This article continues my series about Rosetta Stone (NYSE:RST) by analyzing the competitive landscape of its industry: Language-learning materials. Since even this sub-sector is quite broad, this article will focus on Rosetta Stone's closest competitors along with a couple other more tangential players.
The first category of competitor consists of competing language courses. Simon and Schuster's Pimsleur (Simon & Schuster is a unit of CBS (NYSE:CBS)) is a leading competitor in this category. Its programs help you to "learn like a spy" by using an auditive approach with 30-minute lessons where the user hears a prompt, says the answer and then hears a native speaker say the answer. If nothing else, users quickly develop a good accent. Pimsleur uses repetition to drill the material it covers. While it won't make you fluent, it will teach you 500 or so words to the point that you'll know them in your sleep, and unlike Rosetta Stone, it also effectively teaches some grammar points. Pimsleur is available in more than 50 languages. Due to its entirely auditory method of teaching, this course is extremely useful for commuters.
The most comprehensive of the language courses out there would probably be Assimil. Of the popular ones, it is the only one I'm aware of that actually has taken a significant number of people to fluency without additional courses or classes. The French company that produces Assimil has been around since the 1920s and its well-respected program teaches several thousand words in each of the dozens of languages it offers while using a combination of audio and written dialogs to help users assimilate the language. For 65 euros (less than $100), users get a complete comprehensive course that will take them farther than Pimsleur or Rosetta Stone. One drawback is that it's not as fun as either of those other two.
Another popular course is the Michel Thomas series of audio courses (Michel Thomas is a unit of McGraw-Hill (MHP)). These are a series of short (usually 8CD) courses that provide a wonderful and surprisingly painless introduction into grammar and sentence construction for beginners. I've seen people be able to string to together surprisingly complex sentences after only completing Michel Thomas' short audio course. Both Michel Thomas and Pimsleur directly compete with the audio-CD component of Rosetta Stone's software.
A number of other comprehensive courses exist. For the sake of brevity, I'll only mention one more as it is especially alarming for Rosetta Stone investors. The Fluenz language-learning system was created from scratch in the past few years, it appears, as a direct attempt to beat Rosetta Stone at its own game. Fluenz has strongly marketed itself as a better alternative to Rosetta Stone and has received a number of high profile endorsements that seem to agree, along with raving reviews at Amazon.com. Fluenz is now appearing on high-profile outlets such as CNBC. Fluenz notably only offers four languages thus far as it takes the time to make a separate culturally relevant course for each language. This contrasts to Rosetta Stone which merely translates the text associated with the same ubiquitous pictures that Rosetta Stone uses for all its courses. If Fluenz is able to maintain its high product-quality across additional languages while maintaining its aggressive advertising, it could be a Rosetta Stone-killer.
Since Rosetta Stone has entered the online arena, it now directly competes with Internet-based language-learning solutions. The most widely-known of the online competitors is LiveMocha, which has more than 8 million users learning more than 35 languages (LiveMocha also is preparing for an IPO). The site offers social interaction, classes and games among other features. Its worldwide Alexa rank is in the 4,000s, putting it far ahead of Rosetta Stone's website in terms of popularity. LiveMocha has also received at least $14 million of venture capital funding. If LiveMocha were to go public, it would serve a devastating blow to Rosetta Stone investors who think are invested in the only language-learning company out there.
Another rising competitor is LingQ which is the cheapest of the paid online language sites. Many of its features are entirely free. The most innovative of these is the site's "lessons" which provide a native speaker's reading of a text along with a written transcript with a pop-up dictionary and a quick way to identify trouble words and make flashcards out of them. It's quite an innovation. The site also offers live lessons with native speakers and writing correction at prices much below Rosetta Stone.
There are additional less obvious competitors to Rosetta Stone. For extroverts, Skype has emerged as a surprising free language-learning option, as many people have joined places such as LanguageExchange. This site helps match people trying to learn each others languages, for example a Brazilian wanting to practice English can call a Canadian wanting to learn Portuguese with Skype for free.
The Web also provides tons of free or cheap blogs, forums and websites which have been increasingly able to replace language-learning courses. The combination of the forum at how-to-learn-any-language.com, Spanishdict.com, and the digital flashcard program Anki taught me more Spanish than anything I had to pay for.
Of course, the traditional method of going to a tutor, university or community college for classes and lessons also provides competition to Rosetta Stone. Foreign language enrollment in U.S. universities continues to rise (particularly in languages that offer great career opportunities such as Mandarin and Arabic) and classes at community colleges have drawn renewed interest. Since Rosetta Stone's approach is quite different from a college, I won't discuss this source of competition at length.
One note about many of these online competitors is that their Alexa ratings are far higher outside the U.S. than in the U.S. For example, LingQ is a top 25,000 or better site in Canada, Hong Kong, Ukraine, Belgium, Israel, Brazil and Russia - all significant markets. Rosettastone.com earns a worse Alexa rank than LingQ in each of the above mentioned countries. While Rosetta Stone may be more popular overall, it is because it has paid through the nose to establish a brand in the U.S. In overseas markets Rosetta Stone wishes to cultivate, it has already been beaten to the punch as smaller nimble competitors such as LiveMocha and LingQ which already grabbed the first-mover advantage and gained market share. Investors thinking that Rosetta Stone will effortlessly expand abroad will soon be disappointed.
Despite Rosetta Stone's aggressive marketing strategy, the company faces intense competition, even in the U.S. market. There are numerous strong and creative competitors, and more like Fluenz will keep emerging if profit margins in the industry remain elevated. I visited my local Barnes & Noble (NYSE:BKS) recently and found four racks of shelf space devoted to non-Rosetta Stone language products including Michel Thomas, Pimsleur, a variety of reputable Barron's and Lonely Planet products, along with dictionaries and grammar books. By comparison, Rosetta Stone had one rack and two end-caps. While Rosetta Stone is still the most prominent product you see in a bookstore's language section, competition is thriving, both at bricks-and-mortar locations and online.
Rosetta Stone has not consolidated the field of language learning as investors had hoped it would. In fact, the industry appears to be fragmenting further with new online entrants and well-liked new courses such as Fluenz appearing on the market. The worst outcome for Rosetta Stone would be if a prominent competitor such as LiveMocha launches an IPO and disabuses investors of the idea that Rosetta Stone is the only significant language-learning company out there. In any case, Rosetta Stone will have to fight off increasing competition, both from other courses and from online offerings to maintain its profit margins and market share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Author recently taught himself Spanish primarily with the help of Michel Thomas, Pimsleur and the above-mentioned websites along with some Spanish study at university. He is not an affiliate of, nor compensated by, any language-learning websites or courses.