Article from ForbesECollege needs Business 101
By Nicole Koffey
NEW YORK. 4:35 PM EST-ECollege (nasdaq: ECLG) opened today at $13, slightly above its $11 price. The company's lukewarm reception may be a sign of a saturated IPO market, but more likely it reflects concerns surrounding this distance learning company's ability to turn a profit in such a low-margin business.
The company is aiming to capitalize on a trend that has been garnering a lot of attention lately, both from academics as well as Wall Street. Distance learning engages students in interactive classes over the Internet, eliminating geographic boundaries that constrain the education industry.
The concept of being "present" in class is changing as the Internet and certain software applications enable companies to leverage technology to bring the classroom experience virtually everywhere. By using the Internet to host online classes and simulate university campuses, eCollege is expanding the market for many of the universities with which it partners.
ECollege partners with colleges and universities to create classes and campuses over the Internet. In 60 days, the company claims to deliver an online campus, complete with faculty and administration training. Services include instructional design, course development, course certification, evaluation and research services, enrollment marketing and a 24-hour help desk.
The company charges $30,000 for the comprehensive service and then collects an incremental fee for each additional course that the university adds. ECollege also charges a fee for each additional student that enrolls in the class. Because the upfront cost to its clients is low, eCollege reaps the benefit of a performance based revenue model that takes advantage of its access to students across a vast geographic expanse.
The market for distance learning originally targeted people living in rural areas who were looking to take classes, either for career advancement or to finish an uncompleted degree. The idea was that by using the Internet, people who would not usually have access to education could attain it simply by logging on from their own PC or a library computer. Recently, however, companies such as eCollege have recognized the need for their service at universities where students want a broader choice of classes.
"For classes that demand face to face interaction, such as business administration or science, there is a serious element that is eliminated by the Internet," says John Dalton, an analyst at Forrester Research. "But for classes in the humanities where there is less interaction, its simply not necessary to teach the course in an actual classroom."
In addition, many professors today are focused on research and don't spend a lot of time interacting with and thinking about students, especially at the undergraduate level. The added value of being in a physical classroom for some classes is minimal.
Although the service undoubtedly offers value to students looking to enhance their education, it does so at significant costs. Developing and implementing school curriculums are expensive. Education companies such as the reputable Academic Systems (which was bought by Lightspan, a private company) have rolled out well designed curriculums which nonetheless failed to be financially successful.
ECollege's cost of revenue is also absurdly high. The line item, which represents the cost of designing and developing courses, was $2.1 million in 1998. Revenue, for the same period, was $1.1 million, bringing the company?s gross margin to a loss of $400,000.
"The costs associated with developing curriculums have always been outlandishly high. Ultimately overcoming those costs will be this company's biggest challenge," says Dalton.
Moreover, eCollege assumed $7.0 million in operating costs for the same period; $3.4 million of which was marketing expense. If eCollege wants to grow its top line substantially, it will need to establish a stronger brand name and more recognition among universities. This is especially important in an industry where brand name is very important.
In terms of getting the big names it needs, the company is making headway. Within the last two months, both Harvard and Princeton have hinted that they are considering signing on with eCollege.
The company currently has contracts with over 80 schools. They include California State University, Hayward, University of Colorado, Drexel University, Keller Graduate School of Management, University of Pennsylvania, Seton Hall University, and the National Association of Realtors.
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