue, and Lotus
LearningSpace (purchased in 1995) has leveraged the installed based of Fortune 1000 Lotus Notes
users to become a widely used platform for collaborative learning.
IBM has taken long strides in a short time, something we expect from a giant with long legs.
We expect Big Blue to emerge as a dominant force in the e-learning world, primarily as a platform
provider, for the following reasons:
鈥? IBM has one of the best brand names in the world.
鈥? It has very deep pockets to support necessary acquisitions and other investments.
鈥? Its distribution channel (sales force and resellers) is broad and deep.
The ability to leverage the installed user base of Lotus Notes through a global sales force and a
marketing budget virtually unmatched in the e-learning universe makes IBM an obvious candidate
for giant status. In the fall of 1999, Lotus acquired the training management software of
Macromedia, Pathware to enhance LearningSpace鈥檚 ability to track and schedule c-learning
courses and monitor learner progress. We believe the transaction supports our thesis regarding the
migration toward the need for providers to offer customers a training solution rather than a
specific product or service capability. While the marriage will require some near-term work (Lotus
is still integrating 1998鈥檚 acquisition of Databeam), it should provide Lotus with a more complete,
integrated training solution in the long term.
We believe IBM will provide content or give clients the ability to create content in support of the
LearningSpace learning platform focus. Catapult certainly could be a source of that content,
although we believe that will not be the focus in the near term.
Sun Microsystems (SUNW)
Sun Microsystems is leading an initiative called the Schooltone Alliance. . . . Sun hopes to further
its penetration of the K-12 e-learning market by combining Sun鈥檚 assets (reputation, installed base,
marketing budget, sales force) with a wide variety of products, content and services for the K-12
market. The initiative should drive Sun鈥檚 core business, too, as the Alliance should drive sales of
Sun鈥檚 servers and technology service businesses, in our opinion.
Oracle (ORCL)
Oracle Education Online is the complete one-stop shop where IT professionals can register for
classroom training, purchase interactive courseware, learn online, interact with others about Oracle
technology and prepare to become Oracle Certified Professionals. Importantly, content on the
Oracle education site is not limited to Oracle software. Oracle also offers training in Microsoft,
46
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Novell and other Internet-related technologies. Oracle Education is roughly a $400-million-per-
year business.
Harcourt (H)
Harcourt is the ideal example of a publisher that can be a giant in e-learning, primarily driven by
its cache of content:
鈥? Harcourt Schools: K-8 textbooks.
鈥? Holt, Rinehart & Winston: upper school textbooks.
鈥? Steck-Vaughn: K-12, Adult Education and ESL supplemental products.
鈥? Harcourt College: textbooks.
鈥? Harcourt Trade: Fiction, nonfiction adult and children鈥檚 books.
鈥? The Psychological Group: develops and administers K-12 clinical and assessment tests.
鈥? NETg: Online training content and services.
鈥? International Correspondence School: Degree and nondegree distance learning provider.
鈥? Professional Trade: materials for finance, accounting and legal professions.
鈥? Drake Beam Morin: career and outplacement services.
鈥? Domestic STM: science, technology and medical publications.
Beyond the company鈥檚 current business lines, however, are three major initiatives that should
propel Harcourt into the mainstream of e-learning:
鈥? Through Harcourt University, Harcourt may become the first major publishing house
to offer accredited college degrees, pending approval from the New England Association
of Schools and Colleges.
鈥? An Internet high school is in the works for students planning to take high school
equivalency exams. We believe Harcourt is well positioned to build a profitable business
in high school e-learning. The Harcourt name is well-recognized and respected within
high school academic circles. The company is experienced in developing and delivering
K-12 tests, and it should have an early-mover advantage in the e-learning world.
鈥? Harcourt made a large investment in Family Education Network. . . and provides
content for its site.36
36
Banc of America Securities, The e-Bang Theory (Sept. 1999), 101-109.
47
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Continued Effort to Reduce Costs and Improve ROI
Another key driver, and one that is especially important to businesses of all sizes, is the return on
investment. Technologies within e-Learning are beginning to measure the impact that learning
has within an organization.
Fred McCrea, R. Keith Gay, and Rusty Bacon from Thomas Weisel Partners have compiled
considerable information about e-Learning, how it can be used in targeting business objectives
and how to realize a significant return on investment.
Reducing Delivery Costs and Increasing Organizational Efficiency. As the reach of global
corporations continues to expand, learning organizations must cope with delivering learning to
employees who are scattered around the world. At Ford, for instance, 120,000 employees visited
the Fairlane Training Center in Dearborn, MI during 1998. With training hours doubling every
three years, Ford can no longer justify the expense of bringing people to one centralized location
and keeping them from their job functions for extended periods. Instead, new solutions must be
found to deliver the learning experience remotely.
Validating Outcomes Directly with Increased ROI. More and more, corporate universities are no
longer viewed as cost centers but instead are given profit and loss status within the company. As a
result, managers need as many tools as possible to aggressively sell learning across the extended
enterprise. One of the key focuses is demonstrating the direct benefits of learning
implementations. University managers need measurable performance data from each engagement
or investment in order to show a meaningful return on investment. Therefore, we believe the most
successful e-Learning solutions will provide reports that demonstrably prove the link between
learning investments and improved business outcomes.37
鈥淥f all the initiatives we鈥檝e undertaken at Chevron during the 1990s, few have been more
important or as rewarding as our efforts to build a learning organization by sharing and
managing knowledge throughout our company. In fact, I believe this priority was one of the keys
to reducing our operating costs by more than $2 billion per year, from about $9.4 billion to $7.4
billion, over the last seven years.鈥?
鈥? Kenneth T. Derr, Former Chairman and CEO, Chevron Corp.38
Changing Perception of Training from a Cost to an Investment
Education and training are beginning to be viewed as an enhancement for productivity, as
indicated in the following chart:
37
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 13.
38
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 9.
48
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Education Increases Productivity
9%
8.6%
8%
7%
6%
5%
4%
3.4%
3%
2%
1%
0%
10% Higher Level in 10% Higher Level in
Education Capital Stock
Source: The National Center for Educational Quality of the
The perception of training is changing from one of "cost center" to one of "revenue-generating
investment." The shift in perception is fueled by the emergence of solid conclusive evidence
correlating training with productivity improvements. Motorola, for example, calculates that every
$1 it spends on training translates to $30 in productivity gains within three years.
A recent study found that corporations that employed a workforce with a 10% higher-than-average
educational attainment level enjoyed 8.6% higher-than-average productivity. In contrast, capital
investments that were 10% higher than the average capital investment only yielded a 3.4% higher
payoff than average. This illustrates the clear shift our economy has made to favor human capital
over physical capital.39
Thomas Weisel Partners also points out the power that e-Learning can have in expediting the
business cycle of releasing and selling a product. This could be true for any size business. The
greatest factor is how distributed the workforce is and the timing by which training must occur, as
indicated in the following case study40:
A company launches a new product and, in the process, must train its 100-person sales team in the
merits and other details of the product. ETA is used to reduce the time it takes to train the sales
staff. This reduced time is materially valuable and is equivalent to the value of ETA. This scenario
shows the value of reducing the training time it takes to get a sales force 100% capable of selling a
new product.
Business Objective Reduce product-launch training times by one-third to allow sales personnel to hit
the streets sooner.
Performance Number of days it takes to get 100% of sales force fully trained on new product.
Objectives
Traditional training: 90 days
39
Merrill Lynch, The Book of Knowledge (Apr. 1999), 135.
40
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 14.
49
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Enterprise Training Automation: 60 days
Revenue/ Profit Number of sales personnel: 100
Metrics
Average sales volume per day per salesperson: $5,000
Life span of new product: One year or 200 selling days
Value of Business Number of salesperson days saved using ETA: lOOx3O=3,000
Objective
Multiplied by
Average sales volume per sales person day: $5,000
Equals
Value of reducing product launch times by 33%--$15 million
The product's expected life span is only one year, or the equivalent of 200 days of selling. If the
sales force consists of 100 people, then there are a total of 20,000 salesperson days available
during the life of the product to sell it.
Using traditional training media, 9,000 sales person days (90 days x 100 sales persons) would be
devoted to training on the product, leaving only 11,000 salesperson days left in the product's life to
sell the product. Using ETA, training requires only 6,000 salesperson days, leaving 14,000
salesperson days left to sell the product. The 3,000 extra days resulting from an ETA approach
potentially delivers $15 million in sales revenues = (3,000 salesperson days x $5,000 per
salesperson).
If the total investment in the sales force product launch was $500,000, then the first year's return
on investment would be:
Return on investment =
(Value of Realized Gain/Investment Required for Gain) m($15,000,000/$500,000)
=3000%
Source: Granada Research
50
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
PART II
HOW BIG IS THE E-LEARNING MARKET?
51
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
HOW BIG IS THE MARKET?
Several learning markets exist. This section breaks down the numbers associated with these
markets and identifies the money as either 鈥渇or profit鈥? or 鈥渘ot for profit.鈥? This section also
presents several figures and trends associated with the individual learning markets, such as home
schooling, K-12, and corporate.
World-Wide Education Market
According to a report from Merrill Lynch, of the $2 trillion spent on global education, $740
billion are spent in the U.S. In the same report, Merrill Lynch explores some of the trends
affecting education and corporate training in the United States.
The two trillion dollar global education and training industry is going through radical changes.
Market forces are providing a catalyst to alter the traditional ways education is delivered.
Megatrends such as demographics, the Internet, globalization, branding, consolidation, and
outsourcing all play major roles in this transformation. In the U.S., the focus of this report,
education and training is a $740 billion dollar market.
U.S. Education & Knowledge
Projected Market Size ($Bil)
Lifelong Post-Secondary
Learning $233
$25
Training
$103
Pre & K-12
$382
Source: SunTrust Equitable
Technology and specifically the Internet will "democratize" education, providing greater access at
lower cost. Ubiquitous PCs combined with high-speed bandwidth will facilitate engaging anytime,
anywhere learning. We predict that "educational portals" (provide a) gateway to the Internet, the
world's greatest library, will emerge in K-12, post-secondary and corporate training markets.
In the knowledge economy, the pay gap between those who have a college education and those
who don't has widened from 50% in 1980 to an estimated 111% today. A thirty-year-old male with
a high school diploma earns just two-thirds what he earned twenty-five years ago. Yet only 21%
of American adults over the age 25 have a bachelor's degree or better. These factors continue to
propel the post-secondary education market forward.
Corporate training has become a business imperative, migrating from an expense to an
investment. Eleven percent or 55 of the Fortune 500 have a Chief Knowledge Officer today, up
from virtually none five years ago. Motorola calculates that every $1 it spends on training
translates to $30 in productivity gains within three years. We see the opportunity for the creation
52
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
of several multi-billion dollar companies in this highly fragmented market where the largest
training company today has training revenues of just $200 million.
The $360 billion K-12 segment is the largest in the education industry, but is the most difficult to
invest in. Impediments to change include the entrenched status quo that argues for more time and
more money to improve the current dismal situation. Studies showing U.S. students finishing at
the bottom in international education comparisons have united parents, politicians and businesses
in saying that 200 years is enough, and change and competition are happening. Charter schools,
which didn't exist six years ago, now total more than 1,200. There are well over one million
children in home school. It is our prediction that 10% of the publicly funded K-12 school market
will be privately managed ten years from now, implying a market of over $30 billion in today's
dollars.
The ratio of students per PC in public schools has improved from 17 to one in 1993 to seven to
one today. Still, when compared to the 50% of capital expenditures that corporations spent on
information technology (IT), the 2% of total spending schools commit to technology is relatively
small. Computer literacy is the second language of the new economy. This, plus increased
accountability and assessment in schools will accelerate the need for Learning Information
Systems and other technology solutions to improve education. With two million new teachers to
be hired in the next ten years, teacher training will be an important aspect of ensuring that
technology is implemented in our schools.
Changing demographics have created huge opportunities in the $34 billion child care industry
where the largest 50 companies hold less than 5% of the overall market. Eighty percent of families
in America are now either dual income or single parent. Sixty percent of mothers with children
under six work outside the home compared to 19% in 1960. A major trend to watch in this market
is accreditation. In addition, we predict that child care will become a standard corporate benefit
over the next 10--15 years, similar to the way corporations provide health care coverage.
Investment Opportunities
The compelling dynamics of the education industry have not been lost on investors. The sector has
attracted significant interest from leading financiers, venture capitalists and visionary business
leaders. Since 1994, 38 IPOs and 30 follow-on offerings have been completed, raising $3.4 billion
of equity. Education is nearly 10% of GDP, yet just 0.2% of U.S. capital markets. We see this,
coupled with strong industry fundamentals, causing demand imbalances for education shares to
persist for the foreseeable future. In our view, this will result in sustainable high P/E ratios in
the sector and significant opportunity for investors.1
The overall education and training market can be segmented into for-profit and non-profit
markets. The for-profit education markets are indicated in the following information from Merrill
Lynch:
Education Market For-Profit Market ($Bil) Total Market ($Bil)
Market Size ($B) Growth Market Size ($B) Growth
1
Merrill Lynch, The Book of Knowledge (Apr. 1999), 2-3.
53
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Education Market For-Profit Market ($Bil) Total Market ($Bil)
$11.5 10% $34 6%
Early Education and Child Care
18.5 15% 358 6%
K-12 Education
8 15% 237 6%
Post-secondary Education
19 13% 98 6%
Corporate & Government Training
13 10% 13 10%
Consumer Products and Services
Total 70 13% 740 6%
Source: National Center for Education Statistics, Industry Associations Market Research Firms, and Merrill Lynch estimates
While the U.S. spends more money on education than any country on an absolute basis and is
second on a percentage-of-GDP basis, our return on this enormous educational investment is
unacceptable. US school children, for example, score at or near the bottom in international
academic comparisons. Approximately 75% of the $740 billion education market is publicly
funded and controlled by a bureaucratic monopoly that are like most monopolies, has stopped
serving its customers, operates in the interest of the bureaucrats and employees and is managed
much less efficiently than its private sector counterparts. In fact, on average only 50% of public
school funds go to classroom instruction and only 3% is spent on books and materials. To the
best of our knowledge, there is not another service industry that exists in the world today where
50% of every dollar is spent outside of where the service is being rendered - unless the service is
subsidized by the government.
The disconnect between our current education system and its customers' (students鈥?) needs has
created tremendous opportunities for for-profit companies that have innovative, customer service
oriented education solutions to gain market share. Currently we estimate that the for-profit
education market is approximately $70 billion in size, representing approximately 10% of the total
education industry.2
Consumer/Home Education Products and Services
SunTrust Equitable points out that educational institutions have made significant efforts to get
connected to the Internet; however, SunTrust believes that the proliferation of computers in the
homes is what will change education as we know it:
Today, more than 50% of households with children own personal computers. This number
continues to rise with the advent of lower-priced PCs and the availability of trade-ins. Increased
affordability has expanded the PC customer base to include the full spectrum of household
incomes. Because of the proliferation of cheaper PCs, Internet access in America has grown at
impressive rates. There are now 36 million homes connected to the Internet and this number is
expected to grow to 61 million by 2002 (IDC).
Although school connectivity represents a critical first step to incorporating technology in the
classroom, ultimately home connectivity will be the deciding factor in the use of the Internet for
education. As previously mentioned, by 2003 close to 60% of the U.S. population will be online,
up from around 42% today. Currently, over five million students are online. This number is
expected to grow to 21 million students by 2002. Student interest is stimulated by their
experiences in the classroom. The real power of technology will not be completely realized in
2
Merrill Lynch, The Book of Knowledge (Apr. 1999), 22.
54
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
education unless learning continues at home and parents get involved. Home connectivity is key.
It is important to note that the number one reason for individuals with children to buy computers is
education.3
Consumer/Home Market Snapshot
USbancorp 鈥? Piper Jaffray highlights the consumer/home market:
鈥? Parents are expected to spend roughly $23 billion in 2000 on educational toys, books,
games, software and services.
鈥? In 1990 22.0 million U.S. households had PCs and 1.0 million were online. In 1998,
those numbers increased to 46.0 million households with PCs and 24.0 million online.
Further, in 1995, the Internet had 9.0 million registered users. During the month of Oc-
tober 1998, the top 25 most visited sites on the Web had 62.5 million users.
鈥? Number of U.S households joining the Internet per hour: 760.
鈥? Close to 20% of U.S. households are already buying products and services online and
more consumers are converting to digital shopping each day.
鈥? According to the National Home Education Research Institute (NHERI), home-schooled
students increased from 400,000 in 1990-91 to 1.23 million in 1996-97 and an estimated
1.7 million students were home schooled in 1997-98. (Source: The Education Industry
Report)4
Merrill Lynch discusses indicators that suggest the consumer/home market is poised for growth:
鈥? Parents dismayed at their children's progress in school, as well as those looking to give
their kids a competitive edge, are taking greater responsibility for their education,
purchasing services such as tutoring, test preparation courses, private schooling or even
schooling them at home. Product purchases include educational software, toys and
games, and books.
鈥? Many parents are lobbying for school choice, vouchers and charter schools. Charter
schools, of course, have grown from zero six years ago to over 1,200 today. At the
extreme edge of this phenomenon are parents who educate their children at home,
entirely bypassing the public education system. The number of students in home school
today is estimated to be as high as 1.2 million. Another 5 million children attend private
schools. Even more parents are taking small steps--supplementing their children's in-class
time with separate tutoring sessions or with additional books, educational games and toys
and computers and software.
鈥? The tutoring market is an approximately $2.5 billion market, appealing to time-strapped
parents whose children are struggling to learn in overcrowded classrooms with thirty kids
per teacher or are gifted, and bored in school. This includes private academic test "prep"
services to prepare for high-stakes college entrance exams. We further estimate that
language instruction is a $1.0 billion industry, and that test delivery is a $1.5 billion
market (including test delivery for IT and professional adults).
3
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 43.
4
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 88.
55
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
鈥? We estimate that education's share of the consumer software market is $700 million, with
personal productivity and reference software rounding out the group to create a $1.5
billion market. Parents purchase $2.5 billion of supplemental material each year to help
give their children an edge in school. Educational toys are a $1 billion market, and
children and adult self-improvement books are a $3 billion market.
鈥? Adults are also accessing education markets in record numbers, be it to improve their
English skills, prepare or take a professional certification exam, or purchase self-help
books or software.
Schools that teach to the lowest common denominator, the ever increasing importance of
education in our society, competition for admission to our top universities, and the potential for
affordable, effective technology solutions is driving the market for consumer-oriented educational
products and services. Moreover, as many adults assume control of their own careers, they too,
become purchasers of educational products and services.5
Other analysts have identified the societal problems that add to the growth of e-Learning for the
consumer/home market:
With the emphasis on children's test scores and the keen interest parents have in their children's
education, parents today are seeking alternatives to further the education of their children other
than the typical six hours per day of classroom time. Parents are constantly searching for ways to
help children learn, improve standardized test scores, and make learning fun in and outside the
classroom. After-school programs, tutors, and the Internet are playing an increasingly significant
role in furthering the education of America's children. With its vast information resources, the
Internet serves as a fantastic tool for kids to perform research on topics of interest. Parents, too, are
harnessing the power of the Internet as a source of educational content and a vehicle to purchase
educational products and services for their children. In 1998 consumer purchases over the Internet
were $37.3 billion, and are expected to increase sharply to $708.0 billion in 2003. (Source:
Internet Commerce Market Model) Worldwide expenditures on consumer software for home
education and edutainment alone were approximately $1.6 billion in 1998. We believe America's
thirst for learning, together with the power of the Web as a tool for gaining access to learning
resources, will continue to drive the demand for educational products and services for years to
come.6
Educational Products and Services
The consumer market for educational software has seen significant growth in the past decade and
is expected to continue to have solid growth:
Educational Software
The consumer educational software sector has exploded in recent years, virtually creating an
industry that was all but absent before 1990. Based on the trends we see, we expect growth in this
sector to continue at a healthy 14% pace. PC penetration in the home has grown to 50%,
accelerating with the introduction of the sub-$1,000 PC. This has given parents, especially those
with lower incomes, another tool to help their children learn. More than forty percent of retail
PCs sell for under $1000, with first-time buyers leading the charge in PC purchases. We expect
that with increased investments in PCs will come additional software spending, particularly among
first-time PC buyers, and that this will boost the PC software market in turn.
5
Merrill Lynch, The Book of Knowledge (Apr. 1999), 170-177.
6
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 88.
56
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
We estimate that the consumer software market in the United States was approximately $7 billion
(up from $6.5 billion in 1997), and that it will continue to grow at 14% for the next few years. We
further estimate that education's share of this market is $700 million. Other consumer software
categories such as "personal productivity" and reference add an additional $125 million and $550
million, respectively, to that total In addition to rapid growth and the increase of PCs in the home,
the consumer software industry in general, and the educational software business in particular,
have been shaped by consolidation, falling average selling prices and technological change.
Three years ago, the U.S. retail market share of the two largest educational software companies
was 42%. With The Learning Company and Cendant Software leading a consolidation charge, that
percentage is now over 70%. These two companies, of course, have recently fallen to the same
trends that they created, both being acquired by larger partners in the last few months. Cendant's
acquisition by Havas and TLC's by Mattel have further changed the competitive picture in the
consumer software market.
We believe that pricing has stabilized and that we will not continue to see dramatic price declines
in the near term. However, we do think that demand will continue to expand for educational
software, making future price reductions likely.
We expect that technological change will continue to affect both product content and distribution
in the educational software market. Kids love computers, and learning can be enhanced by
increasingly rich multimedia content delivered via CD-ROM, DVD or, increasingly, over the
Internet.
Online Services
Online services for children are an emerging area where "fun" and "educational" can be combined.
America Online has been particularly active in this area, with its AOL Kids "channel" and its
investment in the FamilyEducation Network. Content companies and content aggregators have
sprung up with the increasing penetration of this new media. Safe Internet sites for children,
where only kid-appropriate content can be accessed include Juniornet and Searchopolis. Fun
content sites include Headbone Interactive, Bonus.com and Cyberkids/Cyberteens. Children-
oriented online services is one area we expect to see a great deal of activity in over the next few
years.
Supplemental Materials
Consumers purchase $2.5 billion of the total $6.0 billion or so spent annually on supplemental
materials as discussed in a previous section.
Educational Games and Toys
Only a fraction of toy industry sales are on educational toy products, but at 4-5% of a $22.5 billion
industry, this makes educational toys a $1 billion segment. Moreover, it is one of the fastest
growth areas in the toy industry as parents (and, of course, grandparents, who buy nearly 15%
of all toys) strive to give their children a head start in a hyper-competitive economy. Given how
fun and engaging many of these toys are, it may be that kids, who spend $24 billion of their own
money annually and have a say in how nearly $200 billion is spent, may be among the purchasers
as well.
Many of these toys are sold through specialty toy retailers who have created a niche in a highly
competitive toy retailing environment. In general, consumers don't look for these toys at Toys-R-
Us, which captured an 18.4% share of toy sales last year, or Wal-Mart, which had a 16.4% market
share. Upscale buyers often look to Noodle-Kidoodle, Learningsmith, Zainy Brainy, Store of
Knowledge and Imaginarium for merchandise with strong educational value. Specialty retailers
57
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
such as (Zainy Brainy, Store of Knowledge, Learningsmith, Noodle-Kidoodle, and Imaginarium)
captured 4% of the toy retailing market, with their focus on unique products and excellent service.
Educational Books
We include children's books here since they are almost by definition, educational. The children's
book component of the $5.6 billion "trade" publishing industry is $1.4 billion, or 25%, and is
estimated to grow at 5.7% annually by Cowles/Simba Information. In addition, children's books
likely capture a large component of books sold at mass marketers, book clubs and mail order,
which combined account for an additional $3+ billion of book sales.
As for adult book sales, adult reference and self-help books accounted for approximately $500
million and $438 million, respectively, in 1997. While the reference category grew at 7% from
1993-1997, the self-help category grew at 21% over the same period.7
Lifelong Learner Market
The lifelong learning market relates to the pursuit of hobbies and lifelong interests. The content in
this market is very 鈥渟ticky鈥? because the market is driven by the love of learning about something
that makes the learner 鈥渢ick鈥?:
The Web has become much more than a place to track down driving directions and look up
restaurant reviews. It has become a primary source of information and a part of a daily interactive
ritual for a wide variety of people, where we seek and share knowledge on our passions and
interests in life. It has become a place where we learn how to live a more fulfilling life.
According to IntelliQuest, 87% of people who visit the Web do so in order to pursue a hobby or
a lifelong interest. These are not people shouldering the task of learning because their bosses
order them to or because of degree requirements; these are people who love to learn and who
aspire to reach their many personal and professional goals through the help of this new, dynamic
environment.
Lifelong Learning portals recognize this passion, and have created a dynamic personal learning
community where people enrich their life through exploration, transformation, and shared
experience. SmartPlanet, for example, helps people pursue their interests--everything from
cooking to money management to Web development--and advance their careers through
professional development courses.
The dynamic, active content available on the Web lends itself to a unique, empowering
experience. Lifelong Learning portals provide a more effective way of learning where, people can
study, teach, share, and then act on their new knowledge, creating a uniquely rich and diverse
experience. Through these integrated areas, people can directly exchange information and advice
with like-minded people, easily review and buy services or products that make their passions come
to life (e.g., cookbooks, travel gear, lessons), and access a wide variety of content that helps them
to "see the whole picture." Lifelong Learning sticks with this unique combined approach.
Lifelong Learning content is generated from a mix of professionals, professors, authors,
celebrities, and regular people. SmartPlanet's community authors, SmartPartners, are an integral
part of the business model. They provide content, commerce, and community, and in return
receive an entrance into a lucrative market with an efficient co-branded extension on the Internet.
7
Merrill Lynch, The Book of Knowledge (Apr. 1999), 175-178.
58
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Most portals offer hundreds of courses in a variety of formats. Online instructor-led courses are
taught by experts who present engaging lessons, hands-on projects, and answers to your questions.
Other students in these classes often share great tips and tricks as well. Students can take self-
paced courses that use a variety of knowledge builders, quizzes, streaming audio, and simulations
to help you learn. Many of the self-paced courses are even created by portal members, eager to
share their expertise.8
Home School
SunTrust Equitable indicates that home schooling is increasing at a faster rate than many of the
other areas of education:
With more than 110,000 schools and 53 million students, there is an abundance of opportunity in
the public and private school market. One group of students that should not be overlooked is the
rapidly growing home school market. According to Homeeducator.com, there are approximately
2.2 million children schooled in the home, thus illustrating the potential market opportunity.
Further, the home schooled population is projected to grow by nearly 15% annually.
Homeeducator.com states that, on average, a home schooler spends roughly $626 annually on
educational materials, implying a total market size of $1.3 billion annually. Considering the
parent is making the curricula-buying decisions, we believe that e-Learning companies can realize
significant market penetration. Home schooled children tend to perform above national averages.
Specifically, a Pennsylvania study showed that home schoolers, on average, scored at the 86th
percentile in reading and the 73rd percentile in math, as compared to the 50th percentile national
average. In addition to the Pennsylvania study, there are additional results that illustrate home
schooled students excel over their school-bound counterparts. This demonstrates that the home
learning environment is effective. We fully expect that K-12 e-Learning companies will be
successful in realizing solid growth from this expanding customer base.9
Children who learn at home now outnumber the students enrolled in several states combined, as
indicated by the following information from Merrill Lynch:
In the purest indictment of the educational system, more than 1.2 million children are not enrolled
in school at all. The population of home schoolers is so large, that there are now more children
studying at home than there are public school students in Wyoming, Vermont, Delaware, North
Dakota, Alaska, South Dakota, Rhode Island, Montana and Hawaii combined. Put another way,
the population of home schoolers is larger than student populations in New Jersey and forty other
states. While this market is hard to measure, our estimate puts the market at $500 million, based
on per student expenditures of $400 on books and other supplies.
Historically, many parents who taught their children at home were doing so for religious reasons,
with an aim to infusing education with their religious beliefs and moral values. Increasingly,
however, parents who are teaching their children at home do so because they believe they can
offer a superior alternative to the run down or unsafe school, the ancient textbooks and teachers
who may not have degrees in the subjects they teach. Indeed, studies show that parents do know
best--home schooled children perform better on standardized tests than the general school
population.
8
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 53-54.
9
Ibid., 46.
59
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Homeschoolers Population
1,280,000
1,260,000
1,240,000 9th
1,220,000
1,200,000
1.2
1,180,000
10th
mil
1,160,000
1,140,000
1,120,000
Georgia Home Schoolers New Jersey
Source: Home School Legal Defense Fund,
Alternatively, children who are home schooled may have needs that can't effectively be met by the
public school system. Of the 1.5 million U.S. children who are taught at home, about 5-10% have
learning disabilities. While all students benefit from one-on-one teaching, special- education kids
may benefit most. Most public schools can't afford to give special-needs kids the full-time, one-
on-one attention they may require.
The Internet is also a tremendous resource for home schooling families, providing access and
interaction like never before possible. And a variety of companies have enjoyed some success
selling software, supplemental materials and other resources to home schools, proving business
concepts that can later move into mainstream schools.10
The home school market has also been noted by USbancorp 鈥? Piper Jaffray:
The number of students taught at home continues to rise as a number of parents show dis-
satisfaction with school programs and attempts at reform. The top five reasons parents choose
home schooling: higher academic performance, individualized instruction, closer family
relationships, better interaction with peers and adults, and a safer environment. In a study based on
20,760 home-schooled students from 50 states, students taught at home scored higher on
standardized tests than their public and private school peers in every subject and at every grade
level. Almost 25% of the students were studying one or more grades above normal for their age.
With the accessibility of computers, the Internet, technology-based educational products, and
statistics such as the ones stated above, parents are exploring other ways to fulfill their children's
educational and developmental needs.
During the 1996-97 year, home-schooled students totaled 2.3% of all children enrolled in the U.S.
K-12 market and 17% of the total non-public school population. Students in home schools
outnumbered students in charter schools by over 10-to-1 in the 1997-98 academic year. If these
trends continue, the home-school population could number well over 5 million by the 2005-06
school year. (Source: NHERI)11
10
Merrill Lynch, The Book of Knowledge (Apr. 1999), 92.
11
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 90.
60
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
K-12 Market
Although there appears to be unrest in the K-12 market with the rapid growth in home schooling
and a rise in private schools, there is a fairly large amount of materials that are sold into the K-12
market. According to SunTrust Equitable, pressure to perform is mounting on schools, teachers
and students and this will continue to advance the use of e-Learning in the formal K-12 setting:
The K-12 market consists of approximately 112,000 schools in 15,000 school districts. According
to the Department of Education, there are 3.1 million teachers and 53 million students nationwide.
The proliferation of companies servicing this market, including publishers, special education, and
tutoring companies proves that the opportunity of selling to schools has enormous potential. This
is despite the highly bureaucratic and fragmented nature of the U.S. education system. K-12
schools spend $9 billion annually on textbooks and other academic materials, $6 billion on
education technology, and $650 million on standardized testing. We believe e-Learning
companies will gain a significant foothold in the K-12 market due to the inherent advantages of
using the Internet as a complementary tool in an instructor-led learning environment.
The power of the Internet to transform the K-12 market lies in the ability to create and adjust
lessons that can be customized for every student. There is enormous public and political pressure
for increased testing and accountability in our nation's schools. Forty-eight states now mandate
statewide testing. Teachers are forced to conform their lessons to state standards and education
leaders stake their careers on next year's test results. The ability of the Internet to reach each child
on his or her own level is one of the true benefits created by e-Learning. Assessment tests can be
given frequently and lessons can be customized for each child based on objective diagnostics that
adjust learning to each child's progress.
As teachers become more accustomed to using the Internet, they will become "guides" to all the
great educational web sites and products. E-Learning companies that are able to connect with
teachers to drive student traffic to their sites will gain access to a population that spends $130
billion annually on discretionary items. Teachers can also "guide" parents to products that assist in
the learning process. According to recent surveys, the number one concern of parents is their
children's education. Still further, parents spend $19 billion annually on educational products.
The potential for all-inclusive web communities is enormous. The Internet enables teachers and
parents to share student information on an ongoing basis. Parents can now gain real time access to
their child's attendance and academic performance. For parents, this promotes a proactive
approach to their children's learning. No longer do they have to wait for report cards to view their
child's progress. Children will get help in subjects before they become hopelessly behind and fall
through the cracks of our school system.
Although the use of the Internet in the K-12 segment is still in its infancy, rapid penetration by
early movers is well under way. Headbone Interactive already has a registered user base of over
220,000 members. Its web site, www.headbone.com, recently topped Nintendo, Nickelodeon, and
Yahooligans as the number one site for kids based on traffic. MaMaMedia.com has over 650,000
registered users for its portal designed for children aged 12 and under. MaMaMedia.com recently
signed a strategic alliance with InfoSeek (NASDAQ: SEEK), whereby MaMaMedia.com will be a
prominent feature on InfoSeek's GO Kids Center.
The K-12 market consists of a total of nearly 15,000 school districts, 110,000 public and private
schools, and 2.7 million teachers.
61
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
With the baby boom echo effect in full swing, enrollment in K-12 schools hit a record 53.1 million
in 1999 and is projected to grow to 54.2 million by 2009. (Source: NCES.)12
Private Schools
Merrill Lynch indicates that the private school sector comprises about ten percent of the K-12
student population, with about $2.6 billion available to for-profit providers:
Ten percent of American school children are attending private schools. Of these five million or so
children, 50% are attending Catholic schools, 35% attend other religion-sponsored schools, and
15% attend non-sectarian private schools.
The total cost of private education is $27.5 billion, of which we believe $2.6 billion is captured
by for-profit providers. There are 26,100 or so private schools in the U.S., with 8,351 Catholic
schools, 12,180 other religion-sponsored schools, and 5,563 non-sectarian schools. The
stereotypical student at these programs couldn't be more different. Many Catholic schools are
featured in the news for the remarkable success they have had in educating inner-city children and
the tremendous support they receive from parents who scrimp to pay for tuition to help their
children escape dismal public schools. The privileged kids attending one of the country's 778
private non-sectarian secondary schools, on the other hand, pay average tuition of nearly $10,000.
Despite these extreme differences in family situation of these two examples, we believe the
motivations for parents sending their children to private schools is ultimately very similar. That
is, a desire to ensure that their children receive the best possible education available to them,
one which encompasses parents鈥? hopes for their children's development and their futures.
These schools are subject to the discipline of the market. If they aren't able to offer a superior
education, environment or set of opportunities for children, parents will withdraw their business,
and the schools will close. The presence of choice in this market has created a situation where
education for children is the real beneficiary.
The non-sectarian schools bring in tuition revenues of approximately $6 billion. This is a highly
fragmented industry in which we believe most schools, although not all, are operating on a for-
profit basis. A few companies have consolidated or developed clusters of schools in certain
markets where they can gain leverage with advertising, hiring and other expenses as well as build
a brand that reflects their educational philosophies.13
Computers in the Classroom
Technology spending has increased but what does the spending represent on the whole and is it
making a difference? Merrill Lynch looks at some of the factors behind the numbers:
Technology spending has increased at an encouraging 14% annually, from $2.1 billion in 1991-92
to $4.8 billion over the past six years. With public school expenditures exceeding the $300 billion
mark, however, this still only represents 1.6% of the total.
As with all statistics, to really understand the numbers requires getting behind them. According to
a recent study by the CEO Forum on Education and Technology, a nonprofit organization of 21
U.S. business executives and educators, only 3% of schools are at the "leading edge" of effectively
12
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 42-43.
13
Merrill Lynch, The Book of Knowledge (Apr. 1999), 91.
62
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
integrating technology into the classroom. Approximately 59% of K-12 schools in the U.S. are
either without computers in their classrooms or have antiquated hardware. The other 38% are
using computers in their classrooms, but not to their potential. So while the computer-per-student
ratio has come down substantially, this simple number alone is not a sufficient proxy for the use of
technology in schools. The bottom line is, we still have a long way to go before technology can fill
its promise in America's schools.14
Post-Secondary
With the increases in both high school graduates and older college students, the post-secondary
education market will need to accommodate and accelerate post-secondary learning by non-
traditional means. USbancorp 鈥? Piper Jaffray provides the following snapshot of higher
education:
鈥? The U.S. higher education market consists of 3,700 education institutions and accounts
for $22.5 billion in expenditures.
鈥? Enrollment in institutions of higher education was over 14 million students in the 1996-
1997 school year, and is expected to increase to 16 million by 2008.
鈥? There are 6.6 million adults (person aged 25 and older) projected to enroll in higher
education by 2007.
鈥? The number of high school graduates is expected to increase 20% from 1995 to 2008
(from 2.5 million to 3.0 million).
鈥? Sixty-five percent of all high school graduates go on to college.
鈥? The number of students enrolled in distance education is expected to grow from 753,640
in 1998 to 2.2 million by 2002. (Source NCES, IDC)
鈥? By 2003, over 50% of all higher educational institutions globally will be offering e-
Learning programs to students. (Source: Gartner Group)15
SunTrust Equitable makes the case that, with so many older college students working to gain a
better education, learning will have to become more accessible:
The most important force driving post-secondary education, and online learning specifically, is the
dramatic shift in student demographics. Today's university has a much greater percentage of older
students than ever before. International Data Corporation estimates that adults over the age of 24
comprise 43.5% of higher education enrollees. Adding fuel to the fire is the fact that 75% of
students over the age of 24 work while attending school. The key to success in this environment
is to make the learning experience more accessible and enjoyable for the older student.
Higher education expenditures exceeded $232 billion in 1996, the last year for which data is
available from the Department of Education. In 1996, the post-secondary population included 15
million students, one million professors, and 1.7 million administrators (U.S. Department of
Education). These figures are expected to grow as children of the baby boomers, or echo boomers,
14
Merrill Lynch, The Book of Knowledge (Apr. 1999), 96.
15
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 47.
63
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
reach college age. The National Center for Educational Statistics predicts that an additional 1.1
million students will enter college over the next nine years as total student enrollment grows to
16.1 million in 2008.
The Internet now serves as an inexpensive and efficient platform from which to deliver
educational content. The popularity of distance learning also stems from the growing need on the
part of many higher education institutions to reach out to nontraditional students, reduce costs, and
increase enrollment. Distance learning will be one of the main issues dealt with by higher
education institutions over the next several years. Those institutions that fail to adopt distance
programs will ultimately be at a disadvantage.
As indicated by an IDC report, the number of students enrolled in distance education courses is
expected to realize a 33% compound annual growth rate from 710,000 in 1998 to 2.2 million by
2003. We believe that these estimates will prove conservative considering the rate individuals are
accepting the Internet as a viable vehicle over which to conduct commerce.
In 1999, institutions spent about $305 million, or about 9.8% of their IT budgets, on distance
learning technology. This number is expected to grow to $379 million in 2000. IDC estimates that
spending on content creation accounts for the largest share (21%) of the distance learning
budget. Items in this category include electronic textbooks, study guides, lab manuals, and other
materials for lesson plans. Hardware was the second largest category at 19%.
Two years ago, videotape was the most frequently cited technology used for distance learning.
Currently, web-based courses are most popular. As the following chart shows, 78% of the
institutions that offer distance learning courses use web-based technology. This is due in large part
to the increased speed of computers and the increasing availability of high-speed Internet
connections. As bandwidth improves we will see this trend intensify.16
Extending Post-Secondary Audiences World Wide
In the following excerpt, Merrill Lynch distinguishes between the market places for working
adults and traditional students. Merrill Lynch then goes on to point out the important role
distributed learning will make in the international markets:
Working Adults: Working adults, who represent nearly 50% of post-secondary students (6.1
million individuals), in our view, are the perfect candidates for distributed learning courses.
Working adults want to stay relevant in today's knowledge-based economy, yet when seeking
education find many schools inaccessible, with either inconvenient schedules or expensive tuition.
鈥? Among adults potentially interested in acquiring additional education or training, 54
percent report lack of time as a barrier, forty percent report that courses are not available
at convenient times, and 25 percent consider distance between their home and
educational institutions to be a barrier.
鈥? Forty-one percent of participants in adult education said their "work schedule" made it
difficult to participate in adult education, 37 percent said that "meeting times" constituted
an obstacle, 30 percent said that family responsibilities interfered with their participation,
and 22 percent cited the location of classes as a barrier.
16
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 47-48.
64
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Distributed learning enables adults to schedule in education alongside with work, family and
personal obligations, providing them with a flexible, convenient learning solution.
Traditional Students: The benefits of distributed learning have also caught the attention of
younger students who are currently enrolled in traditional campus-based programs. A growing
number of younger college students are working while in school, meaning they too are tempted by
the convenience and flexibility of distributed learning programs. Approximately 84% of students
at public, two-year institutions work while in school and 76% of students attending both public
and private four-year institutions also work. Moreover, sixty-five percent of students at public
two-year colleges enroll part time. Distance education presents younger students with a flexible,
convenient solution to gaining an education while working.
International Markets: Unlike the U.S., where postsecondary education is relatively available,
seats in postsecondary institutions in many parts of the world are limited. We believe that in the
knowledge-based global economy, there is a huge opportunity to serve this pent up demand.
Currently over 400,000 foreign students study in the U.S., spending $7 billion.
While many of these students study in the U.S. because they want the cultural experience of living
in a new country or to attend a specific university, many likely came because they did not have
access to a university education in their home country or did not have the diversity of choices that
we enjoy in the U.S. We believe that for every one foreign student studying here, there are three to
five students who would if they had the resources or the access. Distributed learning makes it
possible to serve these students who would never have had this opportunity before. Sylvan
Learning Systems has announced plans to own a network of up to ten institutions of higher
learning in countries around the world to capitalize on this need. We think distributed learning
could be a highly complementary part of this plan.17
The following projections about higher education enrollment from Merrill Lynch provide further
indications that students will require new ways of learning:
Higher Education Enrollment Projections
Overall, public high school enrollment is projected to grow 26% between 1988 and 2008, with the
majority of the increase expected to be concentrated in the western states. High school enrollment
in the states of Nevada, Arizona, and California is projected to increase 98%, 79%, and 66%,
respectively. In addition to the western states, Florida and Georgia are expected to experience
large high school enrollment increases over the 20-year period, with projected increases of 47%
and 46%, respectively. The increase in high school enrollment ultimately will make its way into
the higher education arena, with 65% of college graduates going on to college.
High School Graduates
College enrollments are expected to rise 18% in the 18 to 24-year-old college population between
1996 and 2008, demonstrating the effect of the baby boom echo. In 2008, students from the 25 to
34-year-old age group are expected to account for 21% of higher education enrollment, and the
35-year-old and older group are expected to represent 17.8% of total enrollment.
Rising Use of Technology in Instruction
According to the Campus Computing Survey, a national study of the use of information
technology in higher education, the marriage of technology and instruction is increasingly
becoming more common in institutions of higher education. Forty-four percent of college courses
use e-mail, up from 32.8% in 1997 and 8% in 1994. One-third of all classes utilize the Internet,
compared to 24.8% in 1997 and 15.3% in 1996. An additional 23% incorporate the Web into the
17
Merrill Lynch, The Book of Knowledge (Apr. 1999), 124.
65
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
course structure, up from 5% in 1994. Moreover, over half of college students in the United
States will be surfing the Web directly from their dorm rooms, and 84% will have Web access
from some campus location, according to a Greenfield Online study.
Distance Learning Enrollment Projections
According to a study conducted by NCES, interest in using technology in education was rather
light in 1995, with only 4% of respondents offering live interactive communication during
instruction. However, 75% of higher education institutions that offered distance learning programs
indicated that they planned to either start or increase their use of technology in distance learning.
As we look back today, this study proved to be an earlier predictor of what was to come. The
rising use of technology on college campuses across the United States is demonstrated by the
dramatic increase in distance learning courses, which are expected to reach 2.2 million in 2002, up
from 710,000 in 1998, a CAGR of 33%, according to IDC. The number of educational institutions
offering distance learning programs is expected to grow dramatically as well. By 2002, IDC
estimates that 85% of two-year colleges will be offering distance programs, up from 58% in 1998,
and 84% of four-year colleges will be offering distance courses in 2002, up from 62% in 1998.
How Is Distance Learning Used?
It is more than just learning online though. The Internet has become a daily staple for many
college students today. Over 60% of college students check out the Web daily and almost 85%
own computers. (Source: USA Today) Also, of the $105 billion university students are expected
to spend on everything from books to clothes to rent, $700 million will be spent online. (Source:
Student Monitor) Moreover, college student spending over the Web is expected to reach $4 billion
by 2002. (Source: Jupiter Communications) No doubt, the Web is wired into the daily lives of
college students, creating huge opportunities for companies that offer products and services to
students online.18
E Textbooks: K-12 and University
In the past, education book publishing was always very centralized, but now there are new ways
for students to get their hands on the learning materials they need in school. Merrill Lynch
discusses both the growth and the changes in distribution in the following excerpt:
U.S. schools purchase nearly $6 billion in new textbooks each year. The K-12 textbook market is
estimated to be $3.1 billion in 1998, growing at 4.4% annually, and the university market is
estimated at $2.5 billion in 1998, growing at 6.6% each year. Growth in these two sectors has been
revised upward over the past few years, as schools and universities respond to demands for
updated, more rigorous instructional material.
The textbook publishing sector is very concentrated, unlike many sectors in the education
industry. The top ten largest college publishers, for example, accounted for over 85% of sales in
1997, according to Cowles/Simba Information, and the eleven leading K-1 2 publishers captured
96% of U.S. sector sales in 1996.
In 1998, Harcourt exceeded Houghton to earn the number three spot in K-12 publishing, in part
due to the success of its reading series, Signatures.
Technology in general and the Internet in particular are impacting the publishing industry. One
area that is being increasingly transformed 鈥? distribution of books including at the college level. It
used to be that once a professor selected a book for a course, students had little choice but to head
to the campus bookstore to buy it. Some bookstores developed a healthy trade in used books,
18
Merrill Lynch, The Book of Knowledge (Apr. 1999), 48-54.
66
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
which captured up to 70% of book sales annually. Still, students were for the most part captive
customers.
A couple of innovative companies are quickly stealing share from college bookstores, using the
advantages of scale and convenience to outsmart them. Varsitybooks.com, CampusBooks.com,
and BIGWORDS.com have emerged quickly as alternatives in a new race for student dollars.19
Supplemental Materials and Curriculum
Merrill Lynch also sizes up the supplemental education materials and curriculum:
The U.S. spends $6.1 billion annually on non-textbook educational supplies and equipment. About
sixty percent, or $3.6 billion of this is sold to institutions, with the remaining $2.5 billion sold to
consumers. We expect this market to grow by 6% per year, driven by increasing per-student
expenditures and an increasing student population.
In addition, under site-based management, teachers and school administrators are given increased
ability to determine how their budgets are spent, and we believe this could drive additional
spending on supplemental materials: musical instruments, arts and crafts supplies, physical
education equipment and manipulatives (physical objects) to help kids learn geography, math and
science. Supplemental curriculum materials too, such as workbooks, lesson plans, video tapes and
films in curricular areas are also widely sold, along with the more typical office supplies such as
paper, copier toner and paper clips.
The distribution of supplemental materials takes place through retail stores, direct mail and
distributors. The market for distribution as well is highly fragmented, with 3,400 distributors. Just
two brand name suppliers have any significant size, School Specialty, which holds 9% of the
market and J.L. Hammett, which holds 2%.
About 65% of the industry's sales go through distributorships, with contract stationers claiming
6%, office superstores 11% and mass merchants 18%.
We believe technology will begin to change the way schools buy supplies and classroom tools.
School Specialty and J.L Hammett have both developed e-commerce sites to complement their
traditional catalogs, direct sales forces and retail outlets.20
Corporate Training
Thomas Weisel Partners reference both Training Magazine and IDC for growth numbers in the
corporate training market:
According to Training Magazine's most recent annual survey, the market for formalized learning
within U.S. companies is $62.5 billion. Given the scalable and distributive nature of web-enabled
learning, this represents a substantial opportunity for e-Learning companies and investors.
Supporting this investment thesis, IDC's newly revised market forecast for the corporate e-
Learning market provides strong evidence that this is a market poised for substantial growth. IDC
estimates that in 1998 the size of the U.S. corporate e-Learning market was $550 million. We
believe an increase in available content, combined with technical innovations in delivery systems,
bandwidth and software, will create a rapid uptake within corporations. Based on these key
19
Merrill Lynch, The Book of Knowledge (Apr. 1999), 87-88.
20
Merrill Lynch, The Book of Knowledge (Apr. 1999), 88.
67
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
catalysts, IDC predicts that by 2003 the corporate e-Learning market will grow to $11.4 billion,
representing a five-year compound annual growth rate of 83%.
Historical and Projected Corporate e-
Learning Market
$11,415
$12,000
$10,000
$7,113
$8,000 CAGR - 83%
$6,000 $4,053
$4,000 $2,222
$1,114
$2,000 $550
$-
1998 1999 2000 2001 2002 2003
Source: IDC
A closer look at Training Magazine's 1999 survey would clearly support IDC's predictions. Even
today, 36% of the over 1,000 organizations surveyed are using the Internet to facilitate learning
within the company. Furthermore, a full 54% are using computer-based content delivered via CD-
ROM. Given the dramatic improvement in web technology and infrastructure, combined with the
tremendous interactive and personalized nature of the web, we believe online courses will rapidly
eclipse CD-ROM and other technology-based training mediums.
The IT training market provides a well-lit road map for the overall corporate e-Learning market.
Not only does it represent a substantial sub-segment of the overall corporate learning market, but it
is also a pioneering early adopter of technology-based delivery. According to Training Magazine,
one-third of training delivered within U.S. organizations is dedicated to teaching employees how
to use, maintain and implement information technology systems. Since IT training is so
technology focused, it is not surprising that its practitioners were early adopters of desktop
delivery. Internet delivered IT training is expected to overtake all other firms if technology-based
delivery mediums this year.21
Untapped in Small Business
Most e-Learning providers have concentrated on the needs of larger corporations, which is often
the case in a newer market. However, small- to medium-sized businesses are the ones that are
more likely to access learning content from the web versus building their own internal learning
environments. According to USbancorp 鈥? Piper Jaffray and Training Magazine:
The larger a business becomes, the more likely it will train employees through its intranet instead
of using the Web. Of all training delivered via computer, Training Magazine estimated that 38%
of businesses with 10,000 or more employees use their internal intranet, whereas 9% use the
21
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 7-8.
68
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Web. Conversely, of all training delivered via the computer, 14% of businesses with 100 - 499
employees use the Web and only 24% use their own internal computer network.
IDC estimated that the proportion of U.S. business PCs and network computers that use the Web
grew from 33% in 1997 to 44% in 1998. IDC projects this proportion to reach 86% by 2002. We
believe the increasing PC Web usage rates will only serve to enhance the popularity of Web-based
training in corporations, as employees become more familiar with the advantages of training over
the Internet.22
Online Training by Company Size
24%
100-499 14%
24%
500-999 14%
28%
1,000-2,499 10%
31%
2,500-9,999 11%
38%
10,000 or More 9%
25%
All Sizes 13%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Internet/WWW Internal Network
Source: Training Magazine,
Lots of Portals Appearing on the e-Learning Scene
WR Hambrecht points out the trend to provide various businesses with learning portals and the
importance of first movers in the marketplace:
The learning portal game is new, but exploding. We estimate that in 1999, about 100 learning
portals went into business claiming to be the primary destination for learning on the Internet.
Barriers to entry are low, as the cost of building an online portal is relatively small. Demand
exists, since content providers need portals as partners to expand their distribution capabilities and
customers are hungry for electronic training delivery. For a new portal, it is key to aggregate as
much content as possible in the shortest amount of time in order to gain visibility and market
share. We predict that new market entrants will come up with more diverse business models and
increasingly offer value-added services to differentiate themselves from the competition. In
particular, a number of portals will likely add authoring and collaborative tools to their product
mix. In 2000, we expect to see even more new market entrants than in 1999, causing stiffer
competition and beginning consolidation. While more competition is healthy, only so many
Amazon.coms can and will survive. And, as with Amazon, first movers with established brand
22
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 80.
69
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
names should have a competitive advantage. Within the next 12 鈥? 18 months, the learning portal
war may well be over.23
Corporate Universities
Many larger corporations have created what is known as a corporate university to try and
accommodate the needs of their employees. In the past 30 years, this trend for centralized
learning has increased ten-fold as reported by Merrill Lynch and Corporate University Xchange,
Inc.
Consequently, employers in the new economy are spending tens of billions of dollars to increase
employee skill levels, offering everything from remedial education to job training to executive
education. The corporate-sponsored training market is huge, measuring over $60 billion for formal
training in 1998 and serving approximately 54.5 million individuals. Including Government
training expenditures, which we estimate to be $38 billion, the training market is approximately
$98 billion in size. Of this amount, we estimate approximately $19 billion are earmarked for
outside expenditures, a figure growing at 13% annually.
Illustrating the heightened profile and importance of training is the rising number of corporate
"universities." Corporate universities are formalized corporate education programs that cut across
all company divisions. By the year 2000, expectations are for approximately 2,000 corporate
universities, up from only 200 in 1970. To put this figure in perspective, there are currently
approximately 3,700 post-secondary institutions in the United States.24
Corporate Universities
Up 10-fold in 30 Years
2000
2000
1600
1500
1000
400
500 200
0
1970 1980 1997 2000
Source: Corporate University Xchange, Inc.
Outsourcing Megatrend
Merrill Lynch reports the following trend in outsourcing:
The training industry is benefiting from the outsourcing megatrend, with corporations increasingly
relying on the expertise of third-party specialists to provide the training and education necessary to
23
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 22.
24
Merrill Lynch, The Book of Knowledge (Apr. 1999), 134-135.
70
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
prepare their employees. Of the $60 billion spent annually on training, $14 billion is outsourced, a
figure growing at 12% annually per year. Including government training expenditures, we estimate
that $19 billion of training is outsourced. As companies focus on core competencies, we believe
the rate of outsourcing training functions will only accelerate.25
Critical Skills Shortage
Skilled labor is in short supply in corporate America. Merrill Lynch makes the following
assessment:
Corporate America is facing a shortage of one of the most valuable resources in our global
knowledge-based economy--skilled labor. While the reasons for the skill shortage are many, the
dismal state of our K-12 education system and its failure to prepare our children for the workforce
is certainly at its core. The unprepared state of our high school students has expensive
consequences for U.S. companies.
鈥? The Washington Post reports that approximately 33% of job applicants tested in 1995 by
U.S. companies could not pass a basic skills test in reading and math.
鈥? According to PriceWaterhouseCoopers, 70% of the fastest growing companies say they
are faced with serious problems finding skilled, experienced workers.
鈥? A survey conducted by the National Association of Manufacturers found that 37% of
respondents were having difficulty introducing productivity improvements and 36% were
having problems upgrading production technology due to employee skill shortages.26
USbancorp 鈥? Piper Jaffray cite the greatest training needs for improving skill in the workplace as
follows:
Regarding the various types of training required by employees, ASTD Training Data Book and
Skills for Success estimates 65% of companies cite written communications skills as the greatest
training need for support staff, while basic computer skills (63%), and interpersonal
communications skills (62%) were a close second and third, respectively. However, as we
examine the skill deficiencies of professional and technical personnel, 63% of companies cite
interpersonal communications skills as the greatest training need, with listening (58%), and
writing skills (58%) coming in immediately behind. Finally, the skills identified to be of greatest
need by managers were performance improvement skills, including listening skills (69% of
companies), interpersonal communications skills (67%), and basic computer skills (65%). 27
Reasons Cited by Companies for Increased Skill Needs
75%
Increased Computerization
67%
More Teamwork/Participation
37%
Qualified Applicant Shortages
25
Ibid., 136.
26
Ibid.
27
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 74.
71
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
25%
New Job Descriptions
23%
Decreased Quality of Graduates
22%
Lags in Educational Curricula
Source: Adapted from Olsten Corporation, Skills for Success, and The ASTD Training Data Book
Training Expenditures
USbancorp 鈥? Piper Jaffray refers to two charts from Training Magazine to illustrate not only the
total training expenditures but also the trend toward outsourcing more training needs28.
Total Training Expenditures
$70 $62.5
$60.7
$58.6
$55.7
$60 $52.2
$48.3 $50.6
Revenue ($Bil.)
$50
$40
$30
$20
$10
$-
1993 1994 1995 1996 1997 1998 1999
Source: Training Magazine, October, 1999
28
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 76.
72
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Total Outside Training Expenditures
$16
15
$14 14.3
13.6
Revenue ($Bil.)
$12 12.4
$10 10.3
9.9
9.4
$8
$6
$4
$2
$-
1993 1994 1995 1996 1997 1998 1999
Source: Training Magazine, October, 1999
IT vs. Soft Skills Training
Although IT training jumped out to an early lead in training, especially training through the use of
technology, soft skills or interpersonal skills will catch up, according to WR Hambrecht + Co.29
Corporate Training Market Size by Training Product and Delivery Method in 1999 ($ Billion)
IT Training Soft Skills Training
$31.19 $31.31
Total Corporate Training Market
9.45 5.55
Outsourced Training Market
2.27 0.72
Technology-based Training Market
0.87 0.20
Web-based Training Market
Sources: Training Magazine, International Data Corporation, and WR Hambrecht + Co estimates
29
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 13.
73
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Soft Skills vs. IT Training Growth
7.0 $6.1
6.0 $5.3
5.0 $4.1
Revenue ($Bil.)
4.0
$3.1
$2.7
3.0
$1.7
2.0 $1.4
$0.9
$0.4 $0.6
1.0 $0.2
$0.1
0.0
1998 1999 2000 2001 2002 2003
Soft Skills Training IT Training
Source: IDC, 2000
IT Training Industry
Dain Rauscher Wessels cites IDC in its report of unfilled IT positions in the U.S.30
Unfilled IT Positions
1999 2000 2001 2002 1999-00 1999-00
Growth CAGR%
%
Supply 3,685,408 4,054,397 4,460,331 4,906,907 33.1% 10%
Demand 4,061,566 4,468,235 4,915,624 4,507,808 33.1% 10%
722,158 759,838 801,293 846,901 17.3% 5.5%
Cumulative
unfilled positions
Growth% 5.2% 5.5% 5.7%
Source: IDC
According to Dain Rauscher Wessels, a shift toward web-based training will continue, as shown
in the following graphic31:
30
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 75.
31
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 76--77.
74
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
U.S. IT Training Market
$14.47
$16 $13.10
$11.84
$14
$10.62
$9.45
Revenue ($Bil.)
$12
$8.35
$10 $7.36
$8
$6
$4
$2
$-
1997 1998 1999 2000 2001 2002 2003
Source: IDC
Worldwide IT Training
US Bancorp 鈥? Piper Jaffray uses the following charts to identify the worldwide marketplace for
IT training and the growth trends from 1998 to 200232:
1998 Worldwide IT Training by Region
Canada Latin America ROW
3% 3%
Asia/Pacific 2%
4%
United States
44%
Japan
14%
Western
Europe
30%
Total = $18.8
Source: IDC, 1998
32
USbancorp 鈥? Piper Jaffray, Helping Investors Climb the e-Learning Curve (Nov. 1999), 72.
75
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
2002 Worldwide IT Training by Region
Latin
Canada ROW
America
4% 2%
4%
Asia/Pacific
4%
Japan United
11% States
45%
Western
Europe
30%
Total = $28.3 Billion
Source: IDC, 1998
SunTrust acknowledges the ongoing need for traditional training but projects most of the growth
and revenue to be from e-Learning:
Although there will always be a need for traditional training, we remain steadfast in our view that
the future lies with corporate e-learning. Recent forecasts by IDC anticipate that Internet-based
learning revenue will reach $11.4 billion by 2003, up from $234 million in 1997. This represents
an 83% compound annual growth rate.
It appears that corporations are increasingly realizing the benefits of e-Learning. Previous
estimates by IDC projected that web-based learning in the corporate market would reach $5.5
billion. Now e-Learning revenue is estimated at $7.1 billion in 2002 and then rising to $11.4
billion in 2003. We believe that these estimates will prove conservative as the Internet鈥檚
importance in everyday business activities rises.33
33
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 51-53.
76
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Delivery of Computer-Based Training
Other
14%
CD-ROM
Diskette 37%
11%
Internet
13%
Intranet
25%
e-Learning vs. c-Learning Projections
The overall learning marketplace is projected to grow between 10% to 15% and the growth in the
corporate training market will grow even faster; however, in the next few years, the change in
how training is delivered鈥揻rom a c-Learning (classroom) model to an e-Learning (virtual) model鈥?
will be drastic.
SunTrust Equitable predicts that, due to bandwidth and other technology changes, e-Learning will
become more interactive and therefore grow to take market share from c-Learning:
Technology-based training continues its steady rise as the second most popular method of delivery
for IT training (IDC). However, nearly 70% of respondents to an IDC survey still prefer traditional
instructor-led courses, including seminars and classroom-based training. We believe the
dominance by instructor-led courses will decline as the availability of bandwidth and
interactivity increases. Also in the IDC survey, training purchasers acknowledged that from 1997
to 1998, technology-based IT training gained five percentage points in net share and accounted for
18% of the IT training services provided by external suppliers. The survey found that the larger
the company, the greater the use of technology-based IT training as compared to other formats.
We believe that this is primarily related to the ability to disseminate information quickly and
efficiently through the Internet.
Enthusiasm for Internet-based training (IBT) revolves around flexibility, convenience, and cost
effectiveness. Decreased travel costs are also a significant benefit. Twenty-five percent of the
companies interviewed for the IDC survey used IBT. Of those companies, only 62% have been
using IBT for at least 18 months. At this time, larger companies appear to be heavier users of
Internet-based technology as opposed to their smaller counterparts. Despite this, only 40% of large
organizations started to use IBT less than 12 months ago. This illustrates that substantial
opportunities remain for further market penetration by e-Learning companies. Additionally, the
emergence of the ASP model to deliver training to customers will allow more small and
medium-sized businesses to access training that was often financially out of reach. Companies
such as Headlight.com are effectively penetrating the small and medium-sized corporations, a
group that was largely underserved.
77
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Self-paced training constitutes the majority of courses delivered via the Internet. Less than a third
of Internet-based training purchases is composed of live training facilitated by an instructor.
Business unit managers are the strongest advocates of live training via the Internet. In 1998, live
training via the Internet accounted for 41% of unit managers' total IBT purchases. As mentioned
previously, we believe that the continuing introduction of increasingly robust and interactive IBT
solutions will lead to increased market penetration of live Internet learning and collaboration
products.
The lack of human interaction is the most cited reservation to IBT (IDC). We believe that such a
reservation will diminish with the advent of better-refined and more widely available interactive
IBT tools. The second most often mentioned reservation regards the inadequacy of IBT to educate
students on complex technical topics (IDC). Again, the introduction of increasingly sophisticated
interactive IBT systems will resolve this dilemma. Most IT training purchasers agree that Internet-
based training is best when offered in combination with other training delivery methods such as
instructor-led, CD-ROM based, or text based. According to Training Magazine, 36% of online
training is delivered through platforms upon which the student interacts with his/her instructor and
fellow students, while 64% of trainees only interact with the computer. In 1999, CD-ROMs (37%)
remained the leading method to train via a computer, followed by online intranets (25%). Web-
based training reached 13% of all training delivered through the use of a computer.34
WR Hambrecht also provides numbers that indicate the changing environment of training in the
corporate world, with projections of 33% annual growth in e-learning vs. 3% growth in c-
learning:
Market share of e-learning and instructor-led training is evening out. In 2000, the U.S. IT
education and training market is projected to be a $10.6 billion industry, accounting for
approximately 53% of the global IT training market. Technology-based training will make up 30%
of the total, or approximately $3.2 billion. Whereas instructor-led training barely budges with a
CAGR of slightly more than 3%, technology-delivered training is prospering at more than 33%
annually. . . . By 2003, e-learning is projected to be a $6.7 billion industry, with a 46% share of the
overall IT training market.35
As suggested by the numbers in the following graph, Thomas Weisel Partners predicts that e-
Learning will capture more than 40% of the overall corporate training market by 200336.
34
SunTrust Equitable Securities, e-Learning and Knowledge Technology (Mar. 2000), 52.
35
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 25.
36
Thomas Weisel Partners, Riding the Big Waves 鈥? B2B e-Learning (Jan. 2000), 9.
78
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
The "X" Factor: The Internet Will Dominate
Technology-Based Training
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1997 1998 1999 2000 2001 2002 2003
CD-ROM Internet Video Tape Satellite Video
Sources: IDC
WR Hambrecht also refers to data in the following graphs which show not only the growth in the
training market but also the change between e-Learning and c-Learning market share37.
C vs. E-Learning
100%
90%
80%
60%
70%
80%
60%
50%
40%
30%
40%
20%
20%
10%
0%
1999 2003
Source: Corporate University Xchange, 1999
37
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 14 and 25.
79
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Corporate Revenue:
Instructor-led vs. Technology-based
$16
$14
$12 6.66
5.57
Revenue ($B)
4.26
$10 3.19
2.27
$8 1.59
1.25
$6
7.81
7.58 7.53
7.43
7.18
$4 6.76
6.11
$2
$-
1997 1998 1999 2000 2001 2002 2003
Instructor-led & Text-based Technology-based
Source: IDC
WR Hambrecht expects the advent of increased bandwidth to have a significant impact on the
media used to deliver technology-based training. The long-term leader will likely be a web-based
model:
Web-based IT training taking off. We expect to see significant changes in the delivery format
mix in the years ahead. The days of CD-ROMs and videotape are numbered, as the Internet as
training delivery medium is capturing virtually all the market growth. While CD-ROM training is
stagnating and training via videotape is declining at an annual rate of over 18%, online training is
exhibiting 56% incremental growth for 1999鈥?2003. IDC projects that online learning will account
for nearly 37% of the overall U.S. IT training industry in 2003, up from 9% in 1999. One of the
primary influences is bandwidth. In the corporate environment, bandwidth has vastly improved in
the last few years, and is expected to continue as the adoption of switched Ethernet grows. DSL
and cable modems to the home will likewise increase bandwidth to the home. Continued
improvements in network infrastructure do not bode well for companies that rely exclusively on
physical delivery of educational material and will facilitate the growth of Web-based training.
Another reason for this surge is that many individuals seeking IT training are, by definition,
comfortable with using technology, leading to less resistance to implementation and usage.38
38
WR Hambrecht + Co, Corporate e-Learning: Exploring a New Frontier (2000), 25.
80
Facts, Figures and Forces Behind e-Learning 鈥? August, 2000
Corporate Revenue:
Instructor-led vs. Technology-based
$16
$14
$12 6.66
5.57
Revenue ($B)
4.26
$10
3.19
2.27
$8 1.59
1.25
$6
7.81
7.58 7.53
7.43
$4 7.18
6.76
6.11
$2
$-
1997 1998 1999 2000 2001 2002 2003
Instructor-led & Text-based Technology-based
Source: IDC
81
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