ChatGPT is the start of online education, not the end

Of the dozens of listed companies talking up the potential of ChatGPT-like technologies, Chegg Inc. is among the first to publicly state just how deleterious the trend could be for its business. It needn't be, though management seems ready to ride the wave of this new innovation rather than swim against the current. 

Chegg describes itself as a "student-first connected learning platform." With annual revenue of just $767 million last year, it is nowhere near the scale of behemoths jumping on the artificial intelligence bandwagon, such as Alphabet Inc., Microsoft Corp. and Amazon.com Inc. 

Yet online education is a huge industry, estimated by researcher Statista at $167 billion this year and climbing to $239 billion by 2027. Chegg's slice of that market is centred around helping college students with homework and cramming for exams, and charges subscriptions starting at $14.95 per month. The pandemic was good for business, with revenue jumping 57% in 2020 and 20% the following year. 

Online education will keep growing

Driven by university education, the online learning sector is rapidly expanding.

But then it faced a confluence of factors, including a return to campus and a reduced emphasis on academic rigor by both learners and professors. As a result, sales dropped last year. 

Still, shareholders seemed to have been caught unaware by the next big challenge. Chegg's shares dropped at least 42% after the Santa Clara-based company made a simple comment about the advent of OpenAI's generative chat product, ChatGPT. "In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups. However, since March we saw a significant spike in student interest in ChatGPT. We now believe it's having an impact on our new customer growth rate."

ChatGPT's greatest strength is to mimic human language, allowing it to present information in a coherent and conversational manner that is easily accessible. It has been deployed for countless tasks, with the composition of school essays and writing code among the most productive examples. So naturally, Chegg's customers are logging on to give it a try.  

Students go online for homework help

The majority of time spent on Chegg's platform is used for writing homework, a prime area of ChatGPT usage in education.

Stack Overflow, a community bulletin board for developers, has the potential to be the biggest victim of ChatGPT — for over a decade it has been the go-to site for knowledge-sharing and problem solving. Today, you can just ask a chatbot to write code or bug-check your own creation.

But ChatGPT's biggest weakness is inaccuracy. This isn't a great problem when you deploy it to create simple software, because you can run that code and immediately know if it works (it often doesn't.) It's a terrible attribute if you're using it to teach your kids mathematics, because it churns out convincing answers that are just plain wrong. The last thing we need is confident-sounding bots persuading students that 1+1 = 3.

Chegg's investors are right to be concerned about the advent of ChatGPT. Any interruption to the status quo threatens a company's business model, and the introduction of a revolutionary new technology is among the most disruptive developments.

Harvard Business School professor, Clayton Christensen, outlined this conflict in 1997 in his groundbreaking book The Innovator's Dilemma, and we've seen many examples since. Microsoft was so good at desktop operating systems that neither the company, nor its clients, seemed particularly interested in developing a decent mobile version. Apple Inc., on the other hand, pounced and today makes more money from handsets than PCs. Microsoft saved itself by jumping on enterprise and cloud computing.

For Chegg and other online education providers such as Pearson Plc and TPR Education LLC, tackling ChatGPT's entry will come down to how they view their own competitive advantage. Thankfully, Chegg is small enough to be able to adapt without worrying about protecting massive existing revenue streams. If management believe that a well-designed interface and convenient delivery platform are distinguishing features, then an easy-to-use chatbot could have them beat.

If, however, they realize that their edge comes from decades of experience and a growing corpus of proprietary educational materials developed by humans, then they'll probably be just fine. Chegg does, at least, recognize this fact.

While investors are focused on the competition that comes from ChatGPT, they'd be wise to also note that Chegg plans to integrate OpenAI's latest model, GPT-4, into its CheggMate automated tutor interface. This strategy pairs the power of OpenAI's systems with the education provider's billions of items of content, and it keeps that all within Chegg's walled garden that customers will pay to access. 

Other companies are likely to take a similar approach. Chinese peer New Oriental Education & Technology Group last month said it plans to apply ChatGPT-like features in its own offerings, while TAL Education Group is also adopting AI to improve content.

When viewing the role of generative AI, such as ChatGPT and its visual counterpart DALL-E, it's worth remembering that what we're wowed by today is a cute and gimmicky front-end: Chatty bots and expressive artists. In reality, the real magic is in its ability to collate vast amounts of information and present it in a human-friendly form. For that to happen, the true value comes from the content that trains them, which means education providers may well be sitting on a pot of gold.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.