Sunday, August 15, 2010

Rosetta Stone Reports Bad Results and COO Resigns

Rosetta Stone, (RST) a provider of technology-based language-learning solutions, reported preliminary second quarter revenues that came in below expectations sending the shares down nearly 10% in after hours trading. Rosetta also announced that Eric Eichmann, chief operating officer, has resigned from the company. 

My goal here is to take a look at Rosetta Stone's business model. For a more detailed analysis of their financial results and market expectations, read the excellent coverage from TheStreet.

In a first attempt to look at the language training market I built the mind map below, looking specifically at five variables: 
  • Players in the space
  • Sales channels
  • Pricing
  • Geography
  • Buyer motivation
Click on the image to enlarge

Rosetta Stone is in a very competitive market with many forms of delivery of language training. The company was able to generate $269 million in revenue in 2009 and projects sales between $275 and $285 million for 2010. It generates revenue primarily from sales of packaged software and audio practice products, but also online software subscriptions. The company also sells language programs to corporations, government agencies and schools.

My struggle with the Rosetta Stone model is scalability, and my major concern is that the company might be overestimating buyer motivation to acquire their product. I am skeptical because of my personal experience learning to speak five languages and being an English as a Second Language teacher in the past.

There are two key elements in language learning: Human Interaction and Motivation. The former is easy to emulate with software, even though it is not as much fun. The later is harder. Think of it like getting a personal trainer at the gym or signing up for a yoga class, as opposed to having an open commitment to going to the treadmill.

When I read the financials for Rosetta Stone, testimonials, and hear their sales pitch, I am very impressed at how the get people to buy on impulse at kiosks in malls and airports, but what I don't see is any information about follow up sales. I suspect that a high percentage of their software is just shelfware, i.e., software that gets bought by a company or individual that ends up sitting on a shelf somewhere and not being used.

In its SEC filings, the company highlights the fact that their sales peak during the holiday season, which leads me to believe that people buy the product for someone else as a present, and that a big chunk of the buyers never go beyond the first lessons.

A few years ago, I went to Japan for the first time and bought a Pimsleur course to learn some Japanese during my trip. I can say Nihongoga Wakarimasem (I don't speak Japanese) and ask Eigo wakarimaska?(Do you speak English), but I never went beyond the third lesson in that package.

Regarding their stated strategy to sell more in international markets, I think it is a very good approach and I am sure that selling English training in Asia and Latin America has a lot of potential but not at the price points practiced by the company, and not without sometime of localization of the content.

If Rosetta Stone is planning to reach the numbers it has promised investors, I wouldn't be surprised if in the next few years they start looking at acquiring schools and selling butts on seats in classrooms to drive demand.

Bottomline: There is an almost  unlimited demand for foreign language learning, I just don't think that the self-paced and self-motivated model offered by Rosetta Stone is very scalable.

1 comment:

  1. I have tried to learn Japanese with Rosetta Stone and it is clearly very limited - great for party tricks but useless for any real learning (in my case anyway). However, it did trigger an actual effort to go to classes and learn in a more structured classroom environment staring with basic grammar and structure.

    I think many people buy this product on impulse and lose interest after the party tricks wear thin.

    There are many much better tools and websites that offer better instruction - many for free

    I agree, I see no future for their current packaged product that ppl buy on their way to foreign lands.