A Real Time Free Vs Fee Example: Rosetta Stone vs. LiveMocha
As I was driving to work this morning listening to NPR, it became clear to me that this “free vs fee” discussion has some legs (to listen to the NPR piece click here).
Last week, Rosetta Stone was back in the news with regards to an earnings miss as well as pulled secondary offering. Over a year ago, I had the chance to meet with a very interesting Seattle based company called LiveMocha (we are not an investor in LiveMocha). As you might have guessed, LiveMocha offers language learning on the Internet, in a manner that is similar to Rosetta Stone, for free.
If you read our previous thoughts on the free business model, we made one key point. Free is not necessarily a game plan, or a guaranteed model for success, but rather a market reality. Someone may be able to do what you do for free. Does it guarantee they will be wildly successful? No, but it still may be a massive threat. Microeconomics is not a zero-sum game. It’s perfectly reasonable for all the players in a market to not generate excessive (or any) profits.
Let me tell you a bit more about LiveMocha. The company runs a web site where you can learn any number of languages. What’s really cool is that it is also an online community, so they connect you with people that are learning the same language as you, as well as people that are proficient in it, who go so far as to listen to your audio samples and offer 1-1 feedback. Based on these rich community features, LiveMocha argues that their “Free” product is even better than Rosetta Stone.
One other key component of LiveMocha’s business is that the community provides all of it’s contribution for “free,” including translating the courses into more and more languages (this is really, really cool). That represents immense leverage, and from my perspective is problematic for Rosetta Stone. LiveMocha’s cost of building its content is “close enough” to zero, and as such, I suspect they will be able to have a free offering for a long, long time.
Does this mean that LiveMocha will be successful? Not at all. First, they have to be “known.” Today, I suspect their awareness is a mere fraction of that of Rosetta Stone. More critically, they are still experimenting and learning on the monetization front. I believe the current plan is a combination of “freemium” and advertising, but there is still a long way to go from here. It also isn’t directly clear who wants to target this group from an advertiser stand point.
I can certainly see how Rosetta Stone’s management would disregard LiveMocha as a small company that no one knows.* Moreover, I suspect that they would argue that LiveMocha has no material impact on the current quarter (i.e. it didn’t cause the recent miss). Still, I would not be too quick to dismiss the rising threat of the free offering, especially in this type of economy. I was able to find this interesting post from the Orange Beach Library in Orange Beach, Alabama, titled “Goodbye Rosetta, Hello LiveMocha“. Worth a quick read.
As I said before, “free” is more of a threat than a strategy. If someone can do what you do for free, you are forced to deal with it.
* It is important to note that the very beginning of the risk section of Rosetta’s S-1 states, “A decline in demand for our language learning solutions or language learning in general could impair our ability to generate revenue and compromise our profitability, as could the growth of free language learning software and online services and intense competition in our industry.”
This is very interesting. I wonder if this had anything to do with Rosetta Stone removing their product from our local library.
tonya65
November 1, 2009
Certainly, “free” is a threat to fee-based companies (such as Company A). Free-based Company B can get market share but at some point, it has to make money. And if Company C comes along and offers that service for free, well, Company B dies.
Free is not a BUSINESS model. It is a market share tool, but not a business (make money) model.
Andreas Ramos
August 25, 2009
I don’t agree with this. Plenty of Fish isn’t going anywhere, yet it compromises the fee-based players in the market.
bgurley
August 25, 2009
Capture enough of a market and someone will buy you …. or you can expand into other markets from that base … and then someone will buy you.
Step 3: Profit is now satisfied.
thrill
September 8, 2009
Oh, I forgot, Livemocha are about to launch a ‘online English conversation practice’ course built in collaboration with Pearson ELT…premium (i.e.paid for) content! So does free mean crowdsourced and paid mean conventionally authored?
Jason West
August 25, 2009
Fascinating. I’m taking part in an online conference on Thurs (ETCon) with Livemocha, Italki.com, Busuu etc. about community and crowdsourcing in online education. I’ve not seen anyone mention the mid-point. They either go ‘free’ or ‘premium’ and crowdsourced or authored. I think it is possible to have something in the middle that is both crowdsourced and professionally edited and that the crowdsourcing element can drastically reduce development costs, but also make the product more effective and tuned into the needs of the end user.
Jason West
August 25, 2009
Bill,
Thanks for providing your insights on “free” business models and the potential challenge that Livemocha poses to RosettaStone’s business model. I agree with your fundamental thesis that a free business model can be powerful disruptive force to fee based business models as we have seen time and again on the internet especially with the media industry. I also agree with your thesis that just blindly pursuing a free based business model is no guarantee of success. However, I would argue that there are a number of factors that make pursuing a free based strategy even more compelling and feasible than in the Web 1.0 days.
- Low cost of creating software platforms. With significant open source software available, it is indeed possible for a small startup like Livemocha with less than 10 software engineers to compete with the mighty RosettaStone
- Low cost of delivering content and services on a global basis. Hardware, software, hosting, bandwidth costs are incredibly low and getting lower everyday
- Of course, low or negligible cost of customer acquisition given the power of free to attract users. With over 3.5 million registered users, we have clearly proven that free is a powerful customer acquisition strategy.
- Low cost of creating content given that you can now tap the expertise of eager contributors. In fact, if architected correctly, one can build a content base that is so deep that no single company with its own editorial staff can afford to match. As you point out, Livemocha has successfully tapped the community to build a large footprint of languages (now at 25 and soon over 60). Our site, currently localized in 7 languages, will soon be available in many more languages — again through community based translation.
All of this means that we can keep our burn rate low for a very long time and, therefore, the bar to achieving profitability becomes a lot easier. RosettaStone has been very successful in building a powerful brand with their ubiquitous kiosks and TV advertising (and kudos to them for the amazing marketing machine they have created). However, how long is it before people in the US discover Livemocha in droves via their friends on Facebook or through their local school or library. Aside from our own claims, if you search the internet you will find significant evidence that people find Livemocha to be a more effective and engaging offering. And, while RosettaStone is attempting to move to the web with the recently launched TOTALe offering, pressure from Wall Street is undoubtedly forcing them to price the offering at levels ($999 per year) that don’t cannibalize their CD-ROM business.
We believe that the language learning market provides us with a number of significant monetization opportunities that will lead to successful business model. There are a large number of casual language learners in the market, and a critical mass of serious language learners who are willing to pay for specialized learning content and instruction (as they are currently doing today in brick-and-mortar institutions). Livemocha is partnering with experienced and credible publishers like Pearson to deliver new premium courses that users are paying for — and telling us that these courses offer them unique content and native speaker interaction that they can’t get in their local market.
I have no doubt that RosettaStone and other major language players are watching us closely. However, so far, there is no evidence that they are prepared to deal with the growing challenge that the Livemocha represents to their business models. Thankfully, Wall Street is cooperating with us to keep the pressure on the incumbents to stick to their existing business models.
Shirish Nadkarni
August 23, 2009
Well, Rosetta Stone: get ready for competition! Another website that offers free language learning with social networking is coming up soon: hello-hello.com.
I am part of the team and therefore I would like to ask your permission to post some info about the site, which we believe will have a better methodology for the lessons because they were developed in collaboration with ACTFL (The American Council on the Teaching of Foreign Languages)
Hello-Hello.com will be a FREE language learning website combined with social networking where members will be able to:
- LEARN: do the lessons online anytime, anywhere
- TEACH: get help from native speakers and help other members to learn their native language
- COMMUNICATE: chat with people around the world to practice the language and make friends
The site will be ready in a few days and people that pre-sign up before the launch will become VIP members so go ahead to hello-hello.com
Sarah Gontijo
August 21, 2009
The big advantage of Livemocha is its community, the experience to learn with other people from around the globe. Livemocha has 3 million members and it s growing rapidly by a rate of about 1 million users every two months now.
With the community comes the ability of crowdsourcing the content. That’s why most of the lessons are already available in 26 different languages.
Livemocha also made a partnership deal with Pearson to offer a new English online course.
Livemocha is more taking advantage of the social web than of the slow move of Rosetta Stone. Some public lbraries in the US are now even offering Livemocha instead of RS.
And Livemocha are not the only ones. They are the biggest but there are more and more communities like this: Babbel.com, Busuu.com or Palabea.net to mention a few.
KirstenWinkler
August 21, 2009
As someone who is interested in learning Spanish (finally), I went and had Rosetta Stone’s free trial lesson CD sent to me. First, it didn’t fully operate on a nearly new Mac. They are spending a lot of television to create awareness and while it prompted me to try it after seeing the commercials during every single televised tennis event, I was underwhelmed. That, plus the pricing. The lowest entry point for just level 1 of their Spanish course is $299.
After reading your post, I went over to Livemocha, got through the requests to pay and started the free Spanish course. Within two hours, I had two friend requests and since getting through lesson 1 and most of lesson 2, I have had 5 people comment on my written and spoken submissions that are part of the exercises.
There is also a facebook integration feature where your progress can show on your FB page (I did not turn that on).
If they can efficiently market, and find the right level of subscription pricing, this could do serious damage to Rosetta Stone, in my opinion.
Bob Monsour
August 20, 2009
Perhaps LiveMocha is taking advantage of Rosetta Stone’s slow move to the internet and access from anywhere, leaving the bar very low. I found that very frustrating. After all, I get a lot more time to do the exercises on the road than I do at home. They would keep me as a paying customer if I could get their high quality programs on the road.
@comradity
Katherine Warman Kern
August 20, 2009