Part I – IV Overview of Segments of China’s Online Education
As we all know, online education, on the whole, is very popular. But at this stage, it develops in two opposite directions, so detours can be avoided with the background knowledge about the actual situation of this industry.
I. Recurrence of the Battle of Group Purchase in online education
The underlying Battle of Group Purchase in online education is not favorable news. In 2013, the investment orientation mainly focused on K12 and online language learning, the investment in both of which was very hot in 2014, and the bubble from excessive investment appeared in 2015. That suggests these two projects enter the adjustment period as some medium-and-small-sized projects have successively closed down.
According to statistics from China Online Education Research Institute, about 15% of online education projects have failed, but such news was inundated by information on the whole industry and ignored due to very hot investment in O2O throughout 2015.
But unexpectedly, a wealth of companies still had presence in online primary and secondary education and IT application to education last year. A total of 1300 information bases only regarding projects in connection with K12 have been collected by China Online Education Research Institute, and the number of innovations of K12, as a whole, is expected to hit more than 2500 in online education industry. Except the number of companies in this industry being beyond the imagination, the investment scale also has been estimated at one hundred million Yuan not tens of millions of Yuan. Such companies as Xkw, Aixuetang, Gaosiedu, SCHOLASTIC, Afanti and Xueba100 all have obtained the financing of hundreds of millions of Yuan, making it more difficult for entrepreneurs to enter online primary and secondary education industry. Not only online education companies have sprung up in primary and secondary education, but also many companies that have never been heard showed up at this year’s education and teaching equipment exhibitions or smart education exhibitions, and they vied for applying IT to primary and secondary education.
Closure of primary and secondary schools and parents’ low recognition of online education has allowed many online primary and secondary education companies to choose to withdraw from the industry when they could not resist pressure from the market. Even though the presence of many companies prospers this industry, yet only a few companies are able to find an appropriate profit-making model and finally survive after the adjustment period of the market.
Even so, it is very difficult to have a situation in which “only one company dominates the market” in the field of online education within a short period of time as stronger regional features and segmented character of the education industry play a decisive role. Even companies that operate a single discipline alone, such as Jiayi Cloud Mathematics and Yangcong345 Onion Mathematics, can have a share in the market. It is predicted that about 500-800 companies in online primary and secondary education can survive and develop after a few years’ fight. In other words, most projects will fail or be merged.
II. Secret sorrow behind popularity
In 2015, it was often reported that “a project or listed company was merged or acquired”, which was enviable and meant that the founder could get rid of the hard entrepreneurial life and became a business angel. However, the long-distance race just starts. What entrepreneurs do not know is that news about large financing on media is actually only the presentation of the prosperity of the industry, and behind such news there are hidden profound meanings entrepreneurs cannot understand without any experience in media.
Perplexingly, some companies are seemingly glorious, but in reality, they do not take any big step or just make a show of strength, and even cut jobs at the end of the year. That just confirms the secret “hidden rules” — “Companies that make a loud sound do not make any profit, while companies that make profits never make a sound” in the business circle. Actually, the reason is simple. Companies make a sound with a view to drawing the attention from investors just like throwing a bomb in the capital circle and industry to stir a great sensation; while companies that do not make a sound think in the same way — “It never rains but it pours when it succeeds”.
What the large investment brings is just a false dawn as online education is very popular. It is impossible for online companies in K12 to yield capital returns by pouring much money into K12, because they cannot survive without severe operation, product, technology, market, sales, funds, talents and customer resources.
III. Current situations of main online education fields in 2015
- Online language learning: opportunities in segmented markets
The market pattern of online language learning initially took shape in 2015, represented by Hjclass, XDF, 51Talk and VIPABC with the annual revenue of over hundreds of millions of Yuan. Many other companies are start-ups. The remaining hundreds of online English teaching websites are not popular to people.
Online language learning in itself is a very big market. The above-mentioned several giants only dominate the market of adults’ oral English, and an oligopoly is far from being formed in such segments as children, primary and secondary students, examination and others, so a success can still be seen in these markets. One example is cited that the suddenly rising Kouyu100 specializing in oral training for primary and secondary students. It posted a revenue of RMB 35m and a profit of RMB 3.5m in 2015. It was invested and promoted by Yu Minhong, godfather of the education and training industry. In addition, it has powerful investors. Another English teaching company Talk915 in the primary and secondary market has made profits with an unique model of voluntary association.
It can be seen that no oligopoly is formed in the market of online language learning and opportunities are in segmented markets. As a matter of fact, adult oral, primary and secondary English and overseas English markets can be seen as different fields, for English learning is also a large market.
- Search answers from photograph recognition: having become the battle of capital
The gap among competitors is becoming wider in the race for online education. Search answers from photograph recognition, characterized by satisfaction of users’ rigid demands, clear scenes and higher technical threshold, were a hotspot in online education industry in 2014 and 2015. According to a recent report, Afanti completed the second round of financing of US$ 60m, following the fundraising by Xueba100, Yuansouti and Zybang.
After testing mainstream search answers from photograph recognition APPs, China Online Education Research Institute holds the belief that only a few companies have the strength to compete for the position of the strongest one, and it is inevitable for other companies to disappear from the market without money and technical support. But it is difficult to decide the success or loss in the next one year.
Such products need high technologies. It is not enough to only have this function, for searching answers from photograph recognition are just the access to traffic and there is no complete commercial closed-loop. To obtain traffic from users via search answers from photograph recognition, it is necessary to realize the revenue model by providing such services as online one-to-one tutoring, manual answering and others.
With regard to such an App, manual answering service has now been launched without a profit-making model. Some Apps have acquired traffic of tens of thousands of answers each day thanks to great subsidies, while another App that provides answering services is far below expectations. It can be clearly seen that 2016 is a crucial year for finding a commercial model for such Apps.
The basic pattern has been formed, but some companies are still to enter this red sea market, because they believe that they are able to occupy this market. Unexpectedly, such a following-up strategy still works in the market, suggesting that there exist a lot of blind areas about this industry for entrepreneurs, namely, “An ignorant person fears nothing”.
- Education digitalization market: fierce competition
Some companies unfortunately failed in 2014, but K12 is still the favorite for many entrepreneurs and investors. There is no surprise that the state pours much money into applying IT to education each year and attracts many firms to get involved in this field, as the number of primary and secondary users reaches almost two hundred million. But applying IT to K12 is a field full of fierce competition.
According to the research conducted by China Online Education Research Institute, about more than 1200 companies that enter the market of applying IT to K12 for treasure, including iFLYTEK, zxxwk.com, LANXUM, Talkweb, WhSunData.com, Ifdoo.com education and others. With the implementation of “three communications and two platforms”, companies have sprung up in this field these years, leading to the presence of many companies on educational equipment. Compared with seemingly prosperous companies, a lot of companies do not deeply understand the features of the market of applying IT to education, so it is inevitable for them to fall into the trap.
- Teachers finding C2C transaction platform: the long-distance race just starting
Teachers finding transaction platforms, e.g. Genshuixue, Qingtajiao, Changingedu, Edu-china and Entstudy, are eye-catching with the slogan of overthrowing traditional education and training industry. There have been more than 50 similar products on this line, but judged by experience in the Internet industry, only a few top companies can finally survive, and only one or two companies will dominate the market finally.
Teachers finding is targeted at high-consumption groups with less frequency, so it must seek for opportunities from low-consumption groups with more demands in order to shake the longstanding monopoly position of offline training institutions. With the change in the TMT’s attitude towards O2O from popularity to boredom, an amount of O2O projects will fail. According to the author, that is not the real “educational O2O” but the “C2C” under the cover of “O2O”. A real “educational O2O” will form a model similar to “remote double-teacher interactive teaching”, and giving full play to the Internet in teaching resources allocation just begins.
- Online vocational education entering the most pleasant stage
No significant change takes place in online vocational education. Little attention is paid to any change in this market when O2O becomes a highlight. In fact, the actual situation of online education has never been in line with media reports. The idea that a person can understand the essence of Internet start-up only by reading media report is too naïve.
Even though there are a few reports on financing for online vocational education, for instance, 100.com took over 10-years-old Edu24oL only at a price of more than one hundred million Yuan. In June 2015, TANGEL announced to purchase a 60% stake in EMERALD EDUCATION. Online financial and economic education school www.Gaodun.com announced that it had struck a cooperation agreement with KE.QQ to provide full training courses for financial and economic certificates. Also, IBEIFENG obtained a lot of funds. Some IT training institutions are also busy with raising funds in great quantity.
The above-mentioned information shows that online vocational education is a black horse in online education, as public companies, similar to TEDU, will appear in the field of IT training alone, and their revenue and capitalization will exceed that of TEDU. There is no fixed pattern for online vocational education and there are still many opportunities in segmented industries. Especially, new technology revolution upsurge represented by VR and robot will transmit to vocational education, because talents in this field are very scarce.
IV. What to happen in 2016 in face of death curse?
What will happen to thousands of online education projects in 2016? 80% of such projects will disappear in the following one to two years, and even some companies will experience job cut and consolidation. The money-consuming model will still exist, but it only applies to a few projects. To a great majority of online education entrepreneurs, they must find another round of financing or commercial model to survive, otherwise they just die.
- Focus of competition in 2016: creation of a commercial closed-loop
Online education has been popular for two consecutive years, and 2015 is an important water-shed period. The most important feature during this period is the sharp differentiation.
Well-known projects, which were still in the stage of accumulating primary users two years ago, now enter the stage of confirming the commercial model. It is a must for companies in any industry to experience the stage of commercial model, as online education will continue to be recognized by investors only after it is proved that it can generate revenues and make profits in this stage.
More and more covert companies place focus on developing and promoting products, but ignore their exposure on media. Early exposure will cause competitors to copy, unfavorable to development, so some firms devote themselves to creating products and services. But if they make their data available to the public, they will make a great coup. The main focus of the completion of online education in 2016 will be the establishment of commercial model.
- Rising of new technical forms
When investors get bored of online foreign teachers, question bank as well as photographing and questions research, a new round of surprising technical forms will erupt, e.g. online one-to-one teaching, VR, robot education, 3D printing, electronic pen and subjective questions assessment. Financing online education will enter a new climax.
This is the best and the worst of times. Information contained in industry report is just the tip of the iceberg, and the truth that is under the surface of water is only perceived by a few people. Obviously, entrepreneurs will lack the sensitiveness to the industry without reading any industry news.
- Ending of online education companies
When it comes to the ending of online education companies, it can be said that some feel happy while others do not. There are about 3000 companies contained in the database of China Online Education Research Institute, it is pessimistically estimated that about 80% of them will die or go bust, because it is impossible to develop many educational projects, and some projects will be merged or acquired to seek for an opportunity of survival.
Moreover, an ideal model for an enterprise is to be acquired by a large-scale company or become public through the new OTC market, which will still be the main trend this year. For example, NetDragon, listed and traded on Hong Kong Stock Exchange, announced last November its take-over of the transnational online education company Promethean at a price of US$ 130m. After the acquisition, it will give full play to its own advantage and integrate resources in Promethean to strengthen the building of ecological chain for education and edge itself into international education market. Both investors and entrepreneurs can find an appropriate way for them. That is an honorable situation. Last, the best development model for a company is to become public alone. But the difficulty is self-evident, and to date, there are only a few successful cases. Besides, there are some races for entrepreneurs of online education to choose.
Education and training/books publication belongs to the tera-scale market, having a great space for development. It can be said that, to a certain extent, unicorn companies will appear in the field of online education three years later. Meanwhile, there are still many good projects to be developed in the field of online education, investors shall actively explore the virgin blue sea in the red sea.
On the whole, online education develops in the upward direction, a prosperous scene. Even though many companies do not make profits, yet many companies will be on the new OTC market and the main-board market after the bubble in the online education market is burst in following three to five years. It is necessary for investors and entrepreneurs to insist for a few years to see which companies will do IPO and have the last laugh.
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.