Livemocha Signs Deal with Telefônica in Brazil. Rosetta Stone Loses Money.

Livemocha, the community-based online training platform, announced an agreement with Telefônica Brasil offering high-speed Internet customers significantly discounted pricing to Livemocha's English courses. The deal is part of an agreement with Telefonica Worldwide to offer Livemocha's language courses to Telefonica customers across the globe.

Seattle area-based Livemocha provides self-study language courses that combine traditional language training with practice with native speakers online. The company shares the space with traditional language training companies, like Berlitz and The Wall Street Institute, but competes mostly with self-paced programs like Rosetta Stone (NYSE:RST), Mango Languages, and Fluenz.

But why is this news?

The first part is pricing. According to their press-release, Livemocha's regular price for Active English is R$40 per month (US$24); but under the agreement, Telefônica Brasil's broadband customers can purchase the program for as little as R$4.90 per month (US$2.90). This allows the company to easily penetrate one of the fastest growing technology markets in the world, where there is a huge demand for English training.

The second part is scalability. Contrary to Rosetta Stone, which generated a net loss in the third quarter of 2010, Livemocha's training model maintains the engagement of the student through very efficient reminders and invitations. Rosetta Stone relies mostly on self-motivation, which in my opinion is not enough. In fact, as I mentioned in a previous blog post, I suspect that a high percentage of Rosetta Stone's 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.

As for Livemocha, I have personally taken at least three free lessons and I am constantly being invited to come back and join the community.

In its SEC filings, Rosetta Stone states that it is growing faster internationally (119% in the third quarter) in markets like Japan, South Korea, the United Kingdom and Germany, but that those sales still represent only 17% of their total revenues. By signing a deal with Telefonica, Livemocha has an opportunity to penetrate more global markets more competitively though a powerful channel partner.

If Livemocha manages to get the visibility and branding that Rosetta Stone did with its ubiquitous advertising and retail strategy, it has the opportunity to grow in a more sustainable way than its competitors.

Oh... from an international branding perspective, I believe that both Livemocha and Rosetta Stone are very bad names.

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.