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A TESTING TIME

Temporary school closures and quarantines during the Covid-19 outbreak have come as a boon to online education, which may soon fade if the still-developing industry fails to meet expectations

By NewsChina Updated Jul.1

Students from Shuiguohu No.2 Primary School of Wuhan study at home, Wuhan, Hubei Province, February 10, 2020

As the deadly Covid-19 outbreak put most of China’s economic activity on hold, online education seemed to be among the few industries to benefit. With strict quarantine rules in place by February, authorities brought all offline education to a halt and postponed the reopening of schools indefinitely.  

The Ministry of Education (MoE) encouraged schools to continue teaching their curriculums through the internet, sparking renewed enthusiasm for online education as hundreds of millions of homebound K-12 students logged in for class.  

In 2018, there were 276 million students in China, over 200 million of whom were in K-12, according to statistics released by the MoE in July 2019.  

Many online education institutions reported drastic increases in user numbers since February, mostly by donating free services to quarantined students. More offline education providers are migrating their services online amid a surge in third-party platforms. As a result, stock prices for education companies, including New Oriental and Tomorrow Advancing Life (TAL), soared in February.  

But while media coverage has drawn attention to online education, whether users will actually pay for the services following the outbreak remains to be seen.  

The Covid-19 epidemic has hastened what is likely to be the world’s largest remote learning experiment. Now under the spotlight, the online education industry is showing not only its strengths, but also a host of systemic problems.  

Casting a Wide Net 
Lisa Xu, mother of a second-grader in Beijing, said she chose free courses from New Oriental and TAL to supplement the “Cloud Classroom,” a MoE-supported online learning platform that mainly uses video and PowerPoint slides.  

Xu is one of millions of Chinese parents turning to online education for the first time in the wake of the outbreak. But behind these charitable services is a pitched battle for market share.  

Youdao, a major education brand under internet giant NetEase, began the wave in January by providing free lesson access to students in Hubei Province, the epicenter of the outbreak. English-language learning platform VIPKid was close behind, opening 1.5 million free online lessons to students ages 4 through 12 (also mainly for Hubei students). Others followed suit, including industry leaders New Oriental and TAL.  

Tech giants like Alibaba, Tencent and ByteDance also rushed in by providing access to online teaching technologies, while video platforms iQiyi, TikTok and Kwai (aka Kuaishou) began developing their own education services.  

The increased traffic boosted the numbers of registered users. Genshuixue, an online education platform, attracted 15 million new students through free lessons, nine times its paying user base in 2019. Rival Zuoyebang, which focuses on K-12 students, saw 28 million users by mid-February.  

“Besides new customers enticed by free courses, enrollment for our one-on-one lessons also hit record highs thanks to soaring demand,” said Li Guoxun, executive dean of the VIPKid Children’s Research Institute, adding that their teachers working remotely in North America have much busier schedules than usual.  

Due to the outbreak, the online education industry stands to gain at least 50 million users, said Jiang Kaiyang, vice president of Taihe Capital, an investment management company. 

This comes as a windfall to the online education industry, which despite seeing steady growth since 2011 has been plagued by the high costs of courting subscribers.  

In 2018, revenue from online education made up less than 10 percent of the education market, which was still dominated by offline education, according to industry analyst iResearch. Many businesses are still burning through cash and relying on financing to develop products. Most are still without viable business models.  

“The cost of gaining users is an important reason behind the difficulties online education companies face in turning a profit,” said Xiong Bingqi, vice director of non-profit organization 21st Century Education Research Institute.  

Based on a New Oriental report, Xiong concluded that online companies must spend at least 3,000 yuan (US$432) for every new student compared to 500-1,000 yuan (US$72-144) per student for brick-and-mortar operations.  

According to its annual financial report released January 27, Youdao suffered 600 million yuan (US$86m) in losses in 2019, a substantial increase compared to 2018 due to rising operating costs. The company spent 623 million yuan (US$89m) on marketing alone, the report read, mainly while competing for students over the summer holidays.  

Online tutoring platforms ATL, Yuanfudao and Zuoyebang all spent billions on marketing for returns of around 1 million users each.  

The business generated during the outbreak would have otherwise cost hundreds of billions in marketing.  

In addition, online education has extended its reach into smaller cities, said Wu Xiaozheng, who has worked at a major online education company for over 10 years. “There is obvious growth in the number of students from third- and fourth-tier cities,” he added. 

Insiders expect the surge in use to help raise public awareness of online education. Its market penetration rate was only 10 percent in 2018, much lower than online services such as payment and medical care, according to data from Forward Intelligence, a Chinese market research provider.  

“In the past, online education platforms needed to work to cultivate consumers. Now the majority of users, whether from large or small cities, have gotten used to the idea. They’ll find it easier to accept online learning and be more willing to choose it in future,” Li told NewsChina. 

More Questions Than Answers
Observers say the current flourishing of online education is mainly driven by opportunities presented by the coronavirus outbreak. But the resulting marketing war is taking its toll. 

“It has put the majority of platforms under a lot of pressure. The real test is how many users attracted by free courses will be willing to pay when the outbreak ends and offline education becomes available again,” Xiong told NewsChina. “The current prosperity might be a flash in the pan if online education companies fail to provide good user experiences.”  

The strengths of online education are remote access and unlimited multimedia resources. But the period has exposed and accelerated many of its existing problems, Xiong said.  

The tens of millions of students and teachers flooding to online classrooms have been a strain on livestreaming platforms. In addition to quality control issues, online teaching also suffers from lack of student interaction and lesson customization (to target students at different levels). 

What’s more, online education requires greater self-discipline from students, especially those who are easily distracted while seated in front of their own computers. These concerns could influence parent confidence in online learning’s effectiveness. 

Many teachers have reported difficulty in adjusting to the livestream format. Parents are struggling, too. “It’s a big headache to keep an eye on kids to make sure they are studying rather than chatting with classmates or playing games,” Xu said. “I’d rather send her straight to offline classes.”  

Xu told NewsChina she would not sign up her daughter for online courses after the outbreak ends, mainly because she doesn’t find them as effective. 

“Online education demands that students be more willing to learn, which partly explains why online education companies have difficulty turning a profit and spend so much to get users,” Xiong said.  

Without positive feedback, the outbreak period might damage online education as a whole, he said.  

According to Edu Sight, an education industry analysis service, many platforms sacrificed curriculum quality to provide a stable supply of free courses and failed to follow up with customer conversion, which takes many steps.  

“It may dissuade those who planned to buy lessons,” read an article on Edu Sight’s WeChat account. “A quick surge in users is not necessarily a good thing if the industry is not ready. In the long run, it might shake people’s confidence in online education,” it read. 

“Many companies competed for traffic in the past but could not turn it into profit,” Yang Zhengda, founder of iTutorGroup, an online English-language learning platform, told financial news outlet GPLP. “The key to getting users is reputation. Without that, education companies can¡¯t turn traffic into users, no matter how much they’re getting.” 

IT staff at No.3 Middle School of Boxing County, Shandong Province, supervise online classes and provide technical support, February 11, 2020

The Matthew Effect 
In an open letter to parents, online platform Mingxi, which focuses on Chinese language learning for children, announced its closure on February 13, citing financial difficulties.  

Mingxi is one of many online education companies showing low resilience to risks such as capital shortages.  

“Competition has intensified in this period. Only big companies with sufficient cash flow and sound tech support are able to deal with the large volume of users,” Wu said.  

“Overall, the epidemic will to some extent change the status quo with a mingling of good and bad [in the market] and push for orderly development,” said Li from VIPKid.  

Li said the industry growingly suffers from the Matthew Effect, which refers to the idea that “the rich get richer while the poor get poorer.” The term, coined by US sociologist Richard C. Merton and his wife Harriet Zuckerman in 1968, takes its name from a passage in the Gospel of Matthew and is widely used by economists and education experts. 

“Users will increasingly gather toward brands with high quality and good reputations,” Li said.  

Zhang Xi, founder of OneSmart Education, a K-12 tutoring company, said at an online press conference on February 20 that “at least 60 percent of online education companies will go out of business in a year” in the wake of the Covid-19 outbreak. “The majority of online education companies do not have positive cash flow and depend on investment. There are bubbles,” Zhang said.  

Nevertheless, the market for online education is expected to keep growing.  

According to iiMedia Research, an online consulting platform, the number of users for online education surpassed 200 million in 2018 and will climb to 300 million in 2020. Data from iResearch shows the online education market reached 252 billion yuan (US$36b) in 2018. The market is expected to grow by 16-24 percent in three to five years and be worth over 500 billion yuan (US$72b) by 2022.  

Online education has seen huge injections of investor capital in recent years. But pursuit of profit runs counter to education goals, which require long-term and careful cultivation, Xiong said. 

“Many companies enter in the hopes of quick returns, expanding business rapidly and emphasizing traffic. But they won’t profit in the long run if they overlook quality. Above all, they should have the right attitude toward education,” said Xiong, adding that enhancing interaction and customization are crucial to improving the quality of online courses. 

As the merging of online and offline education quickens and offline schools are forced to move online, the future market will see both fields develop in step and giant companies rise, Yu Minhong, founder of New Oriental, told technology media outlet 36Kr.

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