Why It's A Mistake To Assume There Will Be A Long-Term Boost For Online Education Providers

When everything from kindergarten to college went online this spring, pundits and investors alike predicted major upside for the companies that create and sell online learning products and services – companies such as Pearson plc PSO, 2U Inc TWOU, and K12 Inc. LRN.

For the most part, they have been right. The latter two of those stocks have more than tripled since March, as online learning demand has opened both doors and eyes. 

For investors, the short-term trade has worked out. But the long term picture doesn't look as rosey.

In evaluating companies that provide education services to schools, the first rule is to remember the sales in education is long—often years long—and very complicated. It can even take as long to onboard a new customer/school as it did to win the deal in the first place. 

Solutions and business deals in this space flow like tectonic plates, nearly impervious to need or demand. In other words, open doors may not result in new deals for a very, very long time. 

Still, unprecedented demand for products you sell is good for business. And the valuation spike after March reflects that optimism, even it is miles down the road. 

However it seems like investors are overlooking the main problem. That is, nearly universally, the public reaction to online education since March has been mixed, at best. Poll after poll has shown the same thing. Some parents hate it, kids aren’t doing it, teachers don’t understand it, it’s unfair to poor and minority students, college students refuse to pay full price for it – even suing to get refunds - and colleges themselves are worried the thud of online learning will hurt their reputations. Don’t overlook what a factor that last bit is in colleges digging in to come back to campus this fall.  

And President Trump even weighed in on the fiasco tweeting, in part, “Now that we have witnessed it on a large scale basis, and firsthand, Virtual Learning has proven to be TERRIBLE compared to In School, or On Campus, Learning. Not even close!” On this point, he’s accurately reflecting public sentiment.  

So, from a business view, it may be worth considering the implications when consumers hate your product. 

To deal with the bad reviews, online learning providers have tried diligently to distinguish “online” education from “remote” education. Remote, is what they say we’ve seen since Covid-19 blocked out in-person learning in March. It was the same thing, just done remotely. Online is better, they say. It’s planned, curated and refined. It has better tools, more experienced teachers. 

It feels like a big, multi-billion dollar gamble to trust students, families and schools to get the language difference. It feels akin to making a distinction between getting delivery from a nice steak house and delivery from a corner deli. If it’s overpriced, arrives late, and cold, customers may not care whether it’s filet or a tuna melt. And if that’s what they got from their last delivery, in many cases their first and only delivery, they aren’t likely to be eager to try it again no matter what you call it. 

In other words, in this case, in the online education space, it may be too optimistic to assume that a windfall of demand will move into the balance sheet in the long term, or even too much in the short term. 

It is likely that companies with good customer bases before Covid-19 will keep those. Online education is not likely to shrink or go away. But they may not add much after Covid, either. There are, after all, reasons why schools had not signed with theses providers already. And it’s very unlikely anyone is going to think that’s a better idea now that people have sampled the product and found it lacking.