Technical Industry Forces – The Giants (AOL, AT&T, IBM, Microsoft …)

It happens in every market--larger companies seize opportunities and have the resources to dominate. The giants in the technology industries will make a strong play to gain mind share and market share in e-Learning. This is already evident with the recent announcement of the LRN (XML) proposed standard from Microsoft and Mindspan Solutions from IBM/Lotus. Others are expected to create similar initiatives related to their particular areas of technology.

History teaches us that large, deep-pocketed companies can make a significant impact on a market in a relatively short amount of time. We believe e-learning is ripe for a similar play by the Giants. The incentives are obvious:

• An enormous market with annual expenditures potentially reaching trillions.
• An inefficient and fragmented market.
• The likelihood that technology will improve efficiency and consolidate the market.
• Exciting opportunities to create lifetime brands for young consumers.

Companies such as IBM/Lotus, Sun, Microsoft, Harcourt and others have the mettle to dominate the e-learning world. One of their core competencies is their ability to develop new technologies and adapt them to different marketplaces, then use their substantial marketing power to quickly dominate the market. The Giants usually possess the key ingredients to dominate a new market:

• A recognized brand.
• The financial resources to lose money until critical mass or significant market share is captured, particularly by supporting a massive marketing budget.
• Superior reputations for quality, service and innovation.
• A large installed base of users.

Where Will the Giants Frolic?

We thought it would be instructive to provide a brief look at some of the giants’ current e-learning initiatives. We believe the technology giants will focus on systems support and infrastructure for e-learning. We believe they will flex their muscles by developing, marketing, installing and maintaining systems that bring learners together including:

• Collaboration software and hardware.
• Search technologies.
• Networks and bandwidth enhancement.
• Oodles of content.

The Portal Giants

The decline in computer prices has enabled millions of Americans to go online. According to the IDC, in 1998, 44.5% of all households owned at least one PC. Of those homes with PCs, 55.3% of them were connected to the Internet. We believe as consumer access to the Internet expands, major Internet portals could become strong players in e-learning.

Education is the second-most-popular application for family households, which shows the potential for the Internet to be used in the area of education. In our view, AOL and Yahoo! have the brand names (and thus the site traffic), financial resources, marketing prowess and sales organization to draw both consumers and vendors to their sites, thereby becoming leading e-learning portals.

America Online (AOL)

We believe AOL may be a prominent player in the e-learning world, primarily driven by its huge membership base (now upwards of 17 million people). AOL offers consumers access to learning content, support services, chat rooms and more through its Research and Learn web center. In AOL’s Research and Learn web center there are links to a variety of education topics such as science, history, legal, reading and literature, as well as links to top education sites such as Family Education Network, the college boards, Learn2.com and more.

Content could be developed in house, privately labeled for AOL (and thus branded AOL education) or resold by AOL for content developers and authors. In any scenario, AOL would derive revenues from product sales and increased advertising as learners would spend time on the AOL Research and Learn site doing research, taking classes, preparing for tests and completing assignments.

Yahoo! (YHOO)

Yahoo!’s education center provides a link to a wide variety of education-related topics such as instructional technology, K-12, distance learning and standards and testing. Each category is further broken down by market or topic, providing links to vendors in the specific subject area. Yahoo!’s home page includes an education "center" and a separate web guide for children called Yahooligans! Yahooligans! is a search engine specifically for kids. The site provides links to a plethora of online learning resources and other sites that are appealing to children. Some of the links include:

• Teachers Guide to teaching with Yahooligans!, which provides resources to help teachers use the Internet and Yahooligans! in their classrooms.
• School Bell links to resources that are specifically school related. Links to sites that help with homework, various subjects, reference and information on clubs, programs and careers.

As with AOL above, we believe Yahoo! could be a prominent player in e-learning, but most likely as a content aggregator e-learning portal. We do not believe teaching or advising students or teachers will be a long-term core competency for the company, but given its brand name and tremendous site traffic, Yahoo’s future in e-learning may be something to yell about.

Microsoft (MSFT)

In 1995-1996, industry observers pilloried Microsoft for their lack of an Internet strategy. Upstart Netscape rolled out their Navigator web browser and dominated the consumer and corporate markets. Microsoft did not panic. Nor should it have, because it had the resources and economic clout to strike back. When it seemed appropriate in their eyes, Bill Gates and Microsoft shifted energy and resources toward the Internet.

The Microsoft barrage included:

• An Internet browser (Microsoft Internet Explorer).
• An online provider (Microsoft Network-MSN).
• A partnership with media/content/broadcasting giant NBC (MSNBC).
• E-commerce sites (Expedia, carpoint, etc.).
• Investments in cable (TCI), broadband and content.
• Microsoft remains the dominant PC-centric software provider, yet now it is an online force, too.

Of course, Microsoft’s strategy was aided by its own brand name and its appeal to Microsoft partners (see MSN and MSNBC). In short, we view Microsoft’s online move as a classic in the Land of the Giants: Use might to get into an attractive market when it is believed that the dust is settling, then use vast marketing clout to ensure the effort receives support from key players in the technology, media/content and consumer worlds.

We are confident that Microsoft will soon release a robust enterprise-level management product to manage the learning module of the enterprise. The company already owns other assets that are germane to e-learning, including:

• NetMeeting, a collaboration and conferencing tool that allows users to interact across the Internet in real time. Products include video and audio conferencing capabilities, chat, whiteboard and file transfer to facilitate document sharing.
• Microsoft BackOffice, a suite of products designed to help network administrators manage a single server or a distributed network of multiple servers.
• Internet Explorer, a web browser that allows users to access the Internet, allows developers to construct high-quality content and allows administrators to roll out multiple access point with minimal administration.
• Microsoft WebTV, an e-appliance that allows users to access the Internet through their television. Users can send and receive e-mail, access interactive television programs or just surf the Net.

AT&T (T)

AT&T, historically a voice and data transmission company, looked into the crystal ball and saw the singular convergence of voice, data, entertainment content, billing and services at the back of the consumer’s cable-connected television. AT&T also saw something else in that crystal ball--a weaker AT&T. So, Giant AT&T responded. It recently became one of the largest cable TV players virtually overnight with the purchase of TCI Inc. and the pending buyout of MediaOne Group. AT&T’s strategy was extremely bold, one that few participants in the telecommunications or cable industries could even have considered. Nonetheless, given AT&T’s financial position, installed customer base and brand name, the combination looks like a winner. Successful execution still looms as a significant question mark, but the probability is high that AT&T will dominate or at least wield significant influence in the new telecom world.

IBM (IBM)

We believe IBM will walk among the giants as the e-learning universe takes shape, driven by its experience with its external training division (Catapult, focused on software training), its internal education efforts (Global Learning) and Lotus LearningSpace (a dominant platform for collaborative learning). Global Learning was launched in 1997 and now trains more than 125,000 employees across the globe. Catapult boasts more than $300 million in revenue, and Lotus LearningSpace (purchased in 1995) has leveraged the installed based of Fortune 1000 Lotus Notes users to become a widely used platform for collaborative learning.

IBM has taken long strides in a short time, something we expect from a giant with long legs. We expect Big Blue to emerge as a dominant force in the e-learning world, primarily as a platform provider, for the following reasons:

• IBM has one of the best brand names in the world.
• It has very deep pockets to support necessary acquisitions and other investments.
• Its distribution channel (sales force and resellers) is broad and deep.

The ability to leverage the installed user base of Lotus Notes through a global sales force and a marketing budget virtually unmatched in the e-learning universe makes IBM an obvious candidate for giant status. In the fall of 1999, Lotus acquired the training management software of Macromedia, Pathware to enhance LearningSpace’s ability to track and schedule c-learning courses and monitor learner progress. We believe the transaction supports our thesis regarding the migration toward the need for providers to offer customers a training solution rather than a specific product or service capability. While the marriage will require some near-term work (Lotus is still integrating 1998’s acquisition of Databeam), it should provide Lotus with a more complete, integrated training solution in the long term.

We believe IBM will provide content or give clients the ability to create content in support of the LearningSpace learning platform focus. Catapult certainly could be a source of that content, although we believe that will not be the focus in the near term.

Sun Microsystems (SUNW)

Sun Microsystems is leading an initiative called the Schooltone Alliance. . . . Sun hopes to further its penetration of the K-12 e-learning market by combining Sun’s assets (reputation, installed base, marketing budget, sales force) with a wide variety of products, content and services for the K-12 market. The initiative should drive Sun’s core business, too, as the Alliance should drive sales of Sun’s servers and technology service businesses, in our opinion.

Oracle (ORCL)

Oracle Education Online is the complete one-stop shop where IT professionals can register for classroom training, purchase interactive courseware, learn online, interact with others about Oracle technology and prepare to become Oracle Certified Professionals. Importantly, content on the Oracle education site is not limited to Oracle software. Oracle also offers training in Microsoft, Novell and other Internet-related technologies. Oracle Education is roughly a $400-million-per-year business.

Harcourt (H)

Harcourt is the ideal example of a publisher that can be a giant in e-learning, primarily driven by its cache of content:

• Harcourt Schools: K-8 textbooks.
• Holt, Rinehart & Winston: upper school textbooks.
• Steck-Vaughn: K-12, Adult Education and ESL supplemental products.
• Harcourt College: textbooks.
• Harcourt Trade: Fiction, nonfiction adult and children’s books.
• The Psychological Group: develops and administers K-12 clinical and assessment tests.
• NETg: Online training content and services.
• International Correspondence School: Degree and non-degree distance learning provider.
• Professional Trade: materials for finance, accounting and legal professions.
• Drake Beam Morin: career and outplacement services.
• Domestic STM: science, technology and medical publications.

Beyond the company’s current business lines, however, are three major initiatives that should propel Harcourt into the mainstream of e-learning:

• Through Harcourt University, Harcourt may become the first major publishing house to offer accredited college degrees, pending approval from the New England Association of Schools and Colleges.
• An Internet high school is in the works for students planning to take high school equivalency exams. We believe Harcourt is well positioned to build a profitable business in high school e-learning. The Harcourt name is well-recognized and respected within high school academic circles. The company is experienced in developing and delivering K-12 tests, and it should have an early-mover advantage in the e-learning world.
• Harcourt made a large investment in Family Education Network. . . and provides content for its site.

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