Ambient Insight s Organizational Enterprise Licensing Model

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2 Ambient Insight s Organizational Enterprise Licensing Model The buyer of this report is granted an Ambient Insight Organizational Enterprise Site License. The Ambient Insight Organizational Enterprise Site License is an organization-wide volume license, which allows companies that buy reports to post the reports on their internal portals, intranets, and servers and grants unlimited access to all of the company's employees, including employees in wholly owned subsidiaries. The Ambient Insight Organizational Enterprise Site License covers an unlimited number of users within your enterprise, school, district/county, or organization, regardless of the number of locations and distance between them. An Ambient Insight Organizational Enterprise Site license does not have any geographical restrictions whatsoever. There is no time limitation and the license is granted in perpetuity. The Ambient Insight Organizational Enterprise Site License also permits purchasers to share the report(s) with investors, private equity firms, and investment banks. The license does not permit reproduction or distribution of the report(s) to external customers, consultants, channel partners, distributors, or suppliers without the express permission of Ambient Insight. Permission is required to reproduce or distribute sections, tables, diagrams, or charts from Ambient Insight research in press releases, external blogs, promotional material, external presentations, or commercial publications. For more information about this research, info@ambientinsight.com 2

3 Table of Contents Ambient Insight s Organizational Enterprise Licensing Model... 2 List of Tables... 4 List of Figures... 6 Abstract... 7 The Primary Catalysts... 8 Reduced Training and Education Budgets... 9 Digitization and Educational Policies Driving the Market High Demand for Language Learning Products in All Segments Steady Increase in Online Student Enrollments The Commercial Training and Education Industry Goes Digital Inhibitors Commoditization Erodes Pricing Power Product Substitution Accelerates in the elearning Industry Sources of Data on the US Self-paced elearning Market What You Will Find in This Report Who are the Buyers? What Are They Buying? Related Research US Forecast and Analysis US Demand-Side Analysis Who is the Buyer? Consumers Federal Government State and Local Governments PreK Post-secondary Higher Education and Tertiary Education Corporations US Corporate Revenue Forecasts by Four Company Sizes...52 US Corporate Revenues for Packaged Content by Ten Verticals...54 US Supply-Side Analysis What are They Buying? Consumer Packaged Retail Content Supply-Side Analysis For more information about this research, info@ambientinsight.com 3

4 US Consumer Revenues for Content by Ten Categories...58 Consumer Forecasts for Self-paced Language Learning by Five Languages Federal Government Supply-Side Analysis State and Local Governments Supply-Side Analysis PreK-12 Supply-Side Analysis Higher Education Supply-Side Analysis Corporate Supply-Side Analysis US Corporate Revenue Forecasts for Ten Packaged Content Categories Corporate Enterprise Supply-Side Analysis...70 Corporate LORG Supply-Side Analysis...72 Corporate MORG Supply-Side Analysis...73 Corporate SORG Supply-Side Analysis...74 Index of Suppliers List of Tables Table US Revenue Forecasts for Self-paced elearning Products by Eight Buyer Segments (in US$ Millions)...41 Table US Consumer Revenue Forecasts for Packaged Self-paced elearning Content (in US$ Millions)...42 Table US Federal Government Revenue Forecasts for Self-paced elearning Products (in US$ Millions)...42 Table US State and Local Government Revenue Forecasts for Self-paced elearning Products (in US$ Millions)...44 Table US PreK-12 Revenue Forecasts for Self-paced elearning Products (in US$ Millions)...45 Table US Higher Education Revenue Forecasts for Selfpaced elearning Products (in US$ Millions)...49 Table US Corporate Revenue Forecasts for Self-paced elearning Products (in US$ Millions)...52 For more information about this research, 4

5 Table 8 - US Corporations by Company Size, Number of Locations, and Number of Employees...53 Table US Corporate Self-paced elearning Revenue Forecast by Four Company Sizes (in US$ Millions)...53 Table US Corporate Revenue Forecasts for Self-paced elearning Packaged Content by Ten Vertical Industries (in US$ Millions)...54 Table US Revenue Forecasts for Self-paced elearning by Three Product Categories Across All Six Buying Segments Combined (in US$ Millions)...56 Table US Consumer Revenue Forecasts for Packaged Self-paced elearning Content (in US$ Millions)...57 Table US Consumer Forecasts for Self-paced elearning Content by Ten Categories (in US$ Millions)...58 Table US Consumer Forecasts for Self-paced Language Learning Courses by Five Languages (in US$ Millions)...60 Table US Federal Government Revenue Forecasts for Self-paced elearning by Three Product Categories (in US$ Millions)...62 Table US State and Local Governments Revenue Forecasts for Self-paced elearning by Three Product Categories (in US$ Millions)...63 Table US PreK-12 Revenue Forecasts for Self-paced elearning by Three Product Categories (in US$ Millions)...64 Table US Higher Education Revenue Forecasts for Selfpaced elearning by Three Product Categories (in US$ Millions)...66 Table US Corporate Revenue Forecasts for Self-paced elearning by Three Product Categories Across All Four Company Types Combined (in US$ Millions)...67 Table US Corporate Revenue Forecasts for Packaged Self-paced elearning by Ten Subject Matter Categories (in US$ Millions)...68 Table US Corporate Enterprise Revenue Forecasts for Self-paced elearning by Three Product Categories (in US$ Millions)...70 Table US Corporate LORG Revenue Forecasts for Selfpaced elearning by Three Product Categories (in US$ Millions)...72 Table US Corporate MORG Revenue Forecasts for Selfpaced elearning by Three Product Categories (in US$ Millions)...73 Table US Corporate SORG Revenue Forecasts for Selfpaced elearning by Three Product Categories (in US$ Millions)...74 For more information about this research, info@ambientinsight.com 5

6 List of Figures Figure 1 - Primary Catalysts Driving the US Self-paced elearning Market... 8 Figure 2 - The Big Picture: Total 2015 US Education and Training Market (in US$ Billions)... 9 Figure US Commercial Training Company Revenues by Eight Categories (in US$ Billions)...17 Figure 4 - Learning Technology Product Lifecycle Phases...18 Figure 5 Ambient Insight's Learning Technology Research Taxonomy...21 Figure US Self-paced elearning Five-year Growth Rates by Six Buyer Segments Across All Three Product Types Combined...32 Figure 7 - US Post-secondary Higher Education, Professional Education, and Association Training Competitive Landscape...34 Figure US Corporate Self-paced elearning Five-year Growth Rates by Four Company Sizes...36 Figure Self-paced elearning Five-year Growth Rates in the US by Three Product Categories Across All Six Buying Segments Combined...37 Figure Total US PreK-12 Expenditures (in US$ Billions)...45 Figure 11 - Professions in the US with Licensure Requirements...69 We Put Research into Practice To learn more about our research services, info@ambientinsight.com For more information about this research, info@ambientinsight.com 6

7 Abstract The growth rate for Self-paced elearning in the United States (US) is now negative at -2.7%; this is the first time in the history of the US elearning industry that growth has entered negative territory. Revenues in the US will drop from the $21.3 reached in 2015 to $18.6 billion by While the growth rate may seem low compared to the other countries, the revenues in the US are the highest in the world. The vast majority of global revenues for elearning are concentrated in the United States. Over 120 suppliers operating in the US are identified in this report to help suppliers identify local partners, distributors, and resellers. The second-largest buying country is China, yet by 2020, the US revenues for elearning will still be nearly four times higher than the revenues in China. South Korea is the third-largest Self-paced elearning buying country in the forecast period, but revenues in the US will be more than ten times higher than South Korea by Clearly, the US is still the most lucrative revenue opportunity for global elearning suppliers. The growth rates in all six of the buying segments in the US are now negative-to-flat, with different factors impacting specific segments. The US elearning market has entered a new phase characterized by commoditization and product substitution. The irony of a commoditized market is that large volumes of products are sold, but the prices are falling. Commoditization is also characterized by the lack of differentiation in products. There is now and ample clear evidence that consumers are opting for Mobile Learning products instead of elearning and this is cannibalizing revenues in the segment. This is known as product substitution in market analysis. The growth rate in the US consumer segment is distinctly negative at -4.4%, the lowest of all the buying segments. Notwithstanding the aggregate negative-to-flat growth rates across all the buying segments combined, there are many bright spots that provide evidence of a healthy demand for particular elearning products in particular segments. The demand for the outsourcing of online programs (Managed Services) in the higher education segment is a good example. Despite the flat-to-negative growth rate in the corporate segment, there are lucrative opportunities in that segment; the aggregate growth rate for elearning in healthcare-facing companies is 7.4%. The demand for packaged online language learning content is also quite healthy in the corporate segment at 6.6%. This report provides a detailed analysis of the buying behavior in six buying segments and identifies the products in highest (and lowest) demand. This provides an accurate roadmap of revenue opportunities for suppliers competing in specific segments with particular products. Ambient Insight principals have been performing quantitative analysis on the US elearning market for over twenty years and we now have a breathtaking view of the market. In a complex market with challenging conditions, it is vital for suppliers to have a precise analysis of the For more information about this research, info@ambientinsight.com 7

8 competitive landscape. This report is the most detailed analysis of the US elearning market ever published and provides invaluable data designed to allow elearning suppliers to recalibrate their tactical business models. The Primary Catalysts While the market conditions are challenging, the US accounts for the vast majority of global elearning revenues and will be the most lucrative Selfpaced elearning market for at least the next decade. China's elearning growth rate is slightly negative-to-flat at -0.3% and unless this changes, they will not take the number one spot anytime soon. Figure 1 - Primary Catalysts Driving the US Self-paced elearning Market There are five major catalysts keeping the revenues for Self-paced elearning products steady in the US: Reduction of training and education budgets in the organizational buying segments Digitization initiatives and new education policies in the PreK-12 academic segment The demand for online language learning products across all of the buying segments The steady growth of online student enrollments in the two academic segments Rapid migration to digital products by the commercial training and education providers For more information about this research, info@ambientinsight.com 8

9 These catalysts are often interacting in tandem. For example, new educational policies often relate to language learning for foreign-born schoolchildren. Digitization initiatives in the PreK-12 academic segments are by definition the result of education policy. The move to digital formats by commercial training and education suppliers has a direct correlation to the training budget planning process and the evolving buying behavior in the organizational buying segments. Despite incremental increases in budgets since 2012, corporate spending on training and education is still below prerecession levels. Reduced Training and Education Budgets Organizational training budgets have not recovered from the last two recessions and organizational spending on training and education is still below the expenditures before the downturns. Training and education budgets have been increasing for the last three years, but in the context of the deep cuts made during the recession. Figure 2 - The Big Picture: Total 2015 US Education and Training Market (in US$ Billions) It may seem counterintuitive, but the weak economy in the US was a major catalyst for learning technology sales and had a direct impact on the way buyers restructured their training and education budgets. Those new budget structures are still in place. It is now clear that organizational buyers will never return to pre-recession buying behavior. Reduced employee and personnel training budgets are driving organizational buyers to more cost-effective technology-based learning For more information about this research, info@ambientinsight.com 9

10 products. In an effort to keep costs down, there has been a steady migration away from classroom instruction to digital learning technology products. This entails more than just the adoption of self-paced products, but also the uptake of collaboration-based technologies, Mobile Learning, Gamebased Learning, simulation (which is now relatively inexpensive), and more recently, virtual reality (VR) and augmented reality (AR) training and education products. Training budgets for professional development (PD) for PreK-12 teachers were adversely impacted by the recession as well. Administrators dealt with reduced PD funding by moving expenditures from classroom training to online training. The transition "stuck" and even with recovering budgets, the use of online training in the PD mix has continued to grow. The reduced training budgets in the federal government segment is related to downsizing of the civilian workforce and the relatively steep (and ongoing) reduction in military personnel. A breakout of elearning revenues by four company sizes is included for the US corporate segment in this report. Self-paced elearning revenues in the US corporate segment are still heavily concentrated in enterprise and large organization (LORG) companies. Both of these corporate sub-segments has the steepest budgets cuts out of the four sub-segments covered in this report. Training Magazine's annual Training Industry Report stated in late 2014 that, "Average training expenditures for large companies decreased from $17.6 million in 2013, to $17.4 million in 2015." The average expenditures on training per employer dropped from $1,059 to $976 from 2012 to 2014, although the 2014 expenditures were higher than In TD's annual State of the Industry report released in November 2014 covering 2013 corporate training expenditures, respondents reported a miniscule increase (statistically insignificant) in spending from 2012 to "In 2013, organizations on average spent $1,208 per employee on training and development. This is a small 1 percent increase over last year (an additional $13 more per employee). The number of learning hours used per employee also slightly increased to 31.5 hours from 30.3 hours." The one organizational segment that has been immune from the recessions is the healthcare sub-segment. Suppliers that specialize in healthcarerelated training and education have significant pricing power and have been generating healthy revenues annually in spite of the decrease in training budgets across all sectors. In sharp contrast, a sector that has being hit hard recently is the oil and gas industry. The dramatic fall in oil prices have forced companies to make deep cuts in internal training budgets. The impact goes way beyond the For more information about this research, info@ambientinsight.com 10

11 industry itself; many oil-rich states rely heavily on oil taxes for public sector employee training budgets and public academic education budgets. Digitization and Educational Policies Driving the Market Large-scale digitization efforts are also a catalyst for Self-paced elearning. Florida, Texas, California are all mandating the digitization of instructional content used in the schools. All of the learning content in Florida has to have a digital version by the end of 2015 in Florida. By April 2015, over half of all of Pearson's revenues were generated by the sales of digital products. Several states in the US are now implementing programs that mandate the use of electronic textbooks. A new state law in California goes into effect in 2020, that requires "all textbooks used in public and private postsecondary institutions be made available in electronic form 'to the extent practicable' either 'in whole or in part'." Similar programs are being mandated in Florida and North Carolina, but with more aggressive deadlines. Schools are increasingly discontinuing summer school programs (known as recovery programs) in classrooms and offering online credit recovery programs instead. There are dozens of commercial suppliers that offer online credit recovery programs including K12, Compass Learning, the Virtual High School, and Apex Learning. In some states (like California, Texas, Indiana, and Georgia) policies were changed to allow funds earmarked for print-based textbooks to be used for digital content. The majority of states still define digital etextbook purchases as technology purchases and cannot use textbook funds to purchase the content. By late 2014, only 20 states had expanded their definition of textbooks to include digital content. Due to botched rollouts in several schools systems (particularly the infamous LAUSD ipad fiasco) districts are being more cautious in their rollouts. One major lesson learned was to deploy the devices and digital content in incremental phases. Incremental rollouts can be managed more effectively and mitigate large-scale technology obsolescence. Many digitization efforts are at the district level. The Roanoke County Public School District in Virginia has 12,000 students and more than 90% of their textbooks are available in digital formats. In March 2014, the City of Baltimore announced that they would deploy 150,000 Windows tablets for their one-to-one initiative in a four-year timeframe starting with grades K-5. In August 2014, the Minnesota's St. Paul school district announced that they would deploy 40,000 ipads to 61 schools starting with 37 schools in 2015 and expanding to an additional 24 schools in In August 2014, the Chesterfield County Public School System in Virginia announced a multi-year rollout of Chromebooks starting with 18,000 laptops for middle school children in the Fall of For more information about this research, info@ambientinsight.com 11

12 The schools system will provide laptops to high school students in late 2015, reaching a total of 32,000 machines. In October 2014, the Jackson County school district in Florida announced that they would deploy 7,000 Windows tablets in three phases starting with grades K-3. In August 2015, El Paso Independent School District began distributing over 18,000 laptops; every high school student in the district will got a laptop. An additional 4,500 laptops were given to the teachers. Tablets with screen sizes of 9.5 inches or more are officially approved for electronic Common Core testing; the tablets must be equipped with physical keyboards. When schools buy both laptops and tablets, they tend to deploy the tablets in the lower grades and the laptops in the middle and high school grades. According to a recent survey by the Center for Digital Education (CDE), teachers and administrators identified tablets as the top choice for one-toone computing initiatives up to the eighth grade; they said laptops were the best device for grades 9 through 12. The breakout in CDE's survey by grade level was interesting; 61% of teachers identified the tablet as the best device for K-2 students and 69% said tablets were ideal for grades 3-5. This starts falling in the higher grades. In grades 6-8, tablets and laptops were virtually on par at 55% and 50%, respectively. For grades 9-12, 71% of teachers said the laptop was the best computing device for the students. The Tustin Unified School District in Orange County, California started deploying devices to 15,000 students starting with K-8 students. They expanded the program to high school students in By June 2015, they had 18,000 devices deployed. The mix of devices is interesting; the K-4 grades got ipads. Students in grades 5-8 received either an ipad or a Lenova ThinkPad. Students in grades 9-12 were given the convertible Lenova ThinkPad Twist device. In the September 2015 results of a Harris Poll conducted for Pearson, it was reported that 88% of higher education students in the US own a laptop and 66% of 18 and 19-year old students use it on a daily basis for schoolwork; 73% of students over 25 use a laptop on a daily basis. This provides suppliers with clear guidance on what type of digital content to develop based on the grade levels they target. Suppliers marketing education content for early childhood learning would be more successful focusing on Mobile Learning formats and suppliers serving the higher grades and the higher education segment are more likely to be successful with self-paced courses designed for PCs and laptops. For more information about this research, info@ambientinsight.com 12

13 High Demand for Language Learning Products in All Segments There is a strong demand for digital language learning products in all of the buying segments analyzed in this report, but the dynamics of that demand are different in each segment. City, county, and state government agencies fund a massive amount of ESL training, even though most of it is still delivered in classrooms, which points to significant revenue opportunities for digital suppliers. Self-paced elearning courses for English are now routinely used in the PreK-12 schools in the US starting in the early grades; this is mostly related to the need to bring foreign-born children up to fluency as early as possible. Until 2014, the US was the largest buyer of digital English products; China took the lead in mid Compulsory and elective language learning (increasingly known as World Languages) usually starts in late middle school and high school. As of October 2015, the most popular language learning elective in US high schools was still Spanish but the fastest growing is Mandarin Chinese. Bestof-breeds serving the PreK-12 segment include Rosetta Stone, Transparent Language, Mango Languages, and ETS. In September 2015, the US federal government launched the 1 Million Strong initiative. The goal is to increase the current number of PreK-12 students learning Chinese (200,000) to over one million by To meet this goal, the US will have to increase the number of students studying Chinese by at least 50% a year and considering the growing shortage of qualified Chinese teachers, learning technology will play a major role in this initiative. Language labs are now common in the higher grades and in higher education institutions. Finland-based Sanako is the largest language lab supplier in the US and has been a reseller of Oxford University Press' digital content since Interestingly, they launched a digital sign language learning course in According to a report by the Modern Language Association released in February 2015, the top ten languages chosen by higher education students in the US in terms of enrollments in 2014 were Spanish, French, American Sign Language, German, Italian, Japanese, Chinese, Arabic, Latin, and Russian, respectively. Only two of these languages had positive growth rates since 2009, American Sign Language at 19.1% and Chinese at 2%. That said, Spanish is still the top language by enrollment at just under 800,000, more than four times that of second place French and eight times higher than third place American Sign Language. Foreign-born workers entering the US workforce in the US are often provided with English language learning paid for by the employers. Highlyspecialized forms of English products such as Aviation English, Business English, and Hospitality English are selling well in the US. US-based DynEd is the leading digital Aviation English provider in the US (and the world).pearson acquired GlobalEnglish in 2012, one of the world's For more information about this research, info@ambientinsight.com 13

14 largest online Business English schools. It is now branded as Pearson English. The US-based American Hospitality Academy (AHA) is one of the leading online hospitality certification provider in the world and offers an online Hospitality English course and certificate for $250. The oil industry in the US used to be an avid buyer of English for Oil and Gas. The recent (and dramatic) drop in oil prices has had a negative impact on the purchase of training products including English for Oil and Gas. The demand is not just relative to new arrivals, but also the increased demand for specific languages other than English. The US consumer section of this report provides a five-year forecasts for self-paced courses for five languages: English, Spanish, French, Chinese, and German. Except for Chinese (Mandarin), the growth rates for the other languages are now negative, being dampened to a large degree by the preference for mobile language learning apps. That is not having an impact on the demand for self-paced Chinese courses, which are experiencing a healthy 16.8% growth rate. There is a healthy demand for digital language learning products in government (both federal and state/provincial) agencies, particularly in agencies involved with foreign diplomacy, intelligence, and trade. According to the US Government Accountability Office (GAO), "more than 70 federal agencies have foreign language needs; some of the largest programs are concentrated in the Army, the State Department, the Central Intelligence Agency, and the Federal Bureau of Investigation." In June 2014, Transparent Languages announced a licensing deal with the US government to provide free access to their online language learning catalog to all government personnel (both civilian and military) via the Joint Language University (JLU) operated by the DoD. State and local government agencies are also avid buyers of language learning products for their employees. Not surprisingly, Spanish for First Responders is in high demand. Local and county public libraries license a great deal of digital language learning content. Mango Languages is a bestof-breed online language learning supplier serving US libraries. They now claim to be "the number one language resource in public libraries" and have "thousands" of libraries licensing their courses. Transparent Languages also serves this sector. Steady Increase in Online Student Enrollments There has been a consistent growth in the number of virtual PreK-12 schools and higher education institutions offering online programs in the US and a steady increase in online enrollments in both segments. According to the US Department of Education, a majority of school districts currently have students taking classes that include distance-learning solutions. Nearly 96% of all high schools indicate they have students enrolled in a distance or online course. Over 75% of these districts plan to expand the number of courses they offer to their students. For more information about this research, info@ambientinsight.com 14

15 By September 2015, Ohio had over 39,000 students enrolled in online PreK-12 schools. Ohio is expected to spend $554 million on online charter schools over the next two years. In mid-2015, Penn Foster High School announced it had "become one of the largest private high schools in the country with more than 50,000 students." Penn is an online high school and enrollments increased by 35% since Liberty University had over 110,000 total enrollments in 2015, up from just under 75,000 in Over 95,000 of their students in 2015 were online students. By mid-2015, US-based Western Governors University (WGU) had over 55,000 online enrollments, more than double from 20,000 in In their 2014 annual report, WGU reported that online enrollments were growing by a five-year compound annual growth rate of 29%. Enrollments increased from 43,000 students in 2014 to 53,800 in Interestingly, the average age of their students is 37. Pearson reported in their financial statement that "Connections Education, which operates K-12 managed virtual public schools, manages blended public schools, and a private school", served almost 62,000 students in 2014, up more than 20% from 2013, and now operates 33 managed public schools in 23 states and an international private virtual school. The University of Maryland University College had 60,870 students in their 2014 fiscal year and 91% of them were online students. "As of spring 2014, 74% of undergraduate students enrolled in UMUC s stateside programs were working full-time. More than half (54%) of UMUC stateside students are working parents. In fall 2014, the median age for students enrolled in UMUC s stateside undergraduate programs was 31 years old." In October 2015, Capella reported that their online student enrollments for the three months ending in September 2015 "increased 4.2 percent to 36,683, new enrollment increased by 2.3 percent from third quarter 2014 and early cohort persistence improved by approximately 3 percent." On average, the number of higher education students in the US enrolling in one or more online classes is growing by 6.3% a year. The number of fulltime online students is growing by 26.1% a year. By the end of 2014, there were over 25 million tertiary (post-secondary higher education and vocational students combined) students in the US taking one or more classes online; this is the largest number of online enrollments in the world. In contrast, the number of US higher education students that are taking all their classes in a traditional physical classroom environment is shrinking by -22.8% a year and barely 3 million students will be taking classes exclusively in physical classrooms by By that time, over 4 million students will be taking all of their classes online in the US. For more information about this research, info@ambientinsight.com 15

16 One of the major catalysts driving the adoption of elearning in the higher education segment is the steady migration to Managed Services (Schoolas-a-Service) that are provided by commercial third party suppliers. These Managed Services are usually turnkey bundles that include content design, content development, cloud-based hosting, and most importantly, 24/7 technical support all at a fraction of the cost that the institutions would spend if they did it themselves. Managed Services are also known as Ed Tech Program Management services In 2012, the US Department of Education started requiring all degree-granting institutions to report their online enrollments including the number of students enrolled in 100% online programs. They compile these data and release them every two years. The major suppliers are buying their way into the Managed Services market in higher education. Pearson acquired EmbanetCompass and Wiley acquired Deltak in October EmbanetCompass had 35 institutions and Deltak had 26 institutions at the time of purchase; these were the two leading Managed Services suppliers in terms of institutional customers. Other best-of-breeds include Bisk, Academic Partnerships (operates as Whitney in Latin America), 2U, HotChalk, The Learning House, and Colloquy (a Kaplan startup). In November 2015, HotChalk obtained a breathtaking $230 million investment from the German media conglomerate Bertelsmann. This is the largest investment ever made to a learning technology company in the history of the industry. Clearly, Bertelsmann is convinced in the sustainability of the Managed Services business model. The Commercial Training and Education Industry Goes Digital Commercial training and education was a $27.7 billion industry in the US in With minor exceptions, most of the private training firms are migrating rapidly to technology-based products to lower costs and increase margins. The single largest expense in classroom training is the salary paid to the teacher or trainer. On average, salaries account for 70-75% of the cost of delivery. Training firms must also maintain the costs of equipment and physical classrooms. Self-paced elearning has much higher profit margins. In 2010, barely 1.7% ($443.7 million) of all revenues generated by commercial training and education suppliers in the US came from Selfpaced elearning products. By 2015, 16.3% of their revenues were generated by the sales of Selfpaced elearning products; this was $5.4 billion, a more than tenfold increase in five years. Yet, 16.3% is still quite low and points to significant room for growth. Most commercial training and education suppliers develop a percentage of own content. Private vocational and commercial training firms are avid buyers (and resellers) of commercial self-paced educational products For more information about this research, info@ambientinsight.com 16

17 including packaged retail content, custom content development services, and tools/platforms. All three have a direct positive impact on their profit margins. Figure US Commercial Training Company Revenues by Eight Categories (in US$ Billions) Kaplan has 23 private English language learning schools in the US. In July 2013, Kaplan announced a deal with Carnegie Speech to license the NativeAccent English language learning software for use in all 23 schools. (Source: US Department of Commerce categorized by North American Industry Classification System (NAICS) codes for commercial training and education companies. Does not include community colleges or non-profit tertiary schools.) The expenditures for packaged elearning content is broken out for ten vertical industries in the corporate supply-side of this report. Eight of the ten vertical have negative-to-flat growth rates for packaged content. The commercial education and training vertical is one of two industries with positive growth rates, the other being the pharmaceutical and life sciences industry. Commercial training and education companies license Self-paced elearning products for resale, but they also buy the products for employee training. In 2015, they spent $637.9 million on self-paced elearning content. According to the US Department of Commerce, commercial language learning was a $2.1 billion business in the US in It may seem counterintuitive, but English is the best revenue opportunity for suppliers that license content to the commercial suppliers. For more information about this research, info@ambientinsight.com 17

18 Inhibitors The weakness in demand for elearning is different in each buying segment, but there are overarching inhibitors common to the general market in the US. They are commoditization and product substitution. Commoditization Erodes Pricing Power The irony of a commoditized market is that demand is still quite high, large volumes of products are sold, but the prices are falling. Volume is rising but per unit prices are falling, which creates a market with negative revenue growth rates. Commoditization is also characterized by the lack of differentiation in products, which erodes pricing power. The growth rate for authoring tools and learning platforms in the US is the lowest of all three elearning product categories at 5.4%. The growth rates are negative in every single buying segment, but particularly negative in the US corporate segment (and in all four sub-segments analyzed in this report) and the federal government segment; both were the earliest adopters of elearning in the US. Figure 4 - Learning Technology Product Lifecycle Phases It should be noted that the pricing pressures created by commoditization are heavily concentrated in the US elearning market and only present in varying degrees in other countries. In general, early adopter countries are more prone to commoditization, but this is not always the case. For example, there is little to no For more information about this research, info@ambientinsight.com 18

19 commoditization present in the Canadian and South Korean elearning markets. All products are disposed to commoditization to some degree, but hardware and software products have proven to be very predisposed to it. All technology-based products experience well-defined lifecycle phases. The Self-paced elearning market in the US is solidly in the commoditization phase and in the value migration phase is specific buying segments. Interestingly, Adobe launched a cloud-based LMS called Captivate Prime in August 2015, their first foray into the LMS market. They charge $48 a year per registered user. Aside from the impact on a supplier's pricing power, commoditization is also characterized by the lack of differentiation of products. This is certainly true for elearning products. In the presence of nearly identical products with essentially the same features, customers will always opt for the lower priced product; price becomes more important than brand. There are hundreds of learning management system suppliers competing in the market with essentially the same product. At best, LMS innovation has been at the margin. There has been very little innovation in commercial LMS technology in the last decade; all LMS products are basically the same. The most significant evolution of the LMS ecosystem in the last five years is the move to subscription-based cloud platforms and away from installed and hosted (ASP) products and business models. This has made it easy and cost effective for buyers. It is also a factor driving prices downward. Early platforms had relatively long-term contracts (which often included expensive cancellation clauses) and annual maintenance fees that could be up to 18-20% of the original purchase price. Installed platforms are quite rare now and any that are still in use were purchased prior to The revenue streams even out for cloud-based LMS suppliers since they no longer have to maintain tangible shipped products. Maintenance, delivery, tech support, and upgrades are less expensive. Their revenues are lower, but so are their costs. Another factor contributing to the decline in demand for commercial systems is the adoption of open source products and the use of generalpurpose tools. Open source learning management systems like Moodle and Sakai include content authoring capabilities and have a wide adoption rate in the US and across the globe. In open source platforms, the revenue shifts to the "product halo" for services surround the solution, such as training and customization. As of October 2015, Moodle had a 24% market share in the US higher education segment, second only to Blackboard, which still commands a 43% share in that segment. No other LMS supplier had more than a 13% market share in the US higher education segment. Despite the presence of dozens of specialized elearning authoring tools on the market, it is well known in the industry that PowerPoint and Dreamweaver are the two most common tools used to create learning content. The primary feature of Adobe's Captivate product (and all the For more information about this research, info@ambientinsight.com 19

20 pother rapid learning tools) is to convert PowerPoint slides into interactive learning content. Commoditization also negatively impacts retail packaged content prices, particularly for standardized exam prep courses, language learning, and compliance-related courses (which by definition must be mapped to publicdomain criteria identified in legal mandates). Blackboard has embraced the open source movement by acquiring USbased Moodlerooms and Australia-based NetSpot in 2012 and UK-based Remote-Learner UK in April One factor driving revenues downward in the higher education segment is the migration to managed online learning products. Dozens of suppliers (Pearson, Wiley, 2U, HotChalk, etc.,) are now offering managed online learning programs in the higher education segment; this is sometimes referred to as School-as-a-Service. This greatly reduces the need for tools and platforms for institutions that go this route and costs are greatly reduced, which is a factor in lower spending in this segment. These managed online learning suppliers are doing quite well in terms of revenues as can be discerned from their financial statements. In 2U's third quarter earnings report released in October 2015, they cited a 31% increase in revenues from the third quarter in the prior year. In August 2014, Pearson stated in their financial statement that "Student registrations for our under-graduate programs with Arizona State University Online, University of Florida Online, Ocean Community College, and Rutgers grew more than 37% to 40,000." HotChalk garnered an unprecedented $230 million in private investment in November This is the single highest amount invested in a learning technology company in the history of the industry. Clearly, investors see the value of the School-as-a-Service business model. One interesting "non-trend" is the almost nil impact that MOOCs have had on the demand for commercial elearning products. As a forecasting variable, there is virtually no correlation one way or another on the US elearning market. Originally touted as the latest in the long line of disruptor trends, there is no evidence of any disruption in the commercial industry in the US. Product Substitution Accelerates in the elearning Industry The term product substitution is used in the product market analysis industry to describe the demise of one product due to the preference of substitute products. For more information about this research, info@ambientinsight.com 20

21 The most cited examples are the near total replacement of encyclopedias with digital repositories and the decline of the wristwatch industry due to time displays on cellphones. Figure 5 Ambient Insight's Learning Technology Research Taxonomy One of the most common methods used in the commercial analysis industry to perform Strengths, Weaknesses, Opportunities, and Threats (SWOT or SWOT matrix) analysis is the Porter Five Forces Analysis. One of the components of the Threats analysis is the threat of product substitution. Three factors that contribute to the threat of substitution are lower-cost substitutes, higher quality in the substitutes, and low barriers to switch to the substitute. In the US learning technology industry, all three of these factors are now present. Relative to elearning, the threat of product substitution is particularly acute in the consumer and corporate segments, but present to some degree in all the buying segments. Ambient Insight's Research Taxonomy defines seven types of learning technology products: Self-paced elearning, Digital Reference-ware, Collaboration-based Learning, Simulation-based Learning, Game-based Learning, Cognitive Learning, and Mobile Learning. All of them have very distinct pedagogical and information architecture characteristics. As of 2015, learning technology innovation is heavily concentrated in four learning product types: Simulation-based Learning, Game-based Learning, Cognitive Learning, and Mobile Learning. Highly-advanced, low-cost products are flooding the market. All of these new learning technology For more information about this research, info@ambientinsight.com 21

22 products are characterized by all three of Porter's product substitution criteria: lower cost, a higher quality learning experience over legacy products (the knowledge transfer process is significantly enhanced), and essentially no barriers to adoption. The five-year compound annual growth rates (CAGRs) for Simulation-based Learning, Game-based Learning, Cognitive Learning, and Mobile Learning in the US are significantly higher than the growth rates for Self-paced elearning, Digital Reference-ware, or Collaboration-based Learning. In November 2015, Rosetta Stone earned the A-G certification from the University of California, "allowing high school students throughout the state to earn foreign language course credit towards graduation." The growth rates for Simulation-based Learning, Game-based Learning, Cognitive Learning, and Mobile Learning in the US are 15.1%, 13.3%, 11.0%, and 7.5%, respectively. In stark contrast, the growth rates for Self-paced elearning, Digital Reference-ware, and Collaboration-based Learning in the US are -2.7%, 3.7%, and -5.3%, respectively. Despite the recent advances in learning research and technology in general, there have been no significant innovations in Self-paced elearning, Digital Reference-ware, or Collaboration-based Learning in the last decade. Buyers are moving away from these legacy products and suppliers are diversifying their portfolios to meet the demand for the more advanced products. For example, Rosetta Stone has been systematically migrating beyond elearning. They have diversified their portfolio beyond self-paced language learning to virtual language learning simulations, game-based mobile brain trainers (with over 18 million global users), and early childhood reading and literacy education content. They have also expanded their marketing beyond consumers to government, academic, and corporate buyers. In June 2015, Rosetta Stone launched their new Digital World Language Program in a partnership with Calvert Education "that will give high school students the opportunity to earn course credit through a new virtual world language program." Calvert provides accredited online PreK-12 content for homeschooled children and for public virtual schools. They operate in all 50 states. In March 2015, Rosetta Stone launched a version of their virtual Discover Languages for Microsoft's Xbox One console. The app is game-based virtual world where simulated characters "converse" with the language learner. In October 2015, Rosetta Stone released a version of their Advanced English for Business (AEB) content for the Apple watchos2. AEB is targeted to corporate buyers. According to a study released by the Entertainment Software Association released in April 2015, over 155 million Americans play video games on a "regular" basis and four out of five households have a gaming device. According to a Pew study released in August 2015, "Fully 72% of all teens play video games on a computer, game console, or portable device like a cellphone, and 81% of teens have or have access to a game console." For more information about this research, info@ambientinsight.com 22

23 In a systematic review of research papers conducted by SRI Education released in March 2014, both Simulation-based Learning and Game-based Learning were found to be significantly more effective knowledge transfer methods than learning products that did not include simulation or game play. Self-paced courses are still the dominant learning technology used in the higher education segment, but there are nascent signs of product substitution. Game-based Learning has always been a staple in the PreK-12 segment particularly for early childhood learning and math, but until recently was relatively scarce in the higher education segment. The higher education segment is increasingly offering their online content in Gamebased formats. Toolwire started out in 1999 as a corporate-facing learning technology supplier. In 2011, they transitioned to a Game-Based Learning company serving the higher education segment. They will have 80 Game-based Learning products on the market by the end of 2015 and have dozens of new higher education customers. In May 2015, Toolwire reported that are experiencing "a surge of interest in game-based learning and an upswing in adoptions for its writing and environmental science games. With its list of partners continuing to expand as institutions plan ahead for the fall, Toolwire currently estimates that it will provide Game-based Learning to more than 250,000 students this year." Another successful Game-based Learning supplier making inroads into the US academic segment is Muzzy Lane Software. They have partnerships with major education suppliers including McGraw-Hill, Pearson, Cengage, and Knewton. In September 2015, they announced their new Game-based Learning authoring tool, one of the first commercial Game-based Learning development tools on the market. In September 2015, Muzzy Lane was one of three organizations awarded contracts in the million-dollar Library of Congress digital learning project. Muzzy Lane is developing a crossplatform Game-based Learning app called KidCitizen on civics for PreK-5 children. Higher education is also adopting simulation-based virtual reality in their learning methods. Western University opened their new Virtual Reality Learning Center in September Medical students use Oculus Rift headsets "to power an experience that takes students inside the human body on a microscopic level, complete with guided narration. There's zspace four 3D projection monitors coupled with 3D glasses and styluses so that students can do things, depending on the software, like dissect the human body (to the point of being able to select tools like scalpels, and get a bit of haptic feedback when they make a cut), extract organs, even walk around them." In the consumer segment, the boom in demand for Mobile Learning is a direct cause of decline in elearning revenues in that segment. The growth rate for elearning products in the US consumer segment is -4.4%, the For more information about this research, info@ambientinsight.com 23

24 lowest of all six buying segments; in stark contrast, the growth rate for Mobile Learning in this segment is quite healthy at 9.6% in the US. (Source: The US Mobile Learning Market, Ambient Insight, LLC) Augmented reality (AR) technology is evolving at a fast pace; new commercial innovations are coming on the market at a rapid rate. The products are too new and it is too early to make forecasts until a baseline emerges. Mobile AR is an ideal technology for Mobile Learning and there are dozens of new products on the market. Augmented reality and virtual reality are not the same. In AR, digital information is overlaid on the real world. In virtual reality, the user is totally immersed in a simulated environment. Almost all AR educational products on the market are mobile and Ambient Insight categorizes ARbased learning products as a native type of Mobile Learning. VR-based learning products are by definition a type of Simulation-based Learning. In January 2015, the game developer Nival launched a new division called NivalVR that focusses on mobile education VR games. Their first game was inmind and their incell app came out in September The edugames cost $6. Mobile augmented reality (AR) overlays images, schematics, multimedia, 3D objects, animation, location data, and other forms of digital content on real-world objects and locations using the device s camera and sensors; most AR content is interactive. The augmented elements are "triggered" by object recognition, print-based markers, barcodes, and geotags (collectively these are known as triggers). Mobile augmented reality educational apps emerged in 2010 and had a rocky start. The demand diminished in , but came roaring back in 2014 and the first half of This is due to the proliferation of new augmentation hardware and software being developed and marketed by large companies like Microsoft, Sony, Google, Intel, Apple, and Qualcomm and the booming demand for industrial and field-based augmented reality learning in the corporate segments across the planet. Until recently, the most successful mobile augmented reality learning apps were consumer-facing Mobile Learning products for astronomy, anatomy, and tourism. Popular augmented Mobile Learning apps include Star Chart with 18 million global users and Star Walk with 10 million users across the planet. All of the major mobile players are now in the augmented reality market; they have entered the market by acquisition and internal product development. In May 2015, Apple acquired Germany-based Metaio. Metaio developed the popular augmented reality platform called Junaio; this is a strong validation of the AR market. The vast majority of apps developed with Junaio are travel and tourism guides. Google and Microsoft are developing their own AR and VR products. Google is developing the Google Glass headset and the Cardboard viewer and Microsoft is working on the HoloLens headset. Google is targeting the schools with the Cardboard viewer and Microsoft is focused on corporate uptake of the HoloLens (at least for now). In late May 2015, Google announced that they had shipped over five million Cardboard viewer kits in just one year. In October 2015, the New For more information about this research, info@ambientinsight.com 24

25 York Times distributed an additional one million Cardboard viewers to their subscriber base. It is interesting that the new VR and AR training products coming on the market are geared toward industrial and field-based workers. Google started offering schools a free bundle called Expeditions based on the low-cost Cardboard VR technology in May As of November 2015, over 100,000 PreK-12 students in the US were using the platform. The bundle comes with smartphones for the students, the cardboard (literally) viewer, and a tab let for the teacher preloaded with a variety of field trips. The teacher selects the expedition on the tablet and all the students experience it simultaneously in the VR viewers. Google announced that it was working with the Planetary Society, the American Museum of Expeditions, and the Palace of Versailles on content for Expeditions. In July 2015, a company called Touchstone Research released the results of a survey of 500 children on the topic of VR. 79% of the kids were aware of VR. But the interesting thing is what they said they wanted to do with VR: 64% wanted to visit another country, 64% wanted to go someplace they could not go in reality (like space or another planet), 62% wanted to go on an adventure, and 58% wanted to travel back in time (not surprisingly, most of them wanted to go back to see dinosaurs in their natural surroundings.) This is invaluable information for suppliers developing educational VR apps for children. A company called WEARVR operates a VR App marketplace. They have several categories related to learning including educational, architecture, travel, exploration, space, and virtual worlds. They support all the major VR headsets. They publish a weekly top-ten list and educational apps consistently rank in the top ten. WEARVR obtained $1.5 million in private equity in March One of the most popular VR apps according to WEARVR is DinoTrek designed for Google Cardboard and developed by Geomedia and HIVE VR. Suppliers are already meeting the growing demand for VR-based learning for young children and students in the early grades. Google and Mattel announced a partnership in February 2015 to launch a smartphone enabled product for the iconic View-Master that displays animated virtual learning experiences when the viewer is pointed at a physical "experience reel" (a physical disk-shaped trigger). The reel triggers a virtual reality experience on Cardboard's smartphone display. "Mattel's new View-Master offers an easy-to-use and affordable platform that will enable users to take engaging field trips where they can explore famous places, landmarks, nature, planets, and more in 360 degree 'photospheres'. By pairing the View-Master's 'experience reel' and app with an Android smartphone, kids will immediately experience an imaginative and interactive learning environment." London-based Blippar sells an AR authoring tool called Blippbuilder that embeds AR triggers (what they call Blipps) in print material. "Using our simple, drag-and-drop, web-based platform you can enable readers to buy products directly off your magazine pages; add 3D sequences, animations and videos to your packaging; fill your newspaper with additional image galleries; include interactive digital polls in your printed employee For more information about this research, info@ambientinsight.com 25

26 handbooks; add contextual web-links and informative PDFs to your art gallery s paintings, or make your school s textbooks digitally interactive." Blippar soft-launched their new education division called Blippar for Education at the BETT 2015 education trade show in London in January 2015 and hard-launched the new division's global headquarters in September 2015 in New York City. "Blippar's goal in the education space is to enable educators to seamlessly enhance learning spaces and materials digitally - which students access using their smart device." They reported in August 2015 that, "Of the thousands of pilot schools that have been helping us, 46% are from the USA, and within that number, the dominant subjects taught are Computing, Science, and Math. Blippar has been deployed across all levels of education in the US: 41% of our pilot schools are elementary, 21% middle school, 14% high school, and 32% continuing or further education." In the context of Porter's Five Forces, the effectiveness of these new learning technologies equates to a higher quality of product; which is quantifiable performance improvement. A learning technology company called EXO U serves the PreK-12 segment and launched their first Oculus Rift title called Dinosaurs in March The app is designed to be used in the classroom and teachers can "teleport" all the students simultaneously to one of sixteen dinosaurs located in the virtual 100-million year old landscape. The boom in virtual reality technology has created an emerging cottage industry for VR education companies. Boston-based Alchemy Learning has a product bundle called Alchemy VR designed for the PreK-12 segment. It includes hardware, software, teacher training, and custom app development. "Alchemy VR is Alchemy Learning s end-to-end virtual reality solution for teachers and schools. Alchemy VR provides teachers and schools virtual reality hardware configured to be easily integrated into classrooms, a growing portal of educational virtual reality experiences, and adaptive web-based curriculum and learning management tools." A company called Unimersiv focusses on educational VR apps and has over 20 apps available on their site. Their most popular VR app is Teleport: Google Street View for VR. They had 21 VR "courses" available on their site as of November They have a subscription-based business model. Immersive VR Education has a range of educational VR apps including the popular Apollo 11 Moon Landing (and moon walking) experience. "We will cover a wide range of subjects including History, Geography, Biology, Mathematics, Medicine, Astronomy, and Science in an engaging and fun manor which will inspire a new hunger for learning with our users." They support the headsets from Oculus, Sony, and Samsung's smartphone-enabled headset. In July 2015, Boeing shared the results of an internal study on the assembly of a wing unit using three groups; one group with paper PDF instructions, one group with the PDF instructions on a tablet, and one For more information about this research, info@ambientinsight.com 26

27 group with AR objects and guided instructions overlaid on the assembly on a tablet screen. "The AR-tablet group were 30 percent faster and 90 percent more accurate on their first tries than the other groups." NGRAIN and DAQRI design AR products for industrial clients; they are specifically marketing the products as performance improvement platforms. Canada-based NGRAIN has optimized their AR tools to run on the Epson Moverio BT-200 smart glasses (headset). Lockheed Martin uses the platform and the headset for aircraft maintenance on the F-22 and the F- 35. "Maintenance and construction are big areas. We can provide the information the worker needs whether they're using a mobile device or the augmented reality glasses. You can get information and step-by-step instructions right in the field on the display in front of you. You can get feedback on whether you're doing something right." In June 2015, NGRAIN launched three specialized versions of their AR platform: NGRAIN Scout, NGRAIN Consort, and NGRAIN Envoy. NGRAIN Scout is designed for manufacturing companies, NGRAIN Consort is for quality and repair inspections, and NGRAIN Envoy is a "virtual 3D and augmented reality application that eliminates inefficiencies in field-based operations." APX Labs sells an AR platform called Skylight. The software is compatible with a range of headsets, making it device independent. In November 2014, APX announced that Boeing was licensing the platform "for handsfree, real-time access to engineering specifications and complex assembly instructions." SAP also uses the APX Labs platform. Newport News Shipbuilding (NNS) has over 30 AR-based programs in use. The programs combine employee training and decision support in real time as shipbuilders perform tasks. NNS uses the AR technology from a company called Index AR Solutions. Index was founded by former NNS executives in February In May 2014, EON Reality launched their EON Experience Portal, which they claim is the world's largest library of virtual reality content. "These applications are used in a variety of settings: Industrial, Educational, and Edutainment applications such as offshore safety training, virtual chemistry labs, and a virtual aquarium with sharks and dolphins. The EON Experience Portal also contains the world's largest Virtual Reality library for learning, with over 5,000 applications." In May 2015, ExxonMobil announced their new Immersive 3D Operator Training Simulator built on EON Reality's simulation platform. "The Immersive 3D Operator Training Simulator will change how operators and plant crews train on existing facilities and even before a facility is operational." A company called PTC sells a range of enterprise products including ERP and CAD platforms. They sell training to corporations on these products. In November 2015, they acquired the Vuforia augmented reality platform from Qualcomm for $65 million. The Vuforia portal had 103 education apps on the portal in November 2015; this was the largest category out of the other categories of content. The AR content ranges from early childhood For more information about this research, info@ambientinsight.com 27

28 learning to STEM education content. PTC's acquisition will expand the platform into the enterprise training market. One of DAQRI's innovative products is their Smart Helmet, which is a hardhat that has a visor that displays procedural data over objects (machinery, construction sites, etc.) They are targeting the industrial verticals with the helmet. "Reduce talent and experience gap with repeatable, fully modularized, and contextualized training capturing experts knowledge and experience; avoid costly human teaching errors with the use of precise data driven decision-support training." Government agencies are also using these new products. A company called Civic Resource Group serves the public sector and has launched a product called CivicAR (Civic Augmented Reality), "The first Mobile Augmented Reality solution that enables governments and public sector agencies to deliver information and services directly to citizens and communities in a highly contextual and easy to use mobile environment. Case Western Reserve University has already developed an anatomy educational app for the new HoloLens headset from Microsoft. CivicAR is developed using patented technology with the goal of making Augmented Reality applicable for practical, business-specific uses in the civic sector such as government services, transportation, tourism, economic development, environment, utilities, healthcare, and education among others." Microsoft's HoloLens is a self-contained device with a built in computer; it does not have to be tethered to an external PC. It is interesting that Microsoft is initially focusing on corporate and government solutions with their HoloLens headset. In June 2015, NASA and Microsoft announced a partnership in which two HoloLens headsets would be sent to the International Space Station (ISS). "The units will be used for a new 'Sidekick' pilot program that's designed to help crews work on the ISS. The program provides augmented-reality overlays to educate astronauts about how to perform certain procedures on the station, which could eventually reduce the need for extensive crew training." In July 2015, Microsoft opened an RFP for higher education research facilities to submit project ideas for the HoloLens headset. Microsoft is "interested in seeing its technology used for things like data visualization, new forms of collaboration, interactive art and new teaching tools." In November 2015, Microsoft provided $100 thousand in seed funding and HoloLens developer kits to five institutions: Carnegie Mellon University, Dartmouth College, Virginia Tech, Clackamas Community College, and the University of California, Berkeley. Simulation-based Learning used to be prohibitively expensive to develop but that has changed dramatically in just the last year. The solid modelling process used to be time consuming and very expensive. In just the last year dozens of so-called Automatic Spatial Mapping tools have come on the market. These tools generate digital objects and simulated environments in near real time. For more information about this research, info@ambientinsight.com 28

29 Mantis Vision, Occipital, and Matterport have imaging platforms that can covert real world images to digital 3D objects in real time. Dozens of other companies with similar technology have come to the market. Google's Project Tango is a good example of a platform that can generate 3G digital objects (3D meshes) in real time via a tablet equipped with several cameras and motion, location and depth sensors. "With a Project Tango tablet, a user can scan a room, rendering furniture and other items into 3D objects. Google previously showcased this technology by combining the tablet with a VR headset, which transforms a user's "real" world into a virtual one." In August 2015, Intel announced that they had integrated their RealSense technology with the Project Tango platform. Corporate buyers are moving rapidly to new augmented reality (AR) and virtual reality (VR) educational technologies. These new products are ideally suited to provide real-time performance support and decision support to field-based and industrial workers. Simulators have long been a staple in certain sectors such as mining, aviation, and healthcare, but they used to be notoriously expensive proprietary platforms. They can now be developed using off-the shelf components and have finally become cost-effective. Simulation-based products such as flight simulators, truck simulators, and a wide range of vehicle simulators are now attractively priced. On-board performance support is also now common on modern vehicles. Siemens sells a 3D simulator called the COMOS Walkinside Immersive Training Simulator (ITS). "Here, field operators can conduct their training in an authentic 3D virtual reality model including geo-localization training, standard operating procedures (SOPs) and health, safety and environmental (HSE) incident scenarios. Innovative plant-specific simulations shorten learning times and enhance training retention. This strongly reinforces learning outcomes, reducing traditional on-site training and enhances operational safety." The latest innovations in Mobile Learning include next-generation Locationbased Learning, Real-time Performance and Decision Support, Mobile Learning Value Added Services (VAS), and most recently, Augmented Reality Mobile Learning. Mobile AR utilizes images, schematics, audio, multimedia, historical context, location data, and other forms of digital content overlaid on real-world objects and locations. Many VR systems coming on the market require tethering to either a PC or a gaming console. Samsung, LG, Google, Merge, Fibrum, Shoogee, HOMiDO, Wearality, Goggle Tech, Leegoal, Ritech, Sali EVA, Purple EVA, Octagon, Bessky, Sunnypeak, Woody, Knox Labs, usens,and Carl Zeiss (among dozens of others) are developing smartphone-enabled VR systems. These new products are delivery devices for Mobile Learning apps and mobile edugames. These are forms of Mobile VR in which users insert their smartphones into the VR headsets. Google' Cardboard is a good example. Location-based Learning is one of the "native" types of Mobile Learning defined by Ambient Insight. This new Mobile Learning type emerged in Developers are designing learning experiences triggered at geotagged physical locations and in time. Interestingly, the time-based For more information about this research, info@ambientinsight.com 29

30 triggers can provide learning experiences relating to the past, present, or future. GPS does not work inside buildings and a new wave of mobile technology is now on the market called Indoor Positioning Systems (IPS). Most smartphones today contain a variety of sensors. The sensors that are relevant for indoor positioning are the gyroscope, the compass, the altimeter, and the accelerometer. IPS location coordinates are significantly more accurate than GPS. The American Museum of Natural History in New York City and the Royal BC Museum both use IPS for their exhibitions. "Say you want to go see the Woolly Mammoth they have in the museum, your smartphone will show you how to get there, once you have arrived, your phone will push to you the information about the Woolly Mammoth and other content related with that exhibit." Clearly, the learning technology industry has entered a new phase characterized by technology-enhanced experiential learning. This is far more advanced and significantly more effective than traditional courseware, textbooks (digital or otherwise), or web conferencing. The current phase product substitution will continue unabated for the near future but it will not replace all legacy learning technology products in any of the buying segments. Sources of Data on the US Self-paced elearning Market The financial reports from the domestic and international digital education companies that operate in the US provide invaluable insight into the rapidly evolving market conditions and revenue opportunities in the country. There are dozens of publicly traded digital education suppliers in US. Most of these learning technology companies focus on particular products, buying segments, and specific types of content so their financial reports provide details on specific buying behavior patterns in each of the six buying segments analyzed in this report. The major learning technology suppliers are active in the US market. Pearson, McGraw-Hill (filed their IPO in September 2015), Santillana, Cambium Learning, Apollo Education, Career Education, Cengage Learning, Chegg, Capella, Cambridge University Press, Cornerstione OnDemand, Kaplan (Graham Holdings), Instructure, Strayer, 2U, Cricket Media Group, DeVry, Houghton Mifflin Harcourt, GP Strategies, Healthstream, K12, Inc., PCS Edventures, Wiley, EXO U, Oxford University Press, Rosetta Stone, Scientific Learning, and Macmillan all have significant market presence in the US and their financial reports provide detailed data on specific buying segments. For more information about this research, info@ambientinsight.com 30

31 What You Will Find in This Report There are two sections in this report: a demand-side analysis and a supplyside analysis. The demand-side analysis provides suppliers with five-year revenue forecasts for six buying segments for both Canada and the US. The various municipal, county, and state, education agencies in the US disclose details on digitization initiatives including the budget, the type of devices to be deployed, and the expenditures on digital content for the devices. The supply-side analysis provides five-year revenue forecasts for three categories of Self-paced elearning: packaged content, content services, and authoring tools/platforms. Due to the large concentration of revenues in the US corporate segment, this report also includes a breakout of spending by US corporations on elearning products and services by four company sizes, ten vertical industries, and content expenditures by ten content types. This report does not include revenues for the other six learning technology products that Ambient Insight tracks. This report only includes revenues for self-paced courseware and does not include revenues for Mobile Learning, Collaboration-based Learning (live online classes and online tutoring), Digital Reference-ware (video, audio, etext), Simulation-based Learning, Cognitive Learning, or Game-based Learning. Who are the Buyers? This report breaks out five-year spending forecasts for the US by six buying segments: Consumers Federal government agencies State and local government agencies PreK-12 school systems Post-secondary and higher education and tertiary institutions Corporations & businesses In 2015, the majority of revenues still came from large corporate buyers, followed by higher education institutions. By 2020, higher education and tertiary institutions will be the top buyers. The growth rates in five of the six buying segments are negative in the US, reflecting the maturity of the market and the pricing pressures found in the US. The growth rate in the state and local government segment is statistically flat and cannot be considered as negative or positive. The consumer segment is now impacted by product substitution as consumers migrate rapidly to Mobile Learning products. In November 2015, Rosetta Stone reported on the 2015 third quarter revenue and said, "Total revenue was down 23% year-over-year to $49.8 million, entirely due to the $17.5 million reduction in Consumer revenue." For more information about this research, info@ambientinsight.com 31

32 Figure US Self-paced elearning Five-year Growth Rates by Six Buyer Segments Across All Three Product Types Combined The factors contributing to weak growth rates in the US buying segments are different in each segment. Product substation is the direct cause of the weak demand in the US consumer segment and is present to some degree in the other segments. The defining characteristic of Self-paced elearning is the pedagogical structure imposed by formal instructional design and systematic development of the digital courseware products. The negative growth in the US federal segment is related to reductions in the civilian workforce and reductions in military spending on training and education. By mid-2014, the US government had 2.7 million non-military employees, the lowest level since In July 2015, the US Army announced plans to cut 40,000 troops within two years. This is in addition to the recent 80,000 cuts. An additional 17,000 civilian defense workers will also be laid off. The total US defense budget has fallen 20% since The growth rate for Self-paced elearning products and services in the state and local government segment is only nominally negative at -0.2%, which is essentially flat. State and local budgets have recovered from the last recession, but training and education expenditures have not increased. Most of the major education publishers that serve the US PreK-12 segment have reported a slight weakness in demand for certain types of digital content in 2014 and There are types of content that are still in high demand; Scholastic reported a strong 7% growth for their fiscal 2014 year for their digital math and reading products and Rosetta Stone reported in November 2015 that For more information about this research, info@ambientinsight.com 32

33 their Lexia product line (literacy education products) experienced strong growth in In August 2015, Cambium Learning reported that bookings for their Learning A-Z product reported increased 17% compared to the previous year, but their Voyager Sopris Learning product declined by 8% and their ExploreLearning product only grew by 1%. Although their Learning A-Z product (designed for K-6) does have a science module, the product line focusses heavily on reading and writing as well as English language learning. The budgets in the public PreK-12 schools have recovered since the recession, but buying behavior is now quite different. School systems are diversifying their learning technology purchases with large increases now going to electronic testing technology. In November 2015, Houghton Mifflin Harcourt (HMH) reported in their financial statement that "Our addressable open territory market is expected to grow by 1 percent for the full year. While this is a rebound from the first half of the year, it is 5 percentage points below our initial expectations." They also reiterated their strategy to increase product development for the consumer and early childhood sectors. There are several other factors impacting the PreK-12 segment such as the near completion of the migration to new Common Core content (and the subsequent decline in the need for new elearning courses) and the shift in expenditures to digital testing for Common Core. A detailed analysis of market conditions for this segment is included in the PreK-12 section. Education funding has not kept pace with the economic recovery. According to a December 2015 report by the Center on Budget and Policy Priorities, thirty-one states are providing less funding per student than they were before the recession. In fifteen of these states, the reduction was more than 10%. Only twelve states had funding amounts higher than before the recession and eight of them were under 10% in increases. The growth rate in the US higher education and tertiary segment is negative-to-flat at -1.4%. This segment is now quite challenging for suppliers. One of the major factors impacting the post-secondary higher education and tertiary segment is the relatively sharp decline in enrollments in the for-profit institutions. These schools are under intense government scrutiny, and in some cases, the government has suspended federal financial aid to institutions; the schools have responded by systematically shutting down campuses and intentionally reducing enrollments. The for-profits like DeVry, Apollo, and Laureate are now focusing their businesses outside the US. Apollo's University of Phoenix was once the largest online education supplier in the world. In October 2015, Apollo reported that, "University of Phoenix (UOP) revenues declined 17.2% year over year to $507 million at the UOP owing to lower enrollment and new enrollments. UOP reported an 18.3% decline For more information about this research, info@ambientinsight.com 33

34 in total enrollment to 190,700. New enrollment or starts at the UOP declined 31.3% year over year to 26,500." Figure 7 - US Post-secondary Higher Education, Professional Education, and Association Training Competitive Landscape In stark contrast, their global business grew by 9.8% compared to the year before. "We have also made progress on our diversification strategy through Apollo Global, which is now growing in every country it serves." In October 2015, Pearson reported on their higher education business in North America. "In Higher Education, courseware revenues declined, with market share gains more than offset by a weaker market caused by lower Community College enrolments, higher industry-wide returns and regulatory changes continuing to affect the for-profit and developmental learning sectors." In November 2015, Cengage Learning (a major higher education supplier in the US) reported that "Domestic Adjusted Revenues for the three months ended September 30, 2015 decreased $16.6 million, or 3.0%, primarily driven by the continued secular decline of print-only products as well as enrollment declines, particularly in 2-year and for-profit institutions." There are areas of positive growth in the higher education and tertiary segment, particularly for specific types of content and for online courseware Managed Services. Suppliers that provide Managed Services for online programs to this segment have all reported positive growth. In September 2015, John Wiley and Sons (who acquired Managed Services supplier Deltak in late 2012) reported that, "First quarter revenue grew 2% For more information about this research, info@ambientinsight.com 34

35 on a constant currency basis to $423 million due to strong organic growth in Online Program Management (+26%). As of July 31, 2015, Wiley had 38 university partners and 210 programs under contract, compared to 200 programs at the end of last quarter." The post-secondary higher education and tertiary landscape is quite intricate in the US. Very few suppliers have a grasp of the actual competitive landscape. These organizational buyers combined generate over $500 billion a year and only a tiny fraction is from learning technology products so far. Except for the for-profit organizations, until recently these institutions have been notoriously slow at adopting learning technology. In the 2015 Campus Computing Survey, respondents reported that "just a tenth (10 percent) of general education courses make use of educational courseware, and just 4 percent of developmental and general education classes utilize adaptive learning technologies." Yet, a full 94% indicated that they thought digital curricular resources make learning more efficient and effective for students. This points to massive revenue opportunities for suppliers that are patient. There are "bad places" to be in the post-secondary ecosystem. The IT training market in the US has never recovered from the 2001 recession and was hit again in the 2008 recession. The IT certification market has also been in steep decline. This is illustrated by the distinctly negative growth rates for IT-related elearning content in both the consumer and corporate segments. The growth rate for IT-related content is particularly negative in the consumer segment at -10.2%. Ironically, the growth rate for licensure and continuing education (CE) elearning content is relatively high at 7.6%. This content maps to professional licensure, but paid for by individuals. Commoditization is causing significant pricing pressures in the US corporate segment, particularly in the large organizations. This report breaks out spending by four company sizes in the US: Enterprise defined as companies with over 10,000 employees Large organizations (LORG) defined as companies with 1,500 to 9,999 employees Medium-sized organizations (MORG) defined as companies with 100 to 1,499 employees Small organizations (SORG) defined as companies with less than 99 employees The MORG has a negative-to-flat growth rate of -1.5%% growth rate and the SORG has a slightly positive growth rate of 1.6% growth rate. That said, the enterprise and the LORGs combined account for 66% of all revenues in the US corporate segment, but competition is intense, if not ruthless. In a commoditized market, suppliers tend to compete on price and not many suppliers can do that on a sustained basis. For more information about this research, info@ambientinsight.com 35

36 It is interesting that as of 2015, the LORG companies now outspend the enterprise on Self-paced elearning. The growth rate in the LORG is negative-to-flat at -2.9%, but distinctly negative in the enterprise at - 6.4%. Figure US Corporate Self-paced elearning Five-year Growth Rates by Four Company Sizes The SORG is the only company type with a positive growth rate for elearning, but it is an anemic growth rate of 1.6%. In the corporate demand-side section of this report, expenditures on package Self-paced elearning content are broken out for ten vertical industries in the US: Information Services Professional, Scientific, and Technical Services Commercial Training and Education Finance and Insurance Manufacturing Pharmaceuticals and Life Sciences Retail Wholesale Transportation and Warehousing Energy, Utilities, and Telecommunications While the growth rates are negative-to-flat in the two academic segments in the US, in terms of revenue, higher education and PreK-12 were the second and third-largest buying segments after the corporate segment in For more information about this research, info@ambientinsight.com 36

37 What Are They Buying? The supply side section of this report provides revenue forecasts for three categories of Self-paced elearning products and services: Retail packaged digital content (courseware) Custom content services Authoring tools and learning platforms (cloud-based and installed platforms combined) Retail packaged content includes products delivered on tangible media such as DVDs, as well as web-based content. Revenues for custom online courses are considered custom development revenues in Ambient Insight's taxonomy. Different segments buy different types of packaged content. For example, most continuing education (CE) and continuing medical education (CME) content is purchased by buyers in the corporate and healthcare segments. On the other hand, all the segments buy self-paced language learning content. Figure Self-paced elearning Five-year Growth Rates in the US by Three Product Categories Across All Six Buying Segments Combined Across all buying segments combined, the growth rates for all three elearning product types are now negative in the US. The growth rate for retail packaged content is negative-to-flat at-3.3%, being driven down largely due to product substitution in the consumer segment and pricing pressures in the corporate segment. That said, elearning content generates the vast majority of revenues compared to the other two product types. It should be noted that several product categories have positive growth rates in particular buying segments. For example, the growth rate for custom content services are both positive in the higher education and state government sub-segment at 4.7% and 4.4%, respectively. For more information about this research, 37

38 Custom content services in the higher education segment include Managed Services, which is the outsourcing of elearning programs. This is just one of the bright spots in the challenging US elearning market. This is particularly true for private institutions. In the 2015 Campus Computing Survey, "In aggregate three-in-ten (29 percent) of the institutions participating in the 2015 survey report outsourcing their online programs, about the same as in 2014 and up from 23 percent in fall The outsourcing numbers range from 41 percent in private universities to 16 percent in community colleges." The growth rate for content services is flat across all segments combined, but a relatively healthy 4.7% in the higher education segment. The growth rate for retail packaged content is positive in the SORG subsegment of the corporate segment. Forecasts for the three product types for each of the six buying segments is included in the supply-side section. The corporate segment is further broken down by the four company sized sub-segments and by ten vertical industries. Certain types of retail packaged content in particular segments also have positive growth rates. Self-paced elearning courses designed for licensure and certification have the highest growth rate in the consumer segment at 7.6%, followed by professional development courses that have a 4.6% growth rate. Self-paced language learning courses have a 6.6% growth rate in the US corporate segment. Consumers only buy retail packaged content and not services or tools. Selfpaced elearning revenues are broken out by ten content types for the US consumer segment: IT-related content Language learning Early childhood learning Test prep for standardized exams Supplemental and remedial PreK-12 content General instructional "How To" content Medical, health, wellness, and fitness Business, investment, and finance Licensure and continuing education (CE) Training and professional development Growth rates for four of these content types in the consumer segment are positive. That said, the combined growth rate for all ten types is negative at -4.4% being driven down by steep declines in two of these content types. The demand for specific content in the corporate segment is the opposite with only four content types in negative territory. Retail packaged elearning content is broken out by ten content categories in the US corporate segment, which are mostly different from the content in demand in the consumer segment: Vertical and professional skills IT-related learning content Continuing education (CE) and continuing medical education (CME) Channel, partner, and supplier education Internal and external sales For more information about this research, info@ambientinsight.com 38

39 Customer and patient education Business process training Leadership and management development Language learning Compliance and mandated learning The growth rate for custom content services across all buying segments is essentially flat at -0.1%. This is actually good news in the current US elearning market; it means services revenues will remain steady throughout the forecast period. Custom content services include analysis, design, development, conversion, delivery, hosting, localization, maintenance of courseware content, and more recently, turnkey Managed Services (School-as-a- Service). Organizational buyers hire development firms to create new courses or convert classroom and print-based material into courseware. They hire suppliers to build, maintain, and operate entire online programs via Managed Services. The higher education segment is moving rapidly to Managed Services. Authoring tool suppliers and platform suppliers are continually lowering their prices. This generates more sales, but less revenue across the market. The growth rate for authoring tools and learning platforms is the lowest of all three product categories at a distinctly negative -5.4%. Authoring tools are used to create self-paced courses and learning platforms are used to manage content. Learning platforms include Learning Management Systems (LMS), Classroom Management Systems, Education Management Systems, Student Information Systems, Course Management Systems, and Learning Content Management Systems (LCMS). The current authoring tool market is dominated by tools marketed as "rapid learning" tools. Many of these tools originated as screen capture utilities and have been modified to create self-paced courseware as well. All of these tools allow native authoring as well as convert Microsoft PowerPoint slides into Adobe's Flash format. Adobe's Captivate is the best-known rapid learning tool and the market leader. The most significant inhibitor is the availability of open source and free tools. Barely a year goes by when surveys are published that indicate that buyers intend to upgrade or replace their learning platforms in the near future. Those data are then used to claim that the LMS market is "booming", but in reality, the product replacement cycle has always been baked into the procurement process and "intention" has no impact on the aggregate revenues for platforms. Product churn is endemic to all technology lifecycles. On the other hand, recessions will cause delays in replacement processes and there are always apparent spikes in procurement as recessions recede. This post-recessionary spending is in the context of the recession and spending rarely reaches pre-recession levels. This has been the case for elearning products during the last two recessions in the US. Turnkey platforms that provide both authoring and learning management features are now quite common. For the most part, only organizational buyers purchase tools and platforms. Consumers do not buy services or For more information about this research, info@ambientinsight.com 39

40 tools/platforms. It should be noted that the growth rates for authoring tools and learning platforms is not negative in all the organizational buying segments. Revenue forecasts for multi-purpose enterprise platforms known as performance management systems, human resource management systems, talent management systems, student information systems, or student lifecycle systems are not included in this report. Many of these platforms do have learning management features that are used to track Self-paced elearning content but the modules are not sold separately. Related Research Buyers of this report may also benefit by the following Ambient Insight market research: The Worldwide Self-paced elearning Market The Worldwide Digital English Language Learning Market The Worldwide Mobile Learning Market: (Premium Edition) The US Self-paced elearning Market Ambient Insight s 2016 Learning Technology Research Taxonomy We Put Research into Practice For more information about this research, info@ambientinsight.com 40