Part I – II Development Stages of Online Education in China
I. Development stages of online education in China
Online education has developed in China for a dozen of years since its advent in 1996. Its development can be divided into three stages, as shown below.
Development stages of China’s Online Education
- The first wave and bubble bursting period: 1998-2005
The development of online education in China from the late 1990s to around 2000 can be generally seen as in its infancy due to very limited network bandwidth, most online education services are still in the form of documents sharing and static website; it is not until year 2000 that online video courseware in the form of the “three-part-separated screen” appeared, making the online education enter the multimedia stage, but still in the bubble stage.
During this stage, the remote education’s main market was higher education, which belonged to policy market and basically made profits only from online higher education — 68 online colleges that were authorized to issue the diploma of online courses, as well as a few online schools of compulsory education (primary and junior secondary schools in China). Also in this stage, a majority of online schools that failed to find out a commercial model and had to close down.
- Fluctuation period: 2006-2011
Online education entered the fluctuation stage from around 2006 as the industry felt its way and the market capacity increased year by year. Especially after 2009, a lot of newcomers became involved in this industry and many companies stepped out of this industry without a profit-making model. Compared with rapidly-growing portal website, online game as well as e-commerce, online education is a rather slowly-growing industry.
During this stage, a few remote education companies, such as ChinaEdu (formerly China’s Learning Network), China Distance Education Holdings Ltd. (CDEL) and others, were listed and traded overseas just to console the market as the Internet education market had a lackluster performance and only a few companies were praiseworthy, but at that time, their share prices were at a low level.
During this stage, high-definition video courseware started to become a mainstream as network broadband and video network grew up, but a sea of three-part-separated screen courses were still in use. The online learning experience was barely satisfactory at that time.
- The second wave and bubble period: 2012 -current
The e-Learning financing storm from USA-based MOOC and Khan Academy has affected China since 2012. With few opportunities of Internet industry left for e-commerce and online games, online education has become an industry that big shots in the Internet industry began to focus on. According to statistical information from venture capital circle, more than RMB 10bn was poured into the online education industry in 2014, and more went towards this industry in 2015. Some projects even attracted a single investment of over hundreds of millions. The second wave was made in the online education, suggesting the usher of the era of innovating online education.
The online education industry is expected to grow at a fast pace in the next three to six years as it, as a subdivided industry of the Internet Industry, has drawn great attention from Internet giants (Tencent, Netease, Baidu and Alibaba) and hundreds of online education start-ups (e.g. Yuantiku, 17xxw.com, xuexi123 and others) start to step into the market. First two to three years will be the bubble bursting period, and after this period, the remaining winners will enter the harvest period.
II. Main composition of China’s online education market
The nature of education is highly relevant to knowledge and information, and the nature of the Internet is transmitting and exchanging information, so online education is naturally deemed as a highly potential market in the future. According to the author’s researches on subdivided markets, China’s online education market is characterized by complex diversification, as shown in the following figures.
III. Overview of industry development
The number of Chinese companies in the field of online education was estimated at about 9500 by the end of 2015. In this paper, online education includes pre-school education, primary and secondary education, higher education, vocational education, study abroad, language learning, IT application in education and comprehensive projects. There are representative companies in each subdivision.
There are about 2200-2400 companies engaged in K12 online education that grows by leaps and bounds. About 300,000 employees work in this industry, including investors, course developers, technical providers, video recording or online instruction teachers etc. The number of people working for online education industry is on the rise as people become increasingly willing to accept this convenient learning way – online teaching.
In terms of the subscriber numbers, hot fields now include K12, vocational education, language learning and so on. In addition, technical service providers, which play a “shovel” role in the area of online education, also develop very rapidly.
- Growth of revenue: above 70% on average
The fast rise in subscriber number of online education industry is not unexpected. The development of online education makes educational resources unlimited by time and space, enabling students and teachers to give a full play to their self-agency and make use of real-time online teaching, thereby saving a lot of unnecessary spatial limitations and troubles.
The revenue of online education records a new high with more users. The average growth, as a whole, is above 70%, and the figure for study abroad, language learning, primary and secondary education and comprehensive projects is rather noticeable. On one hand, the progressive increase in the revenue is exciting; and on the other hand, we also need to treat such a figure calmly.
- Online education companies’ average revenue for 2015: RMB 27m
It can be seen from the chart below that the average revenue made by online education companies in 2015 was RMB 27m. Maybe, this number is a small one compared with the capital used for investing a large project. But it is very satisfactory for the online education industry that has a difficult starting and forges ahead with great difficulties.
However, the aforesaid figure (RMB 27m) is a mean, and the standard deviation among projects is still very large. At present, only dozens of companies make the revenue of more than one hundred million Yuan, driving the overall average up. So there exists very obvious polarization in the development of online education companies.
In addition, vocational education always follows K12 advances significantly in 2015. According to data from China Online Education Research Institute, vocational education accounts for 15.9% of financed online education projects in 2015. Online vocational education has become an everlasting trend since TARENA INTERNATIONAL, INC. (TEDU) was listed and traded in America and became the first share of vocational education in April 2014. In Sept. 2014, Institute of geeks, online IT education platform, had an access to the second round of financing of US$ 22m; on Nov. 13, 2015, Maiziedu, vocational education platform announced the completion of the second round of financing of one hundred million Yuan; on Nov. 19, 2015, UniquEdu announced its access to the second round of financing of RMB 300m mainly from Qianhe Capital. Meanwhile, America-based Udacity that focused on providing programming education services also obtained the fourth round of financing of US$ 105m mainly from Bertelsmann, and became a new unicorn in the field of online education with the evaluation of US$ 1b.
- Profit and loss: Many companies suffer losses and only 16% make profits
Probably, many people have a doubt that so many projects are tapping the gold mine of online education, then how many companies are now profitable? According to the research conducted by China Online Education Research Institute on 400 online education companies, about 70.58% of companies are in the red; while 13.24% of companies break even, and 16.18% of companies keep profitable.
But on the whole, it is predicted that the percentage of profitable online education companies is below 5%, and the figure is about 10% for break-even companies, 15% for closed-down companies and around 70% for losing companies as even though quite a lot of new projects appear, yet some have been dead.
Typically, it takes at least three to five years for a project to break even from capital investment at the outset to gradual development (except a few projects), even with the Internet acting as an accelerator as educational industry is a slowly-growing industry. Additionally, online educational industry is more challenging than traditional off-line training.
In early days, online education needed a lot of money, and in the late period, every step plays a crucial role, including course development, platform maintenance as well as marketing and promotion. That needs great patience and perseverance.
- Four types of profit-making companies
Which companies are making profits after sweeping off the ripples on the surface of the market? First, online learning platform companies, such as online school platform EduSoho, live online class platform provider Gensee, video hosting platform Bokecc and so on, have the revenue growth of almost above 100%.
EduSoho, as the fresh activist of online school platforms, was one of the few companies that enjoyed the dividend of online education as its revenue in 2015 grew almost four times of 2014. Gensee develops well and is totally acquired by 263. Video hosting server Bokecc is busy in making preparations for its listing.
Secondly, network and hardware providers, such as server hosting, cloud service platform, recording and broadcasting device (e.g. iTVOO.com). Online education makes profits basically from courses, but in the initial profit-making model, it is network hardware supporting these courses that make profits first. Online education cannot be promoted without appropriate hardware facilities.
Thirdly, companies applying IT to education, whose market size is about RMB 20bn annually. Such companies are mainly engaged in business in the institution. For example, a group of companies, including hardware supplier, MOOC developer, technical supplier, are generated as colleges and universities begin developing a lot of MOOCs.
Last, large-scale B2C companies, whose revenue is very large. For example, Xueersi was said to generate double revenue compared with last year; and Hjclass made an income of about RMB 300m and became one of the few online education companies that had the revenue of more than one hundred million Yuan. Koolearn’s revenue grew significantly about 30%.
This is a series of articles from Blue Book of China’s Online Education Industry, authored by our partner China Online Education Research Institute (COERI). Each post is a chapter from the blue book.