Breakingviews - Online education will weed out stragglers

A teacher is seen on a mobile phone during an online lecture, inside a digital mobile education library, initiated to provide mobile phones to chidren who have no access to them for their education classes amidst the spread of the coronavirus disease (COVID-19) in Mumbai, India, October 16, 2020. REUTERS/Francis Mascarenhas - RC2KJJ9VD8PQ

HONG KONG (Reuters Breakingviews) - Online education is about to get an economics lesson. Covid-19 lockdowns rang the bell worldwide for virtual-school financiers, who ploughed money into the burgeoning business from the United States to China. Stragglers should start getting weeded out in 2021.

Kids crammed into video-powered classrooms and supplementary instruction sessions as the pandemic shuttered schools for long stretches. That roused fresh interest in the technological side of education, which in 2019 accounted for only about 2.5% of the $6 trillion invested by schools worldwide, according to Citigroup research. All the fresh interest should help that figure more than double to about $360 billion by 2024.

The math is working for established companies. Pearson, for example, experienced 14% year-on-year growth in its online division in the first nine months of 2020. Koolearn Technology said K-12 enrollments increased by nearly 225% to about 1.9 million for the financial year ended in May. Tutoring apps also attracted fresh funding that quickly inflated valuations. Capital injections put Byju’s in India at about $12 billion and China’s Yuanfudao at $16 billion, according to media reports.

Enthusiasm for educational technology has been so strong, in fact, that stocks such as GSX Techedu’s have overcome short-selling attacks alleging fraud. The exuberance is bound to wane, however, as students suffer screen fatigue and return to school in person. Investors and parents are also likely to be more discerning, intensifying competition. Chinese online teaching companies robustly grew revenue a few years ago while scaling back their sales and marketing expenses, according to CLSA analysts. The price of growth is now quickly on the rise, even if operating profit margins should eventually outpace offline peers saddled with rent and other fixed costs.

The sector’s sprawl also should lead to some consolidation straight out of the financial textbook. Deep-pocketed Alibaba might use its DingTalk app as the basis for expansion. Dutch technology titan Prosus also is emphasising education. Alphabet’s Google, whose operating system runs on many students’ Chromebook laptops, could graduate to other parts of the online teaching market. There can be little doubt that virtual education is here to stay in some capacity, but 2021 will determine which providers are best in class.

- This is a Breakingviews prediction for 2021. To see more of our predictions, click here


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