Language Learning in Europe

Success starts at home: Online Language Learning in Europe

As cross-dressing sensation Conchita Wurst belted out her Eurovision Song Contest-winning tune across a room filled with Europe’s hottest tech start-ups, I knew it could only mean one thing: the Europas annual awards evening had officially begun.  From Berlin came Babbel, who have become one of the world’s leading language learning platforms. Used in 190 countries, with over 25 million app downloads to date, they swept to victory in the education category in exuberant style. However Busuu, Babbel’s nearest rival both in market and geography, reached a staggering 50m users this year, proving that Europe has truly emerged as the home of social language learning.

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Their success certainly paints a sharp contrast to their most notable competitor Livemocha, who faced an arguably disappointing conclusion to their start-up story early last year which despite its 16m users and their $19m in funding, sold for just $8.5m to Rosetta Stone.  Yet Livemocha had been falling behind for a while, and as Busuu and Babbel’s traffic and user base grew strongly, Livemocha’s seemed to stagnate.  In the social language learning market, managing customer acquisition cost is particularly important as it is an especially low margin (CPA to CLTV) model.  Generating viral growth and identifying low cost acquisition channels is therefore key. Mobile had become a key channel in which to do so and while Busuu and Babbel were quick to launch their (good) apps, Livemocha missed this trend. A discounted valuation was inevitable.

But acquisition isn’t the only issue social language learning companies have to face.  On a standalone basis, Livemocha seemed to have failed to convert is substantial traffic and user base into revenue and profit, and within this lies a fundamental flaw in social language learning business models – they don’t attract serious language learners.

Hobbyist language learners have always actively consumed language learning products, whether to achieve that ever illusive dream of comfortably conversing on a Spanish Holiday with the waiter or perhaps a nostalgic dream of reading Sartre in his native tongue.  These consumers were monetised often the same way; you sell them the dream, then they pay for it upfront, and then the product (historically a book or CD), languishes in the book case after just a few short sessions.  The majority of this consumer group isn’t sufficiently incentivised, or motivated enough to actually engage with the product, hence any company who builds its business model around monetising engagement is going to face an uphill struggle.

In emerging markets, learning English is a route to success rather than a hobby. If a taxi driver in Rio ferrying about tourists during the Olympics and the World Cup – has rudimentary English, he will earn more.  Factor in the emergence of the Brazilian middle class, plus rising internet penetration rates, and these markets not only look attractive, but ripe for disruption.  The caveat is, however, that these consumers need insurance.  If they are going to invest both their time and their money, they need a concrete learning outcome which is often still perceived to be only achieved through structured courses in bricks and mortar institutions.

Unfortunately, social language learning is broad (all subjects), global (all regions), and free, giving the perception (whether justified or not) of low quality.  Without strong evidence-based product efficacy or brand awareness, they are struggling to win the patronage of these specific users who have a high willingness to pay.  Perhaps investing into adaptive learning and personalising user journeys to improve learning outcomes will help in the future.  Either way, it will be a while before the wider populous is up to speed on these benefits.

Two companies however who have managed to successfully engage such users are OpenEnglish in LATAM, and TutorGroup in China. It’s true that both these markets have proved fertile. In China, roughly half of the world’s 1bn language learners will be worth an estimated $21 billion by 2015, whereas in Brazil, the market is thought to already be worth in excess of $2bn. However, these companies have distinctively similar characteristics: they’re both focussed purely on one region, on one subject, and on one high stake user need – to gain competency in English in order to gain a better job and, invariably, a better life.  Both have comparatively inexpensive long term structured courses, focussed on annual subscriptions and the promise of fluency.  Having both raised over $115m, they are putting this money to work differentiating themselves against their offline competitors.

And as these new sites start stealing market share, the dominant offline schools are taking the threat seriously.  For instance, Grupo Multi, an offline ELL chain of schools in Brazil (acquired by Pearson early this year for $721m), has actively snapped up several assets to help them compete in the digital ELL market. One such acquisition is EzLearn, who are digitalizing educational content from Wizard (their legacy ELL business) in order to help them compete in the online learning space.

What is next for these two players in the English language learning world then?  Securing domestic market share looks most likely.  With an estimated ELL market size of $2bn in Brazil alone and strong competition from EnglishTown, EnglishUp (a Digital Education portfolio company) and Voxy, it is highly likely they will have a domestic battle on their hands first.  With China and LATAM heating up, who will emerge as the European champion awaits to be seen, but the probability of it being Busuu and Babbel is minimal. Their global imperialistic strategy spreads them much too thin in such a large and competitive market. And now with countries such as Turkey and Poland displaying similar characteristics sitting right on our doorstep, I couldn’t help but look round the room, and wonder who here was going to seize this opportunity that was so ripe for the taking.

Disclosure: Digital Education is a supporter of EDUKWEST and EDUKWEST Europe.

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Timothy Farnell is an investment manager at Digital Education – an emerging markets investor in early stage education technology companies. He has completed multiple early stage investments across Europe and Latin America. Prior to Digital Education, Timothy worked on a number of transactions in the technology and media sector with Quayle Munro. He started his career in Corporate Development with Mazars, Asia Pacific team based in Singapore. He holds a BSc in Natural Sciences (Physics & Economics) from the University of Durham. He is a passionate athlete, representing the UK at the Triathlon World Championships.