“About 80% of global education investment in 2020 will go to China, which is unimaginable in the history of the world.”
This is a set of data disclosed by Genshuixue Chairman Chen Xiangdong in an interview earlier. And this 80% investment has brought an online education outlet with extremely fierce competition. In the face of the hottest online education track, the giants are no longer reserved, and make arrangements themselves one after another.
Baidu, which is already the major shareholder behind Zuoyebang, has launched the first educational hardware Xiaodu intelligent learning machine. ByteDance will also vigorously promote the educational hardware product “Dali intelligent working lights” in 2020. It is not difficult to find that the giants are obviously growing much faster on the online education track than those unicorn companies.
However, these giants have apparently not realized that the competition of the market they are striding into is more than cutthroat. With endless cash burn, crazy involution, and frequent exits, the current situation of online education companies may be crueler than any other outlet in the past.
Rapid Growth vs Huge Losses
About a few weeks ago, those online education companies that have gone public successively released their latest financial reports，from which we can see that most of them are at a loss.
Genshuixue’s parent net loss was 1.39 billion yuan, and the net profit attributable to the parent in the same period last year was 227 million yuan; NetEase Youdao’s net loss attributable to ordinary shareholders for the year was 1.753 billion yuan, and the net loss in the same period in 2019 was 637 million yuan, and the loss was enlarged to 175.51%; TAL Education Group’s third-quarter financial report showed that its net loss was 52.891 million U.S. dollars, compared with a profit of 16.42 million U.S. dollars in the same period last year.
Corresponding to these expanding losses is the rapid growth of corporate revenue and the scale of financing. Although the situation is not optimistic, everyone is still thinking of ways to expand their market share. In a word, losses can be expanded, but growth cannot be stopped.
According to the statistics of “Reference for Education and Training”, there will be 238 financing incidents announced by the domestic education industry in 2020. Since online education itself is not a new track, the number of financings has also shown a continuous downward trend compared with the past few years. However, benefited from the special economic situation, the number of financing has decreased while the scale of financing has increased substantially. The total amount of domestic online education financing in 2020 will exceed 68 billion yuan, much higher than 41.8 billion yuan in 2019.
And these capital flows have obvious signs of moving closer to the head companies. Yuanfudao completed three rounds of financing of more than 3.5 billion U.S. dollars within one year; Zuoyebang also completed two rounds of financing of more than 2.3 billion U.S. dollars. At the same time, online education companies that have been listed are doing everything possible to get more sufficient funds. Among them, TAL Education Group has reached a private placement agreement of US$3.3 billion with Silver Lake and other institutions, and Genshuixue announced that it will receive a fixed increase of US$870 million.
When they get the money, they spend it. So we have seen advertising wars in online education over the past two years.
From the stage of the Spring Festival, Gala to the sponsorship of major variety shows, to the billboards in elevators and bus stops, advertisements of various online education companies are everywhere. The last time we saw such a large scale of intensive advertising may have to go back to the second-hand car e-commerce war in 16 or 17 years, and the scale of burning money is obviously far less than this round of online education advertising competition.
According to the data previously released by QuestMobile, as of the first nine months of 2020, the total investment in marketing of the three educational institutions, namely Yuanfudao, Zuoyebang, and Xueersi Online School under TAL Education Group, has reached about 5.5 billion yuan, at least twice the same period last year.
In terms of individual companies, according to NetEase Youdao’s financial report, its marketing expenses in 2020 will be 2.7 billion yuan, compared with only 623 million yuan in the same period in 2019; the marketing cost of Genshuixue also increased sharply from 1.041 billion yuan in the same period in 19 years. 5.816 billion yuan, an increase of 458.7%; the marketing cost of the future has soared from 74 million US dollars in fiscal year 2016 to 853 million US dollars in the fiscal year 2020. The increase in marketing costs of this scale is also the fundamental reason why these companies have turned from profit to loss.
But can massive advertising really get good results?
Looking at the e-commerce of second-hand cars in a mess today, it seems that online education companies should also think more. But as the entire industry is experiencing rapid expansion, they seem to have no time to really stop.
There is no denying that with the help of capital, the scale of the entire online education industry is expanding. According to the data of iResearch, the market size of the online education industry in 2020 will increase by 35.5% year-on-year, reaching 257.3 billion yuan. But at the same time, we must also see that behind the rapid growth in the scale of the industry is the huge losses of enterprises.
If revenue increases while these deficit gaps continue to increase, it can be regarded as a temporary necessary “sacrifice”, but when the entire industry enters this unhealthy state, it seems that it is difficult for anyone to take care of themselves.
Giant Spoiler VS Capital Cooling Off
The epidemic has promoted the expansion of the overall user scale of online education, and the dual efforts of unicorns and giants, and the investment of a large amount of hot money will directly increase the customer acquisition cost of enterprises. In order to obtain users, various low-cost courses have become the most commonly used means by enterprises. An online education CEO revealed: “At present, the proportion of full-price course users in the entire industry is less than 10%, and the user retention rate and repurchase rate are not ideal.”
In terms of the specific customer acquisition cost, an executive of an online education unicorn said: “At the beginning of last year, the customer acquisition cost of a small lesson package in the entire AI course industry was about 200 yuan, but by November, it had risen to about 1,000 yuan. In less than a year, the price has doubled by 3 to 4 times, but the fluctuation of the unit price of the course is far below this level.”
At the same time, the financial report data of those listed companies seems to tell the outside world that the crazy money-burning marketing war still has no end in sight in a short time, and everyone is holding on tightly.
On the other hand, although companies have invested heavily, there is still a lot of room for the online education market. According to CNNIC’s “Statistical Report on China’s Internet Development Status”, as of March 2020, the number of online education users in my country has reached 423 million, and the penetration rate among the national population has reached 30%.
Perhaps seeing this kind of market situation, big manufacturers such as ByteDance and Baidu that once stood behind unicorns have also begun to enter the game in person.
Taking ByteDance as an example, Dali education is one of its most important internal development business lines.
In October last year, ByteDance launched the “Dali Education” brand, including many well-known sub-brands such as Qingbei Online School, GOGOKID, GuaGuaLong, OpenLanguage, Fclassrooom, AI Learn, Educational Hardware, etc.. Chen Lin, the original CEO of Toutiao, will serve as the CEO of the new business. In January of this year, it internally merged the Xinshi laboratory formed by the original hammer technology team into the education hardware team.
For Dali Education, the company’s internal attitude is also very clear, that is, it does not hesitate to pay a lot of money. Earlier, Chen Lin publicly stated: “ByteDance will invest a huge amount in the education business in the next three years.” According to previous reports, the GuaGuaLong brand under Dali Education alone has a daily sales amount of up to 150-200 million yuan on TikTok. This is still based on the 20% discount inside the byte system.
With the endless money-burning wars of the entire industry, while the scale of financing is increasing, the valuations of leading companies have naturally risen. However, this high threshold also directly dissuades a large number of VCs. “It’s not that VCs don’t want to invest, but they really can’t afford it.” Such a money-burning “war” is a test of the patience of enterprises and investors, but if the end is not seen, investors will naturally become cautious.
In addition, after giants such as ByteDance and Baidu enter the market with huge traffic and capital, the status of those leading unicorns will not be affected immediately, but for those small and medium-sized enterprises, their living space will be squeezed further.
So we saw that starting from the second half of last year, a series of online education brands, including Disney English, Biver English, and Fun Trip, announced their retirement. At the end of last year, Xuebajun, who had accumulated hundreds of millions of dollars in total, also had a thunderstorm. Founder and CEO Zhang Kailei issued an open letter acknowledging that the funding chain was broken.
This is not surprising.
This kind of exit has been staged countless times in a series of Internet outlets, including online car-hailing, shared bicycles, and live broadcasts. Under today’s invisible war, even those with a valuation of billions or even tens of billions. Unicorns can’t sit alone in the high hall with peace of mind. After all, no one knows whether they will fall next.
Profitability is still in the foreseeable future
Previously, shared power bank companies that also burned money had reached a consensus to give up burning money and turn to profit when the market structure gradually stabilized.
But in the field of online education, such a consensus has obviously not been reached yet.
An executive of a unicorn in the field of online education said: “In a short period of time, the problems of burning money for advertising and high customer acquisition costs will not be significantly improved. First of all, unlisted companies are doing everything at this stage. May expand its own scale to prepare for listing. Second, from the perspective of marketing channels, the overall reduction in the past two years has actually been a lot, most of which are concentrated in ByteDance and Tencent. This has created a situation where demand exceeds supply , and the price will naturally go up with it.”
In fact, for Internet entrepreneurial outlets, burning money is a process that every industry must go through, but no investor or entrepreneur is willing to continue to burn. Any company must eventually return to profit-oriented. Therefore, in the business model planning of entrepreneurs or investors, burning money is just a sacrifice that must be made in the early stage, using absolute resource advantages to defeat competitors, and aftermarket harvesting is completed, the unit price per customer can be increased to achieve profitability. This is the case for live broadcast and o2o.
However, from the current stage of the competition, profitability is not something these entrepreneurs and investors will think about. Independent listing maybe their more important goal.
Last year, NetEase Youdao and One Education and other track unicorns landed in the capital market. Although their financial performance is not impressive, they at least give investors a chance to cash out.
In this regard, the investment manager of an investment institution said: “The matter of independent listing must be viewed from two sides. First, the benefits are very obvious, that is, the company has obtained new financing and investors have a better opportunity to realize cash. But on the other hand, this also means that a considerable number of online education companies have difficulty financing in the primary market and can only obtain financing through the secondary market. Under the premise that the entire industry continues to have a high fever, this may not be a good thing.”
Looking back at the short history of this industry, we can find that Yuanfudao is the leading company in large-scale investment in this industry. The delivery model has also attracted follow-up from other competitors.
Therefore, as the leading companies on this hot track, Yuanfudao and Zuoyebang will naturally not stop. After all, their goal at this stage is to do everything possible to expand the market scale and provide more imagination for the upcoming IPO. . But the hidden dangers behind this unreasonable rapid growth cannot be ignored.
Although burning money for the market is the most commonly used business model for mobile Internet entrepreneurship today, it has also been proven, but not every time it works. Such as burning money has exceeded 100 billion, but still far from seeing any profitable long video field. Another example is the original bicycle-sharing industry, but now it can only be embarrassing.
New Oriental founder Yu Minhong said in a public speech before: “In 2020, capital has input nearly 15 billion U.S. dollars into the education field, but the entire online education revenue is about tens of billions of yuan. Up to now, I still don’t think online education is a business model that can run through. It has suddenly become a rigid demand of the people, but it is not a business model that can grow independently.”
From the perspective of the bystander, perhaps it should be more rational to realize that a truly healthy business model should be efficient and sustainable. When applied to the online education industry, it should be that the cost of customer transfer is low enough, that the proportion of high-priced courses and repurchase rate are high. But all of this still exists only in fantasy.