Above the Crowd

A Real Time Free Vs Fee Example: Rosetta Stone vs. LiveMocha

August 20, 2009:

rosettaAs 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.”

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