Online Education Companies Clicking On Hard Times

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At Hononegah High School in Rockton, Ill., the school Web site has been operated the past couple of years by an Internet company known as Highwired.com.

In exchange for displaying ads on the school's Web pages, Highwired hosted the site for free and provided a set of tools for improving the online look of the student newspaper, class schedules, and bulletin boards for parents.

"Our student newspaper looks fabulous, and teachers were jumping in to do more Web pages because Highwired does all the work for you," said Bruce Carlson, the technology coordinator for the one-school, 1,650-student Hononegah district in northern Illinois. "But I know they are in a state of flux right now."

Highwired has dropped its advertising-based revenue model and is planning to charge schools a subscription fee to use its services. The Watertown, Mass.-based company recently laid off 56 employees and eliminated some products and services while it retools its strategy.

Highwired is not alone among education-related Internet companies that are facing bumpy times. The overall downturn in the Internet sector, which began last spring, hasn't spared the dozens of education Web businesses that were just getting off the ground.

"It's fair to say the education economy is not immune in the downturn in the larger Internet economy," said Peter J. Stokes, the executive vice president of Eduventures.com, a Boston research firm that closely tracks the industry. "The next 12 months are going to be a period of increased clarity in the marketplace. By that, I mean the winners and losers will be clearer."

Scores of education-related businesses have set up shop on the World Wide Web in the past two years or so. Driven by the easy availability of venture capital and surging interest in Internet business models, entrepreneurs established sites with a range of education services aimed at children, parents, and schools. Web sites provide educational toys, tutoring, test preparation, and help for high school students in selecting a college, among other services. For schools and districts, other sites offer curriculum, scheduling, and administrative help, and at least four Web businesses offer online school purchasing.

Now, with a cloudier U.S. economic climate, some of those education sites have had to rethink their business strategies, lay off employees, or seek mergers with other companies. Others have gone out of business altogether.

A Slow Burn?

Simplexis.com, a San Francisco- based online-procurement site for schools, recently laid off an undisclosed number of workers, even as it acquired another company and formed a partnership with the International Business Machines Corp. The site attracted notice when it was launched a year ago because of the involvement of former U.S. Secretary of Education Lamar Alexander as co-founder and board chairman.

"Yes, there has been a restructuring," said Jared Cameron, a spokesman for Simplexis, who declined to say how many employees had been laid off. "This is simply the result of the end of the go-go, anything-goes, boom mentality of the Internet. What we've done is realign the company in line with current market conditions."

Simplexis has between 40 and 50 employees and is currently focusing on signing up larger school districts in which it can integrate its procurement system with the district's purchasing operations, Mr. Cameron said.

MaMaMedia Inc., a New York City company that developed a highly regarded Web site and online activities for children, had several rounds of layoffs last fall, going from about 150 employees to as few as 15.

"We have recently downsized and significantly reduced our burn rate so that we can be a surviving, operating business," said Rebecca Randall, a spokeswoman for the company. In the parlance of the Internet economy, the "burn rate" refers to the speed with which a company spends its pool of capital.

Varsity Group Inc., a Washington-based site that started out selling college textbooks online, has amended its business strategy in recent months to include targeted college marketing and exclusive textbook sales to high schools. Nevertheless, it has had to lay off dozens of workers to avoid going out of business, as one of its online competitors, Bigwords.com, did last fall.

In many cases, the struggles of the education dot-coms probably haven't had much effect on schools, since educators never got accustomed to relying on the companies in the first place. But one Internet-related business that had found a place in thousands of schools caused a big stir last fall with its lightning-quick exit from the education arena.

ZapMe! Corp. of San Ramon, Calif., which provided ad- sponsored Internet connections and computer labs in schools, was acquired in October by an Israeli company that decided to focus on high-speed Internet access to the business market.

Schools were soon informed that the free ride was over and they would have to fork over hefty fees if they wanted to keep their ZapMe! computers and Internet connections.

"We felt burned," Mary Conway, the superintendent of the 2,800-student Plainfield, Conn., school district, said in an interview last week. Her district spent more than $5,000 to pay for wiring the ZapMe! labs.

Once the district's plight earned media attention, other businesses offered to help. The district got a personal call from Steven Jobs, Apple Computer Inc.'s co-founder and chief executive officer, offering equipment for testing, as well as a call from a struggling Web business, Drugstore.com, that was trying to unload some fast computers at a discount, Ms. Conway said.

Whole-School Strategy

While the layoffs and belt-tightening are undoubtedly tough for those directly involved, some analysts say they are not necessarily bad for the overall health of the online side of the education industry.

"There are still many indicators that suggest there is a strong market opportunity for e-learning," said Mr. Stokes of Eduventures.com. "It's actually a good thing to have a thinning-out of the herd."

Jeffrey A. Fromm, the president of KnowledgeQuest Ventures, an education industry consulting firm in New York, says that while less venture capital may be available now for education entrepreneurs, "there is still a growing number of students, and a need for distance learning. There is still a lot of opportunity."

In fact, the current climate hasn't prevented a couple of major new Internet learning ventures from being launched in recent weeks. Earlier this month, former U.S. Secretary of Education William J. Bennett announced the formation of K12, an ambitious online school that is scheduled to open for business in the fall. ("Former Education Secretary Starts Online-Learning Venture," Jan. 10, 2001.)

Also this month, a major educational publisher, the McGraw-Hill Cos., launched an extensive Web site offering online textbooks and support resources for teachers and parents.

And sometime early this year, the test-preparation company Princeton Review Inc. is expected to go to the market with an initial public offering of stock, the first in many months for a K-12 education company. Much of the money is slated to expand the New York City-based company's growing Internet services, such as Review.com and Homeroom.com.

At Highwired.com, where 80 employees remain to work on the Web site's new business strategy, spokeswoman Kara Kilpatrick said the business would be offering schools more administrative and curriculum- related tools in addition to Web-publishing services.

"We're moving toward a whole-school solution," she said.

Mr. Carlson, the Hononegah district technology coordinator, said the district would decide this summer whether it will pay to subscribe to the service.

"If they can continue to provide a good product, we're going to pay for it," he said.

Funding for the Business Page is provided in part by the Ford Foundation.

Vol. 20, Issue 19, Page 8

Published in Print: January 24, 2001, as Online Education Companies Clicking On Hard Times
Related Stories
Web Resources
  • In "The Future Is Now," Jonathan Weber, editor of the Internet business magazine the The Industry Standard, predicts a few things that are not going happen to the economy in 2001.
  • From "The Online Education Bubble," by Joshua Green, Oct. 23, 2000, The American Prospect: "Online education could be the latest in a string of overhyped Internet concepts in which an excess of giddy supply overestimates the demand." The article deals largely with higher education ventures.
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