UCLA | ECONOMICS 106T | FALL Simon Board Qianwen Bai Wesley DiMiceli Wing Sze Siu Chegg Introduction Chegg was founded in 2001 by JoshCarlson, Mark Fiddelke and Mike Seager as a classifieds listing service at Iowa State University. After modest success, the site formally launched in 2005 as an incorporated business and spread to other campuses. In keeping with their original goal of helping to reduce the costs of attending college, two years later, Chegg saw an opportunity to offer a textbook rental service in the style of Netflix. The firm has since seen strong growth and support from venture capitalists, having raised more than $140 million before 20101. Chegg’s mission focusses on helping college students save money and enhance their studies. Digital technologies have been transforming higher education throughout the last decade, and as a web-focused company Chegg has been riding this wave by offering online services dedicated to helping students. However, the foundation of Chegg’s business is rooted in print textbooks, a non-digital market that slowly erodes by entry of newer electronic books accessed from ultra-portable tablet computers. While the company has grown significantly, it still operates at a net loss, losing $180 million in the 2013-2014 fiscal year. Now, Chegg is facing a difficult choice regarding its current business strategy, whether or not there’s a future in the textbook market, and how to carve out its place in the education world.Chegg’s Business ModelChegg’s main business model is to offer inexpensive textbook rentals to college students to keep their costs of buying textbooks low. A customer orders a book, which they can keep for five months for a one-time rental price, after which they either return the book or pay fees to extend the due date. The service offers some flexibility in the rental extensions, including options to extend for an additional quarter or semester. Chegg is using disruptive strategies to further differentiate itself from other textbook rental companies. Chegg branded itself as The Student Hub, 2(figure 1), a place that fulfills all students’ needs, from discounts and homework help to internships, by acquiring internships.com, and it plans to be the next LinkedIn for students (Fox). Also, Chegg offers students supplemental help in their studies, such as textbook solutions, a questions amp. answers section, which provides a consumer-monitored environment in which questions are answered by thousands of other students or select experts. tutoring services are provided by InstaEDU 3(Figure 2).Strategic IssuesThe Shift to Digital Learning MaterialsIn today’s age of tablet computers, smart phones, and e-books, there is slowing demand for physical media. Many are seeing the huge advantages of using digital textbooks and choosing to purchase these rather than physical books. In fact, a survey by Vital Source Technologies indicates that students prefer digital textbooks 47% of the time2. College students can have a virtual library in their backpack without having to carry dozens of heavy books, which is especially useful given that many students are taking laptop or tablet computers to class3. These students can also access their learning materials on a huge variety of devices, phones, and computers of every size. By using these devices, students can take advantage of other tools that compliment digital book-reading applications, including note taking and highlighting that would normally harm the book’s value. Environmentally conscious students are also wary of the huge amount of paper used in the printing of hefty textbooks, which are often used for a single class and then sold, given away, or recycled.The overall shift to digital books is affecting the rental business because students no longer want the trouble of mailing books back and forth when they have easy access to digital versions of each textbook they need. Given that Chegg is having trouble staying profitable, the chilling demand for physical books is concerning. Since traditional books were Chegg’s bread-and-butter in their early days, the erosion of this market is forcing the company to consider their business model and try to adapt. High Costs for Print TextbooksChegg already offers digital textbooks in addition to their print books, which are becoming prohibitively expensive. Textbooks tend to be relatively more costly to purchase than mass-market books, and the larger average size gives them a high storage cost as well. According the the Bureau of Labor Statistics, textbook prices have risen as much as 800% over the past 30 years4. Figure 1 shows that the cost of textbooks has exceeded rising the consumer price index. Additionally, there are a huge number of different textbooks that are needed for a vast array of college courses. Every college offers a different set of classes with high variation in popularity, and different schools choose their textbook standards separately. All of the wide variation in textbook requirements creates a need for a very diverse selection of books with low demand for each one. Compounding the problem is the tendency for textbook publisher to release new editions regularly, which continually makes Chegg’s inventory obsolete and forces the company to renew their stocks. The continual textbook revisions make Chegg’s inventory depreciates in value very quickly, greatly reducing the time given to recoup the cost and create profits.Textbooks also tend to be heavy, incurring high shipping costs to ship books to and from customers. Chegg offers free shipping on returns to simplify the rental process and entice customers to return inventory on time, but the cost to deliver books eats into Chegg’s profit margins. All of the associated costs with inventory make it difficult to turn a profit in the face of declining demand for Chegg’s primary market. Adding to the unpromising situation is the heavy competition from established book sellers, some of which have a head start on digital book sales.Fierce Competition in the Textbook MarketAmazonAmazon currently holds a huge share of the market for books, and currently has a good selection of books at competitive prices. Recent reports state that 65% of digital book sales are through Amazon5. They introduced print textbook rentals in late 2012, positioning itself to compete directly with Chegg6. Amazon’s superior infrastructure and wide selection of other products makes them a compelling choice for students looking to save money on textbooks. They also began to sell digital textbook rentals through their Kindle system in previous year, the same year that Chegg offered this option.PackbackAs Figure 2 demonstrates, Amazon’s Kindle remains the juggernaut to beat in the ebook market. However, the recent startup Packback offers their own take on digital textbooks. While companies like Chegg and Amazon offer semester-long rentals, the recent start-up Packback provides on-demand digital textbook rentals for $5 per day. Packback is still a relatively new company, but if on-demand learning materials grow in popularity, the startup could disrupt the e-textbook industry.Apple Another major threat to Chegg in the textbook market is Apple. The company has been courting the educational market for several years with the iPad, iBooks Store, and iTunes U7. Apple has been pushing initiatives to get iPads into classrooms of all education levels, giving the company a market to sell new advanced textbooks through the Apple’s own iBooks application. More than 150 million mobile devices have the iBooks app installed as of June 20138. The iBooks textbooks are like traditional ones but enhanced with multimedia features and study tools. They can also be connected to iTunes U, which provides teachers a platform for course material and student interaction. Currently, Apple has only partnered with McGraw-Hill, Pearson Education, and Houghton Mifflin Harcourt to author and publish enhanced textbooks for K-12 subjects, and iBooks were limited to the iOS devices until the latest version of the Mac operating system, Yosemite9. However, even now the iBooks can only be accessed from other Apple products, and they are created with iBooks Author which is incompatible with other standard ebook formats10. Thus, Apple’s closed system reduces their ability to capture the textbook market for college students. Despite this, the wide adoption of Apple products among college students, along with further pushes from Apple to get publishers on board, could be a serious threat to Chegg in the future.Advantages to Becoming a Digital ServiceWith the shift to digital media, the question remains on how outlets can best differentiate themselves to attract customers. Chegg has already taken the steps to outsource its physical textbook inventory to Ingram Content Group, who offers Chegg a portion of the revenue on each textbook rented through Chegg’s websi11te. However, the question remains on the next steps for Chegg’s business after the deliberate shift away from physical products.Chegg’s CEO has stated that he wants the company to become a purely digital service in the next few years. Despite the uncertainty with venturing into new business models, digital and web services have some advantages over physical product sales. Enticing customers to use Chegg’s services regularly can create an ecosystem with positive network effects. This would give Chegg a competitive advantage over other services that also market to college students. The company can also collect and utilize data on student needs and interests, potentially advertising external products or providing the data to third party companies for additional revenue. According to the statistics given in Chegg’s financial statements, 1.3M students used Chegg’s mobile application last year, with millions more already taking advantage of Chegg’s platform of various digital services12.Strategic Options for GrowthWith demand for print textbooks slowing down, Chegg has several direction to take its business. The company already has experience, reputation, and branding in the textbook market, but with widely available devices capable of accessing ebook content, the digital publishing business has a low barrier to enter. With several large companies already competing in this market, is the textbook rental business sustainable for Chegg?Offer Services Complementary to Digital TextbooksTextbooks are not likely to disappear anytime soon, so there is still revenue to be earned from college students seeking to buy or rent the books they need for their studies. Sales of digital textbooks have grown rapidly, possibly as much as 70% from 2008 to 201013. Since devices and applications to read ebooks are becoming more common, Chegg needs to differentiate its textbooks from other services by adding value to pull customers away from the bigger outlets like Amazon and Barnes amp. Noble14.Chegg’s advantage comes from its ability to focus entirely on education and college students. All of the supplementary features to the textbook rentals can be custom tailored to helping students. Features like note-taking, highlighting, and bookmarking are standard among ebook readers. However, Chegg can take it further by giving students more complete functionality: sharing, math tools, voice notes, and more. It’s estimate that EverNote, a popular online note-taking application, has over 1.5 million paying customers, demonstrating a high demand for services of this kind15. Many students already use other note-taking tools such as Microsoft OneNote, or simple word processing applications to write notes, but none of these are able to tie directly with the student’s study materials. A coherent set of services to complement textbook rentals would be a significant competitive advantage and valuable to students. This would entice them to use Chegg over competitors like Amazon. The subscription revenue would also create a switching cost because subscriptions help to lock in customers.Partner with Textbook AuthorsMuch like Apple’s drive to revolutionize textbooks with tablet computers, Chegg can partner with publishing companies to offer advanced tools to assist customers with the material. There’s a huge variety of ways that digital applications can enhance the learning experience, and Chegg can develop a set of robust tools for publishers to supplement the material. For example, study guides for the GRE, GMAT, and LSAT can take advantage of interactive practice quizzes and personalized progress reports. The publishers stand to benefit from a well-developed and proven system along with Chegg’s large existing network of students. Chegg, on the other hand, will gain a competitive advantage with exclusive partnerships and supplementary features for their customers. Many publishers already provide very rudimentary supplements to textbooks on their respective websites, but by partnering with Chegg these features would be built in and tied to the digital version of the book, allowing for seamless integration.Abandon textbooks and focus on other servicesChegg also has the option of pulling out of the textbook market and focusing on other services for students. Many college bookstores have reacted to the growth of the rental business and moved quickly to begin offering their own rental services16. Additionally, the past few years have seen student spending on textbooks decline17. This could be due to cheaper alternatives like renting, but also could indicate less reliance on textbooks in today’s classes. In the past few years, Chegg has purchased some large companies that students would be interested in: Internships.com, Zinch, InstaEDU, and CourseRank. The CEO has stated that he intends to turn Chegg into a LinkedIn for students, and with all the recent acquisitions, the company now offers a service to students in all stages of their higher education18. Zinch gives colleges the opportunity to browse student profiles and reach out to them for recruitment, InstaEDU offers tutoring to struggling students, and Interships.com is a marketplace graduating students to apply for internships.Chegg has since discontinued CourseRank since it was purchased, but given the popularity of other websites like RateMyProfessors.com, there is a demand for this kind of service, which can be slotted into the overall Chegg platform. The data from this could be helpful in other tools for students such as classmate collaboration, note organization, or course scheduling. While revenue from digital services is still overshadowed by textbook sales, the percentage of revenue from digital products has grown rapidly from just 7% in 2011 to 26% in 201319. Acquisitions of these companies have been recent and Chegg has yet to integrate them into a cohesive platform, which could be invaluable to college students.RisksThe fact that many students and lecturers prefer internet to bookstores makes online business a good venture for Chegg Company. However, the management still experiences associated risks as discussed.Chegg’s business experiences risks associated with stiff competition from electronic books and low sales. Generally, Chegg based their services on print textbooks. However, the digital market is slowly replacing the print with electronic books. Students too fancy electronic and virtual libraries to the print media that Chegg offers to its customers. Besides, environmentalists become cautious about environmental challenges fuelled by paper and logging. Thereby, the prevailing challenges of the print versus electronic media also place the future of the business in jeopardy. Financial implications affect the operations of Chegg. For instance in the period between 2013-2013, Chegg lost about $180 million. Hence, the economic problems pose the risks that can lead to business bankruptcy or close up.To further increase the sales and market dominance. Chegg rents books to students at cheap rates. Nevertheless, the approach poses a risk in regards to customer loyalty and honesty in handling the books. The company risks losing some books since the current business model lacks clear frameworks for customer tracking and accountability.Changes in school curriculum and innovations create serious business risks to Chegg Corporation. Normally, schools use specific book editions. The ever-changing textbook revisions causes Chegg’s inventory to depreciate further. In addition, the alterations reduce Cheggs time to recuperate book-shipping costs and profit margins. The entry of other service providers like with competing services for example Amazon, Packback and Apple gives have the possibility of declining Cheggs relevance, Specifically, the Kindle by Amazon is a milestone development that surpassed Cheggs relevance in digital and timely accessibility of books. Although Chegg faces numerous risks, it has diversified its operations such as venturing into internships programs.ConclusionSince its foundation, Chegg’s goal has been to help students reduce their costs, and the company was able to achieve this by pioneering the textbook rental business. However, the market is sliding away from them as digital products have taken over and students increasingly take advantage of computers and mobile devices in their studies. Chegg’s future depends on either continuing to secure their niche in the textbook business, or innovating with supplementary digital services that help students along their path to a career.AppendixFigure 1https://www.chegg.com/www.chegg.com/loginFigure 2http://www.chegg.com/study#tbsFigure 3http://www.economist.com/news/united-states/21612200-its-economics-101-why-textbooks-cost-so-muchFigure 4http://www.digitalbookworld.com/2013/bisg-report-a-few-more-ebook-stats/Figure 5http://www.nacs.org/research/industrystatistics/higheredfactsfigures.aspxFigure 6http://www.nacs.org/research/industrystatistics/higheredfactsfigures.aspxFigure 7Figure 8 – Chegg’s breakdown of revenue sourcehttp://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9838104-308430-463224amp.type=sectamp.TabIndex=2amp.dcn=0001193125-14-086390amp.nav=1amp.src=YahooFigure 8http://techcrunch.com/2011/06/27/pew-e-readers-doubles-6-months/Reference1. http://www.businessweek.com/articles/2012-05-31/chegg-a-college-hub-dot-togas-not-include2. Figure 1 https://www.chegg.com/www.chegg.com/login3. Figure 2 http://www.chegg.com/study#tbs4. http://www.digitalbookworld.com/2012/e-textbook-use-down-among-college-students/5. http://news.emory.edu/stories/2014/07/er_student_tech_survey/campus.html6. http://www.project-disco.org/competition/112113-the-changing-textbook-industry/7. http://www.forbes.com/sites/jeffbercovici/2014/02/10/amazon-vs-book-publishers-by-the-numbers/8. http://www.usnews.com/education/best-colleges/articles/2012/08/08/amazon-announces-launch-of-textbook-rental-service9. http://www.apple.com/education/ipad/apps-books-and-more/10.http://www.digitalbookworld.com/2014/how-many-new-customers-will-apple-ibooks-get-from-the-new-ios-8/11. https://www.apple.com/osx/all-features/12. http://www.zdnet.com/article/how-apple-is-sabotaging-an-open-standard-for-digital-books/13. http://biz.yahoo.com/e/140306/chgg10-k.html14. from figure 7, no link now15.http://www.nacs.org/advocacynewsmedia/pressreleases/studentspendingontextbookscontinuestodecline.aspx16. Figure 8 http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9838104-308430-463224amp.type=sectamp.TabIndex=2amp.dcn=0001193125-14-086390amp.nav=1amp.src=YahooWhere is Figure 3,4, 5, 6 in the text?