“Welcome, you’ve got mail!”
Those four words — and even the voice that reads them — are familiar to just about anyone who used the Internet back in 1995.
Those were the days when pop-ups flooded our screens, hackers ran rampant, and Internet service providers (ISPs) charged by the hour…
In 1995, America Online was the only ISP most of us had ever heard of — and as a result, the company was able to charge exorbitant fees for what was, in retrospect, a very poor service.
By 2001, AOL seemed to be taking the world by storm. It had just made the largest acquisition in corporate history — a $164 billion purchase of Time Warner — and boasted as many as 30 million subscribers.
But AOL’s dominance was incredibly short-lived.
The company’s merger with Time Warner was an absolute disaster, and by 2012, AOL’s subscriber base dropped to less than 3 million users, representing a 90% fall from its peak.
From its purchase of Time Warner to the mass solicitation of its software installation disks, AOL has made countless blunders since its inception. The company continuously botched rebranding attempts, ruined services like Netscape and Moviefone, and floundered in its pursuit of broadband Internet.
AOL’s greatest downfall, however, was arguably a failed pricing model.
The company relied on revenue from a service that competitors were providing for free. When companies like Yahoo and Microsoft began offering free email accounts, users quickly started to gravitate away from AOL mail and using alternative ISPs.
AOL eventually realized that charging for email for unsustainable, but it was far too late…
In 2006, the company decided to become a free portal. The move was necessary long term, but AOL took a major hit on subscription revenue in 2007 as a result — and has still yet to recover.
The fact is by 2006, AOL was offering an inferior product at premium pricing. The company was relying almost entirely on the value of its brand, resulting in a business model that was clearly unsustainable.
Brand value is definitely important, but it can’t carry an entire business on its shoulders forever. Customers ultimately care more about product quality and pricing.
When you come across a company charging for a service that others are offering for free, your inner bear needs to come out of hibernation immediately.
An Easy Translation
Most of us have been familiar with Rosetta Stone (NYSE: RST) for some time now.
The company provides language learning software and is widely recognized as the leader in this space.
For $500-$900, you can become completely fluent in virtually any language — that is, of course, if you’re willing to put in the time and effort.
When Rosetta Stone first hit the public market in 2009, excitement was high and company shares jumped as much as 44% in its first day of trading.
Over the last four years, Rosetta’s revenue growth has remained nearly flat, and operating expenses have continued to increase.
The result has been a negative trend in net income that should make any shareholder nervous…
Surprisingly enough, Rosetta Stone’s financials aren’t the company’s biggest red flag. RST is now facing a new breed of competition — one that offers a better product, at a far cheaper price.
It’s all thanks to a man by the name of Luis von Ahn.
At just 33 years old, von Ahn has already been named one of the “50 Best Brains in Science” by Discover Magazine and was among Popular Science magazine’s “Brilliant 10.” He has also been recognized as one of the “50 Most Influential People in Technology” by Silicon.com, and he found himself on Fast Company‘s list of the “100 Most Innovative People in Business.”
If you’ve ever filled out one of these, you can thank Luis von Ahn. He invented it.
The official name of the image above is a CAPTCHA.
As you likely know, it’s a necessary evil for preventing computer programs from spamming sites across the Web.
The CAPTCHA is just one example of von Ahn’s massive digital footprint.
Today he is busy at work on a new project — one that is far more ambitious and even wider reaching than CAPTCHA. Luis von Ahn is accurately translating the entire Internet with a program called Duolingo. At the same time, he is helping people efficiently learn new languages — for free.
Here’s how Duolingo works…
As a learner, you’re given a sentence from a foreign website and asked to translate it. You’ll start off with simple sentences at first, and you’ll be provided help if you get stumped.
Over time, Duolingo will provide you with increasingly complex tasks until you’re able to translate entire articles at a time.
Duolingo aggregates your translation with those of many other users in order to create a single product. The end result is a level of accuracy better than Google Translate and equivalent to that of a professional translator.
As for the learning community, the results are just as impressive…
Because users are provided with real world content, engagement tends to be high. This model has resulted in a surprisingly effective language learning program that rivals just about any other method we’ve seen to date.
According to an independent study out of the University of South Carolina, Duolingo offers a learning experience more effective than an average college language course.
While that’s impressive, here’s the real kicker: Researchers have determined that 34 hours of Duolingo is equivalent to 55 hours of Rosetta Stone. In other words, Duolingo is about 40% more effective.
Some will argue that Duolingo is not a threat to Rosetta Stone, because the latter has secured contracts with large corporations, educational institutions, and government agencies.
The premise here is that if you’re using Rosetta Stone as a company or school-wide program, you’re not going to give it up for a brand-new service.
Now, you could easily refute this argument by pointing out that Duolingo is already partnering with major Internet media outlets, such as BuzzFeed and CNN, but that actually doesn’t matter much…
The fact is institutions account for just 22% of Rosetta Stone’s sales, while individual learners make up the remaining 78% of the company’s revenue.
Even if Duolingo doesn’t catch on with major corporations and educational institutions, the vast majority of Rosetta Stone’s revenue is still at risk.
In just two years, Duolingo has pulled in over 10 million users. The mobile app has consistently been the most downloaded educational app on the iPhone since 2012 — and recently ranked as the second most downloaded app overall in America.
In addition to Duolingo, there’s something else that will make Rosetta Stone obsolete: a universal translator.
Google has been tapping Big Data to build one and plans to put it in every Android phone.
While it likely won’t be perfect out of the gates, most people would rather use a simple app than spend $500 dollars and countless hours learning a new language.
With better and cheaper services right on its heels, Rosetta Stone has little left to offer besides brand name recognition…
Like AOL in 2006, this stone will crumble.
Turning progress to profits,
Jason Stutman
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