ELEARNING

THE ENGINE OF THE KNOWLEDGE ECONOMY

JULY 6, 2000

“An investment in knowledge pays the best return.”

-Benjamin Franklin

Brian W. Ruttenbur Ginger C. Spickler

(901) 531-3458 (901) 579-4865
brian.ruttenbur@morgankeegan.com ginger.spickler@morgankeegan.com

Sebastian Lurie, Associate Analyst

(800) 366-7426
sebastian.lurie@morgankeegan.com

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MORGAN KEEGAN ELEARNING INDUSTRY REPORT

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 ELEARNING: THE ENGINE OF THE KNOWLEDGE ECONOMY

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...................................................................................................... 5

SECTION I: INVESTMENT THESIS

ELEARNING FOR THE KNOWLEDGE AGE .............................................................. 10

LEARNING IN THE 21ST CENTURY ........................................................................ 15

SEEKING PROFITABILITY IN THE ELEARNING INDUSTRY ..................................... 20

VALUATION AND PERFORMANCE OF THE ELEARNING STOCKS ............................ 22

RISK FACTORS..................................................................................................... 26

KEY TRENDS AND SIGNPOSTS FOR INVESTING IN THE ELEARNING INDUSTRY ..... 28

SECTION II: A TOPOLOGY OF THE ELEARNING INDUSTRY

A BRIEF HISTORY: THE FORMATIVE YEARS OF THE ELEARNING INDUSTRY ....... 32

THE BUSINESS MODELS OF ELEARNING ............................................................. 37

SECTION III: THE LEARNING MARKET

THE ACADEMIC MARKET .................................................................................... 50

THE CORPORATE MARKET .................................................................................. 66

THE CONSUMER MARKET ................................................................................... 74

SECTION IV: LEARNING TECHNOLOGIES

FROM ABACUS TO LMS: THE EVOLUTION OF LEARNING TECHNOLOGIES ......... 78

NEXT ON THE AGENDA FOR ELEARNING?............................................................ 84

ELEARNING STANDARDS: CREATING A BLUEPRINT FOR THE FUTURE ................ 89

CONCLUSION ................................................................................................................... 98

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MORGAN KEEGAN ELEARNING INDUSTRY REPORT

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EXECUTIVE SUMMARY
The following is a summary of the four main sections of the report. For more information on any of the
topics mentioned in this summary, please refer to the corresponding section in the body of the report.

Section I: Investment Thesis

eLearning will be critical to the success of individuals, organizations, communities and economies in the
dawning knowledge economy. Much touted are the benefits of the Internet for the various functions of
organizations ranging from procurement to marketing to customer service. However, the digital age has
spawned an overwhelming mass of raw information that is frequently difficult to retrieve and to use. We
argue that the critical and distinguishing strength of countries, organizations, and individuals lies in their
intelligence and knowledge in this new economy. Network technology has enabled a proliferation of
customized and timely educational tools that optimize investment in human capital: eLearning solutions
facilitate the delivery of the right information and skills to the right people at the right time. The
globalization of the economy, shortage of skilled workers, free agent mentality, new flexible work
situations (telecommuting, for example) and numerous other factors have created problems not easily
solved by traditional education, spurring the initial growth of the eLearning industry. Companies in this
space are addressing these problems using technology-based
eLearning solutions facilitate learning resources targeting the academic, corporate, and consumer
the delivery of the right spheres with managed, interactive, just-in-time, current, and user-
information and skills to the centric education tools. These factors, and others, set the stage for
right people at the right time. what we believe are exceptional investment opportunities in the
eLearning space.

Although profitable Internet companies are still few and far between, we think that, with rapid top-line
growth and highly scalable business models, select eLearning companies should reward investors with
significant returns.

• Rapid Top-Line Growth: We estimate that expenditures by organizations on education in the United
States alone exceed $750 billion and worldwide reach $2 trillion. Swelling demand for educational
products (particularly U.S. products), a shortage of teachers and other learning resources, and the
centrality of education in the knowledge economy should drive growth in the education and training
industry. Revenue growth for eLearning should considerably outstrip revenue growth in all sectors of
the education industry as eLearning companies capture an increasing share of the industry total. In the
corporate space alone, IDC is projecting eLearning revenues to grow from right around $1 billion in
1999 to $11.4 billion in 2003. We expect growth in the academic and consumer markets to be
significant as well.

• Highly Scalable Business Models: We believe that eLearning companies will benefit from the same
favorable cost structures that other “e” businesses, in theory, will. Whereas traditional education and
training providers have high fixed costs in the form of real estate and high G&A expenses, eLearning
companies are considerably leaner. An eLearning company is
also likely to be better able to leverage its content over a larger We believe that the maturation
body of learners, as they are generally not reliant on live of the industry should bring
instructors for delivery of their services. Over time, we expect declining costs and, therefore,
that more and more content will be developed in the form of increasing profitability.
learning objects that can be assembled on the fly into highly
customized courses, analogous to a just-in-time inventory system. We believe that the maturation of
the industry should bring declining costs and, therefore, increasing profitability.

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Given that most of the players are still losing money, traditional profit-based valuation techniques will not
be effective in the early stages of the eLearning industry. Since first-mover advantage, market share, and
the possibility of leveraging costs will be central to determining the winners in this industry, we think
revenue-based valuations are most germane. However, given the variety of companies competing in the
space and the rapid evolution of the space itself, companies will succeed due to a variety of competitive
advantages. Therefore, treating revenue as a predictor of profitability is an exercise that must be conducted
with care and must be tailored to specific companies.

Section II: A Topology of the eLearning Industry

The eLearning industry has emerged only within the last couple of years, and like many new high-growth
industries, it is highly fragmented and populated mainly with young, unprofitable start-ups and a few of the
more traditional companies in transition to e-companies. Many of the
We expect that today’s younger players are getting financial support from venture capitalists, who
relatively small public have invested a total of $6 billion in education and training companies since
company comp group 1990. Of this figure, $931 million was invested in the first quarter of 2000
will grow significantly alone, with 64% going to eLearning companies in particular. Given this
over the years. growing support from the financial community and assuming continued
product adoption by customers, we expect that today’s relatively small public
company comp group will grow significantly over the years.

eLearning companies are difficult to categorize because they offer such a wide range of products and
services to a number of different target markets, using several different revenue models. In broad terms,
we divide the industry into three main categories: content, services, and technology. However, we have
developed a unique “eLearning matrix” which allows a company to also be characterized by which sector
of the learning market it serves (academic, corporate or consumer) and by what type of revenue model it
employs (contracts, pay-per-use, or ads/sponsors). We also break down the content, services and
technology categories into several subcategories, which enable a more detailed look at a company’s
business model.

Section III: The Learning Market

Our method of analysis divides the overall learning marketplace into three main categories: academic,
corporate and consumer. Each of the three categories is characterized by different drivers of growth that,
when considered in aggregate, suggest the potential for sizable growth in the overall learning market. We
believe that each of the three sectors presents a set of unique challenges to the eLearning vendor
community in terms of providing the products and services that will truly meet the needs of learners.

• The Academic Market: In the U.S. alone, 76 million people (more than a quarter of the population)
are directly or indirectly involved in providing or receiving formal education from the pre-primary
level through the upper reaches of higher education. Educational
expenditures in the U.S. are second only in size to healthcare, and Educational expenditures
represent 7.3% of the GDP. These expenditures have grown by over in the U.S. are second
42% since 1991. While efforts have begun in recent years to use only in size to healthcare,
technology as an instructional tool, we believe that the academic and represent 7.3% of the
world has barely scratched the surface in terms of utilizing the GDP.
Internet to improve academic performance. Growth drivers of the
academic market include

• a growing student population as a result of both changes in demographics and greater rates of
participation in the upper levels of education;
• public demand for a more effective education system that will prepare students to be
competitive in the knowledge economy;
• a shrinking base of teachers, as expertise is better rewarded in the private sector; and
• increasing international demand for U.S. higher education.

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• The Corporate Market: In 1999, U.S. organizations spent more than $62 billion on training-related
resources, salaries, and technology. Other estimates put government spending on training at $40
billion. While the eLearning component of these expenditures totaled only about $1 billion, all
indications are that training in the future will be delivered less and less by instructors in a classroom
and increasingly by networked technology. All areas of the workplace, from the manufacturing line to
the boardroom, are beginning to see this type of shift. For the same reasons that businesses have come
to rely on technology-based systems to manage their human resource and sales efforts, we believe that
the task of managing a company’s training initiatives will increasingly fall to learning systems that are
integrated into the enterprise framework. Some of the key growth drivers for eLearning in the
corporate market include

• a shrinking labor pool and, at the same time, an increasing demand for skilled labor,
particularly in technology-related fields;
• organizations’ need for learning resources that are both accessible and timely; and
• globalization of the enterprise demands flexible training programs.

• The Consumer Market: In the consumer market, we include not only “lifelong learners” pursuing
avocational learning experiences (gardening or wine selection, for example), but also individual
professionals who seek out educational opportunities either because it is mandated for or is conducive
to the purpose of career advancement. The size of the consumer learning market is much harder to pin
down, but we believe that it could eventually prove to be one of the largest growth markets for the
following reasons.

• Consumers who currently use the Internet for informally researching avocational interests will
transition to more formal educational opportunities as the quality of content itself and the
method of delivery improves.
• The flexibility of eLearning will draw those requiring and/or desiring professional continuing
education.

Section IV: Learning Technologies

We believe that education is one of the last bastions of society that has been largely unchanged by the
technological advancements that have revolutionized almost every other facet of life. Certainly we have
seen technology begin to pop up in the world of education and training in recent years. However, in
academia, computers are generally utilized as expensive typewriters, and in the corporate training world,
computer-based training has generally been limited to stand-alone, linear course modules that typically
elicit a groan of boredom from users.

However, as a result of the ubiquity and growing capabilities of the Internet, we believe that technology
will increasingly play a role in learning across all sectors of the market. Web-based collaboration tools
enable people in far reaches of the world to share an educational
experience, while sophisticated learning management systems allow a As a result of the ubiquity and
user’s progress and preferred instructional style to be tracked so that growing capabilities of the
adjustments can be made to a personalized curriculum in order to Internet, we believe that
effectively address learning objectives. Technologies such as these technology will increasingly
are in use today, but are, we believe, a pale version of the play a role in learning across
manifestations of eLearning that we are likely to see in the future. all sectors of the market.

Beyond technologies that are specific to the field of learning, we

believe that advancements in the overall capabilities of networked technology (e.g., broadband access,
wireless networks, etc.) will serve as a catalyst for acceptance of eLearning technologies on a more
widespread basis in all markets. Such improvements will make user concerns about the capabilities of the
technological medium secondary to actually providing meaningful educational experiences.

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Finally, we believe that the emergence of a set of open, industry-wide eLearning standards will be a critical
turning point for the industry as a whole. eLearning standards will allow learning content to be easily
accessed and reused in various formats and will enable the interoperability of learning technologies from
different vendors. Virtually no emerging industry has ever experienced dramatic growth without the
acceptance of a set of common standards on which all product and service offerings are based. We expect
that the eLearning industry will be no different.

Conclusion

We believe that the eLearning industry holds much promise for profitable investments over the coming
years. However, given the immature state of the industry, the wide array of target markets and the
difficulty of keeping up with changes in learning technologies, we believe that discrimination is warranted.
Careful research must be undertaken in order to determine which companies will eventually emerge as
winners, and we believe that this report addresses the issues that will be key in making investment
decisions.

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 SECTION I:
INVESTMENT THESIS
In this section:

• The information age becomes the knowledge age, driving investments in human
capital

• How eLearning addresses the needs of the knowledge age

• The potential for profitable business models in the eLearning industry

• Valuing the emerging eLearning industry

• Cautionary points regarding investments in eLearning

• Our outlook for the industry

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ELEARNING FOR THE KNOWLEDGE AGE

“The biggest growth in the Internet, and the area that will prove to be one of the biggest agents of
change, will be in online training, or eLearning.” – John Chambers, CEO, Cisco

Keeping up with new information and knowing how to use it are “mission critical” activities to businesses
and individuals alike in a market where competition is no longer characterized by the big beating up the
small, but rather by the fast running past the slow. If we define training and education as giving people the
information and skills they need to compete effectively in the marketplace, many traditional learning
methods are anachronisms in today’s fast-paced, information-driven economy. With that realization, we
believe that training and education as we know it today will give way to a new form of preparing
individuals to be productive and thrive in today’s society.

Despite our reluctance to stick the letter “e” in front of anything else, we’ll call this new form of education
“eLearning”, as it is the use of networked technology that will make the learning revolution possible (and
it’s the trendy term these days). However, its name is less important than the role it will play in changing
the way we work and live. Many people have touted the ability of eLearning to provide information to
“anyone, anytime, anywhere”, and although we believe that this is the phrase that best describes it now, this
description is also appropriate for traditional distance learning methods or even the Internet in general. The
above description does not accurately encompass what eventually will be eLearning’s greatest strength.
We believe that the true power of eLearning will be in its ability to bring the right information to the
right people at the right time. Therefore, we would urge investors to think of the “e” in eLearning as
standing for “effective”.

The Growing Learning Industry

It should come as no surprise that learning in America, both in schools and the workplace, is already big
business. According to The Digest of Education Statistics 1999, more than one out of every four
Americans participated in formal education, whether as a student, a teacher, an administrator, or a member
of support staff. Education expenditures alone account
for over 7% of the GDP, making it second in size only to “Until well into the 20th century most
the healthcare industry. We believe that when workers were manual workers. Today
expenditures for both education and training for medium- in this country only about 20% do
and large-sized organizations in the U.S. are added manual work. Of the remainder, nearly
together, the sum reaches over $750 billion. Worldwide, half, 40% of our total work force, are
this total reaches $2 trillion. These numbers do not even knowledge workers.”
include government training, the hard-to-track stats on Peter Drucker
training in small businesses, required continuing
education, or voluntary consumer learning, all of which
would fall into the learning expenditures category.

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 Chart 1
U.S. Learning Market Size
(in $Billions)

$65
Post Secondary
$63 $247
preK-12

Training

Consumer
$382

Source: Morgan Keegan estimates, National Center for Education Statistics, Training Magazine

Despite the often high costs, individuals and businesses are willing to invest great amounts of time and
money in the development of knowledge and skills because of the simple fact that today’s economy is built
solidly on the foundation of human capital. Virtually all of the big players in the technology world (e.g.,
Microsoft, Cisco, Oracle and Sun) have major internal initiatives in the area of eLearning. At the fall 1999
COMDEX show, Cisco CEO John Chambers, after provocatively suggesting that eLearning would be one
of the central catalysts of change in the development of the Internet, went on to say that online learning will
make e-mail usage look like a rounding error. And he’s not the only one. High profile names such as Paul
Allen (Microsoft), Larry Ellison (Oracle), and Michael Milken (yes, that one) have made major personal
investments in the industry.

Workers who neglect to invest in their own intellectual capital do so at their own peril, as they can no
longer rely on a single set of skills for lifetime employ. People starting out in the workforce today can
expect to change jobs, and even careers, numerous times during their working years. The nature of today’s
economy is such that even within one particular job, the responsibilities a worker has and the challenges he
faces are likely to change drastically every few years. Bearing this in mind, it’s easy to see why four years
of education in a person’s late-teens and early-twenties is hardly adequate these days if he or she wishes to
get ahead or, in many cases, just maintain a standard of living.

Propelling the need for technological innovation in education is technology itself. The infiltration of
technology into every part of society has made our lives both easier and more complicated. Yes, we are
able to generate infinitely more information with which to do our jobs and
make decisions in our daily lives, but managing all of that information has "Nothing in
become a cumbersome task, requiring a new and ever-changing set of skills. education is so
Ironically, the sheer volume of information that is available sometimes makes astonishing as the
it even more difficult to find the information we need. The challenge of the amount of
new century, then, is to take these stores of information and build useful and ignorance it
manageable bases of knowledge, which can be tapped at any given time to help accumulates in the
solve any given problem that students and knowledge workers face on a daily form of facts."
basis. In other words, we believe that the much-vaunted “Information Age” is Henry Brooks
giving way to the “Knowledge Age” and that the Internet (and eLearning by Adams (1838-1918)
association) is at the crux of this transformation.

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The Knowledge Age: Investing in Human Capital

The industrial revolution was fueled by physical capital – the machines and the backs of the workers that
made the goods, the factories that housed the machines, and the ships and trucks that delivered the goods to
market. The businesses that succeeded in the first half of the 20th century invested primarily in things you
could touch. Around the middle of the century, however, the tide began to turn and our goods-based
economy began to give way to one based on services – people doing things for other people. Suddenly, it
was not enough to teach a worker one task and put him to work for the rest of his life on an assembly line;
workers had to learn to adapt to constantly shifting demands, both from their employers and from their
customers. The key outcome of the transformation from the industrial age to the information age was a
dramatic shift from investments in physical capital to investments in human (or intellectual) capital.

The main currency of the economy today is unarguably information: information about customers,
information about competitors, information about employees. It’s a chicken-and-egg problem to determine
whether the advent of the computer age brought about the proliferation of information, or if the need for
information drove the rapid development of computer technology (and we suspect it was some of both), but
the fact remains that the computer age and the information age hatched at about the same time. However,
even the notion of the information age, with its vast stores of computer-generated data locked away in
inaccessible databases, is looking a bit
antiquated. Information that is unavailable
to the right people at the right time is of Gary S. Becker, Nobel laureate and professor of
little use. Fortunately, though, that is economics and sociology at The University of
precisely where the Internet comes into Chicago, has estimated that around 70% of a
play. country’s wealth today is in human capital, as
opposed to physical capital. He said, “The beginning
The major impact that the Internet has of this century, in my judgement, should be called,
already had on the world and its promise ‘The Age of Human Capital.’ This is because how
for the future is its ability to connect man well individuals and economies succeed will be
and machines to one another so that determined mainly by how successful they are at
information, whether it is stored in a brain investing in and commanding the growing stock of
or on a server, can be organized into knowledge. In the new economy, human capital is
meaningful knowledge bases that are the key advantage.”
readily accessible to those who can benefit
from them. The result of this connectivity has been our ability to take bits of information and transform
them into knowledge that is infinitely more valuable and powerful to the enterprise. While the overt
changes from the information age to the knowledge age will be more subtle than those from the industrial
age to the information age, we think that it is a shift with major implications. As in the case of the
information age, the knowledge age is still marked by the need for investment in human capital. However,
we believe that the Internet, by creating greater connectivity, is generating marked improvements in the
efficiency and productivity of that human capital.

Hallmarks of the Knowledge Age

It has been suggested that the amount of stored information in the world doubles every 2.8 years. Our
problem is no longer that the needed information does not exist, it’s that specific information is difficult,
sometimes impossible, to locate in the vast networks of technology in which it is stored. It is here where
we believe eLearning meets the needs of the enterprise, for information and skills that are unobtainable by
the workers who need them are virtually useless. Alan M. Webber, in his 1993 Harvard Business Review
article, “What’s So New About the New Economy?” stated “In the end, the location of the new economy is
not in the technology be it microchip or the global telecommunication network. It is in the human mind.”
Students of all sorts must be taught, with the help of technology, the skills to harness the vast and often raw
array of information that technology itself has helped to generate.

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The concepts of eLearning and knowledge management are beginning to make their mark on the
organization, but we believe that the characteristics of the “new economy”
are making the need for these tools even more apparent. What are these “This new economy is
characteristics? Not surprisingly, they generally all relate to the humans based more on brains
within an organization. than brawn – and
moves more on
• Global Economy: The workforces of today’s organizations are broadband byways
increasingly spread out around the globe, creating the need for a than concrete
corporate knowledge base and learning tools that are just as accessible highways.”
(and perhaps even more so) to an account rep in Korea as they are to the Ray Smith, former
CEO in Chicago. Barriers such as time, distance and language must be Chairman, Bell
overcome if strategies devised around the water cooler in the home Atlantic
office are to be communicated to and implemented in far-flung branches,
and vice versa.

• Need for Skilled Workers: Job growth today is occurring at the top end of the food chain, requiring
an increasingly better-educated workforce. According to Futurework, a paper published by the U.S.
Department of Labor, occupations that require at least a college degree are growing twice as quickly as
others, and this is true throughout the economy.

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• Shortage of Skilled Workers: The supply of skilled workers has failed to keep pace with the surge in
demand. Organizations must be ready to take untrained workers and quickly bring them to a point
where they contribute to the organization’s goals. The flip side of this problem is that in today’s fast-
moving business environment, employers can rarely afford the luxury of pulling workers away from
their jobs to attend off-site training events. Learning opportunities must be available in a just-in-time
package.

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• “Free Agent” Mentality: The skilled workers who are participating in the marketplace today exhibit
little of the loyalty to their employers that characterized earlier generations. Whereas career
advancement used to mean moving from the mailroom to the boardroom within
“The rise of Free the same company, today it often means a series of moves to positions of
Agent Nation means greater responsibility in different companies. Recognizing this trend,
that big companies companies increasingly understand their obligation to employees in terms of
no longer have an the cultivation of marketable skills rather than the promise of lifetime
advantage over employment. Also, individuals are now taking more responsibility for their
smaller ones when it own career development by seeking outside educational opportunities, such as
comes to getting the second degrees or certifications, in order to enhance their prospects for
best talent.” advancement. The result of this trend for the organization is that valuable
Seth Godin, intellectual capital may walk out the door with the employee unless efforts
Fast Company have been made to integrate his personal intellectual capital into organizational
intellectual capital.

• Training Viewed as a Benefit: Workers are more likely to leave an organization that does not give
them the opportunity to learn new skills because they know that it does not take long to become
unmarketable in an economy where the skill sets employers demand change so frequently. Futurework
estimates that at 1,600 and growing, the number of “corporate universities” could exceed the number
of traditional universities by the year 2010.

• Stretched Workforce: Putting in hours outside the time and space parameters of the traditional
workday is becoming more commonplace as both work and family responsibilities pull employees out
of the office on a more frequent basis. Workers must have be able to pursue their education and have
access to company knowledge resources whether they’re sitting at their desk, in an airport, or at a
weekend Little League game.

It is largely these issues that have spurred the first wave of eLearning initiatives in the corporate
environment. Likewise, we look for similar factors (time constraints, access to distant resources, the need
for more learning opportunities) to drive growth in the academic and consumer
markets as more products come to market that efficiently meet the needs of We believe that
these groups. Simply put, we believe that eLearning addresses many issues eLearning addresses
that traditional learning methods cannot in today’s marketplace. We will look many issues that
at the markets for eLearning and their growth patterns a little later, but first, traditional learning
let’s outline exactly why it is we believe that eLearning is not just a neat methods cannot in
gimmick, but rather is a fundamentally better way of accomplishing education today’s marketplace.
and training goals.

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LEARNING IN THE 21ST CENTURY
We believe that of all the major components of daily life, formal learning is the one that has, to date, been
least affected by the technological developments of the past 50 years. Advances in technology have
revolutionized communication, transportation, and even household chores, but in fundamental respects, the
process of learning today is much the same as it has been throughout recorded
The ability to adapt history. In an interview in the March 2000 issue of Converge, Don Tapscott,
and learn may have author of Paradigm Shift, The Digital Economy and Growing Up Digital,
never been more describes the current education model as one that has “teachers simply being
urgently required factoid fountains at the front of the class.” Members of today’s wired
than in the 21 st generation, he suggests, are no longer interested in this model. Indeed,
century economy. enlightened educators from ancient times have insisted that the cultivation of the
ability to think, rather than the accumulation of facts, is the proper goal of
education. However, the ability to adapt and learn may have never been more
urgently required than in the 21st century economy, and these abilities can now be fostered in entirely new
ways with the help of networked technologies.

To date, the use of technology in instruction has generally been limited to copy machines, calculators and
overhead projectors. Certainly attempts have been made to utilize technologies such as audio- and
videotapes, and even non-networked computer based training (CBT), in the learning process, but without
mechanisms that tie use of these sometimes expensive technologies to actual improvements in
performance, their broad-scale purchase could often not be justified. In addition, the creation of these older
types of technology-based learning materials is often a time-consuming exercise, particularly when we
consider the fact that they are often not reusable outside of a narrow context.

We believe that the concept of eLearning addresses a number of these issues, and below we will examine in
greater detail the primary benefits of eLearning.

The Benefits of eLearning (or, Everything I Needed to Know I Learned on the Internet)

The main benefits of using networked technology for learning are, we believe, fairly obvious. The
immediacy of information on the Internet is an obvious advantage in comparison to the more traditional
methods of information retrieval. It is certainly a lot easier to flip over to your Internet browser and look
up information on almost any subject in the world than it is to trek down to the local library and hope that
they have a relevant book that’s not checked out. To date, the Internet has been used for primarily this type
of learning: random seek-and-find events that are not connected to your previous or next learning
experience. Some early adopters of eLearning may have taken actual
classes on the Web, but in general, the percentage of the population that has
participated in a formal course of learning that took advantage of all the “Learning how to learn
possible facets of an eLearning experience is very small indeed. We has become the most
believe that is about to change. fundamental skill that
an educated person
As we stated in the beginning of this report, we believe that the true power needs to master, and the
of eLearning lies not in the anyone, anyplace, anytime model, but rather in instrument that enables
its potential to provide the right information to the right people at the right learning in almost every
times and places. This is the yet-to-be-fulfilled promise of eLearning. So field is the computer.”
what does the future of eLearning look like? We think that web-based Dr. Peshe Kuriloff,
integrated learning systems will revolutionize eLearning by enabling Adjunct Associate
personalized, interactive, just-in-time, current, and user-centric learning Professor of English,
tools. These systems will allow all facets of a course of study, including University of
pre-assessment, learning modules completed, practice items, collaboration, Pennsylvania
and testing to be tracked. Adjustments can then be made to the learning
program to make it more effective, and learners (and those to whom they are held accountable) will be able
to monitor progress. We believe that eLearning will embrace the following characteristics.

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• Personalized: Entire programs of study will be customized for the learner. By analyzing the learner’s
objectives and existing skill level, courses will be assembled on the fly that address exactly what the
learner needs to know without wasting time working on areas in which the learner is already proficient
or uninterested. This level of personalization will be achieved by using
small chunks of information, or learning objects, to assemble a course We believe that coming
from the ground up using pre-existing templates. The reusability of manifestations of
these learning objects will make this level of customization feasible in eLearning will truly
terms of both time and expense. We believe that these reusable engage the learner in a
learning objects, the interoperability of which will be based on a set of give-and-take type of
accepted industry standards, will be the key to the creation of an learning that involves
expansive learning economy. We will elaborate on the significance of simulations of real-
learning objects and the standards on which they are based later in the world events and
report. sophisticated
collaborations with
• Interactive: Much of today’s technology-based learning is simply an other learners and the
extension of traditional textbook-based learning, where the user reads instructor.
content from a screen instead of from a page. Today’s interaction
generally consists of the learner being able to click on an unknown word for the definition on a linked
page or the ability to play a short video clip. We believe that coming manifestations of eLearning will
truly engage the learner in a give-and-take type of learning that involves simulations of real-world
events and sophisticated collaborations with other learners and the instructor.

• Just-in-Time: eLearning will move education and training away from the “just-in-case” model in
which learners engage in event-based sessions (i.e., classes) that require learning to take place outside
of the context in which it will be used. Technologies such as electronic performance support systems
(EPSS) will allow users to receive training at the exact time and place that it is needed to complete a
task. Wearable computers will allow augmented reality experiences, in which the user can receive
real-time technology-based assistance in the actual work environment, as opposed to a simulation in a
virtual environment.

• Current: We believe that one of the most under-appreciated benefits of learning via networked
technology, as opposed to earlier non-networked versions of technology-based training (like CD-
ROMs or installed software), is its ability to always present up-to-date material. It is relatively easy
for the content provider to remotely change and update material on a web page based on new
information or new needs of the learner. On the other hand, a CD-ROM
is static, requiring a new product to be distributed anytime there is a
change in the material. We believe that
eLearning introduces
an entirely new model
• User-centric: Finally, we believe that eLearning introduces an entirely
for learning – one that
new model for learning – one that focuses primarily on the needs of the
focuses primarily on
learner, instead of on the abilities of the instructor. With eLearning, the
the needs of the
learner is able to participate in custom-fitted learning experiences that
offer the exact material she needs in the form in which she learns best. learner, instead of on
the abilities of the
The instructor, if there is one, goes from being the “sage on the stage” to
the “guide on the side.” We believe that this model of learning imparts instructor.
more responsibility to the learner, resulting in a richer and more dynamic
experience.

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If Aristotle Had Been an “eInstructor” . . .

We believe that the above attributes certainly make eLearning an exciting proposition for the learner.
However, the learner is not today (and we believe never will be) alone in the learning process. The
instructor, whether it be a second grade teacher, a university professor, or a corporate trainer, also plays a
key role. In our opinion, eLearning holds similar promise for making the work of an instructor easier and
more effective.

• Leverage: One benefit, in particular, that eLearning lends to the process of teaching is leverage of
time and resources. In live collaborative learning environments, a teacher can only respond to so many
students in a given amount of time. Also, the number of students that can participate in the class will
be limited by those who can make the time (or simply fit in the room). We might place the leverage
we can get on instructors on a continuum, using Aristotle as our example instructor. So, when
Alexander the Great hired Aristotle as his tutor, little leverage on the teacher was attained. More
leverage was achieved when Aristotle lectured in his Lyceum, still greater leverage would have been
possible if Aristotle could have led a synchronous Internet seminar, and potentially the greatest
leverage could be achieved with asynchronous Internet modules recorded by Aristotle. While perhaps
not on the same level with Aristotle, in-demand business experts such as Tom Peters and Peter Drucker
are leveraging their time and expertise by developing eLearning modules.

• Organization: Even in a traditional learning environment, such as a college classroom, eLearning has
the potential to greatly aid instructors in the organization of a class. Web-based tools are now on the
market that give an instructor the ability to centralize the management of a class on the web. Such a
web-based forum allows the archival of notes (or even video files of lectures), communication with
students outside of class, and possibly even the ability to monitor student performance. At the
corporate level, a web-based learning system can track an employee’s progress through a training
program and measure resulting changes in performance, enabling the corporate trainer to more
accurately calculate ROI for training programs.

Standards are Key to the Success of eLearning

In order for any of the above benefits of eLearning to be realized, however, we believe that a set of
eLearning standards must be developed and accepted by the vendor community. In order to achieve true
sophistication in terms of understanding the objectives of a learner and addressing those objectives with a
highly customized program of learning, all of the components of a technology-based learning system must
be speaking the same language. In other words, if I have a web-based
content management tool from one vendor, but another vendor develops the
type of content modules that are crucial to meeting my learning objectives, I We believe that a set
want to know that my tool can search the various content repositories on the of eLearning
web and be able to easily identify and deliver the proper materials, regardless standards must be
of their origination. This requires that units of content be labeled to convey developed and
information about themselves – things like subject matter, author, vintage, accepted by the vendor
format, and even price. It is these labels that will form the basis of the community.
standardization effort and allow an organized “digital marketplace” for
learning to develop.

While the standards development process (which is being conducted by various groups with an interest in
their existence) is still underway, it is close to being finished, and eLearning vendors are beginning to focus
on how standards will affect the products and services they offer. We believe that companies that do not
work on implementing standards in their offerings will be left out of the growth of the industry, making
examination of this issue crucial to the analysis of investments in the eLearning industry. In Section IV,
which focuses on learning technologies, we provide further discussion of standards as they relate to
eLearning.

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Who are the Learners?

While some might think of learners as being students in the traditional sense, a learner today might be just
as likely to be found carrying a briefcase as a backpack. And learning is not relegated just to those tasks
assigned by a teacher or trainer, but also takes place on a learner’s own time, when reaching personal
milestones (whether in a professional or avocational sense) is the goal. While we analyze the three sectors
of the learning market in greater detail in Section III, below we quickly review some of the factors that are
driving people in all three markets to seek out educational experiences.

• The Academic Market: With 76 million people directly or indirectly With 76 million
involved in providing or receiving formal education, the academic people directly or
market is huge. As a percentage of GDP, educational expenditures have indirectly involved in
held steady at 7.3% (representing the second largest component of GDP) providing or receiving
for about the past ten years, but the dollar figure has grown by over 42% formal education, the
since 1991. We expect strong growth in expenditures throughout each of academic market is
the market’s segments, driven by the following factors. huge.

Pre-Primary
• Recognition of the advantages conferred by pre-primary education
• Growth in the number of working mothers

Primary and Secondary Schools

• Sustained school-age population growth as a result of the “baby boom echo”
• Increasing sponsorship of technology and expertise by the business community
• Technologically-inclined and ambitious kids
• Increased involvement by parents
• Growing shortage of teachers
• Government determined to tackle the digital divide

Higher Education
• Knowledge economy offers superior compensation for highly-educated workers
• Growth in adult learners
• International demand for U.S. higher education
• Institutions reaching capacity

• The Corporate Market: While actually counting the number of people who are involved in
workplace-related training is virtually impossible, it is a little easier to come up with a dollar figure for
the size of the market; according to Training magazine’s 1999 Industry
According to Training Report, approximately $62.5 billion was budgeted for formal training by
magazine’s 1999 U.S. organizations, which was about 24% higher than it was in 1993. Of
Industry Report, this, approximately 44% is spent on trainer salaries, 24% goes to outside
approximately $62.5 providers of training products and services, and the rest is spent on things
billion was budgeted like facilities, materials, hardware, seminars and conferences. The main
for formal training by part that we are concerned about, of course, is the 24% that is outsourced,
U.S. organizations. which currently represents about a $15-$17 billion market. More
specifically, we are looking at the eLearning component, which,
according to IDC, totaled a little over $1 billion in 1999.

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 Chart 3
U.S. Corporate eLearning Revenue by Component, 1997-2003E
12

10

8
$Billions

0
1997 1998 1999 2000E 2001E 2002E 2003E

Content Learning Services Delivery Solutions

Source: IDC

IDC predicts that spending on outsourced services, content and IDC is currently
technology for training will grow from approximately $14.9 billion in projecting the
1998 to $33.7 billion in 2004. While information technology (IT) corporate eLearning
training currently dominates the mix, outsourced business skills training market to grow to
is expected to reach parity by 2004. IDC is currently projecting the $11.4 billion in 2003.
corporate eLearning market to grow to $11.4 billion in 2003,
representing an 83% CAGR since 1997.

Primary Growth Drivers

• The demand for skilled workers will overwhelm the internal resources of companies to train their
employees; competitive pressure demands quick response to this disparity.
• The global economy means that an organization’s workforce may be spread out all over the world,
creating difficulties in keeping all members up to date with the latest developments.
• The U.S. government is actively pushing integration of technology in its workforce.

• The Consumer Market: The size of the consumer learning market is a little harder to pin down than
that of the academic or corporate markets. However, we believe that in time it could actually prove to
be one of the largest targets for eLearning vendors.

Primary Growth Drivers

• The Internet is increasingly used for researching avocational interests and should transition to
more formal educational opportunities.
• Instructional resources are easier to find and use when they are part of a learning portal.
• The flexibility of eLearning will draw those requiring and/or desiring professional continuing
education.

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SEEKING PROFITABILITY IN THE ELEARNING INDUSTRY
We will be the first to admit that several key factors caution against arguing for, or making predictions
about, the profit potential of eLearning companies.

• Actuality is the best proof of possibility, and few of the publicly traded pure play eLearning companies
are operating in the black. In fact, as these companies strive first and foremost to gain market share,
many suffer widening losses.

• Making general assertions about the group as a whole may be unwise to the extent that the universe is
comprised of hundreds of companies with divergent business models. What is true concerning the
fixed and variable cost structures of technology providers may not be true of content or service
providers.

• As we have intimated several times in this report, the health of the space may depend in large part on
the emergence of technological and content standards. Failure of such standards to take hold on an
industry-wide basis would not only inhibit the growth of the whole sector, but would make comparison
of eLearning companies very difficult for users of eLearning products and investors alike.

• The fact that eLearning companies are focusing almost exclusively on top-line growth at the moment
(as we indeed think they should) may have important consequences. Only a few companies--those that
are cash rich--may survive, thus reducing earnings visibility. The companies that make it to the top
may not be those with the best business models or the most advanced technologies but those with the
deepest pockets and the best luck with the capital markets. Also, “buying revenue” with deep discounts
and/or aggressive marketing may distort attempts to evaluate companies and may even undermine their
long-term profitability. By burying revenue-generating costs deep in the income statement in line items
such as G&A, companies may understate their true operating costs. Moreover, eLearning may
condition customers to subsidized products, and attempts in the later stages of the industry to remove
discounts may cause newer customers to resent older customers, and longstanding customers may not
stand for price increases. More seriously, profitability in contested markets may be indefinitely
deferred as cash-rich companies, in an effort to win market share, undercut those seeking normal profit
margins. So long as the capital markets are generous, companies can interminably “delay
gratification.”

Having assembled these warnings, and in addition, cautioning the investor to consult our Risk Factors
section for further considerations, we still argue that investors should be excited about this space. We
believe that while the “land grab” strategy does carry real risks, it is the right one because in the formative
stages of this fragmented industry, the number of companies that exist and that will shortly come into being
greatly exceeds the number that can survive. We think the winners by and large will be those that establish
or leverage brand names and become leaders in their respective segments.
Also, more importantly, as we argue below, we think that eLearning We think that
companies have the capacity to leverage their costs in a way that their brick- eLearning companies
and-mortar competitors do not. Therefore, it makes sense for these have the capacity to
companies to aggressively ramp up revenue in the hunt for profitability. leverage their costs in
a way that their brick-
It is no surprise the investment promise of eLearning stocks, like other “e” and-mortar
companies, lies in the purported scalability of their business models. competitors do not.
Scalability suggests that small incremental costs are associated with growth
in revenue. Or, conceived of differently, a higher proportion of a company’s
costs are fixed as opposed to variable so that as revenue ramps up, a company’s profitability increases
dramatically. For example, while Amazon.com has to spend gobs of cash building its infrastructure and
promoting its goods and services, it does not, at least to the same extent as its brick-and-mortar rivals, have
to purchase expensive real estate, hire workers, and so on, when it wants to enter a new market. In theory,
after Amazon covers its overhead, it should cost considerably less to sell each additional book or CD versus
its offline competitors. In this sense, Amazon.com (and similar companies) should be able to leverage its
resources and attain superior returns on investments vis-à-vis its brick-and-mortar competitors.

Page 20 of 107
We think that eLearning companies should enjoy many of the same sort of leveraging opportunities. In the
long run, companies should be able to enjoy better cost structures on some or all of the following: real
estate, inventory, revenue per worker, quicker time to market, and so on.

Hand in hand with the idea of scalability is the idea of the massive market
opportunity that the Internet provides. For example, only those qualified The Internet is a medium
more perfectly adapted to
students willing to live in Nashville are able to get an MBA from
developing, advertising,
Vanderbilt’s Owen School. Universities offering MBAs over the Internet,
on the other hand, can attract qualified students from all over the world. In and delivering
an important sense, the Internet is a medium more perfectly adapted to educational products than
developing, advertising, and delivering educational products than it is for it is for books, CDs, and
books, CDs, and apparel. In general, educational products can be digitized apparel. In general,
educational products can
without loss. The eLearning module retrieved by the Mary Kay salesperson
in Siberia will serve her well while the digitized image of a warm coat from be digitized without loss.
Lands’ End will not cut the frigid winter winds. The take-away point is that
the Internet allows education companies to hawk their goods and services to clients anywhere and anytime.
The acquisition of new customers, in the long run, should cost Internet companies less than legacy
companies. And lastly, the Internet is especially powerful when a company’s products are wholly digital or
knowledge/information based.

Clearly, Internet companies do not exist in a business Wonderland where these scalable business models
come free. Indeed, we have already discussed some of the costs and dangers associated with buying market
share. Also, having a greater proportion of costs fixed, with heavy required investments in technology
infrastructure, IT workers and marketing, Internet companies may often have higher breakeven levels than
offline counterparts. It should be no surprise that higher risks attend higher anticipated rates of return.
Nonetheless, we believe that due to the types of reasons articulated above, eLearning companies, like other
Internet companies, have the potential to attain excellent levels of profitability.

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VALUATION AND PERFORMANCE OF ELEARNING STOCKS
Valuation of stocks within the high-growth Internet sector is a science of
We are currently enormous imprecision. While companies are currently being valued on some
valuing pure play multiple of revenue, we believe that valuations will eventually be based on a
eLearning companies multiple of cash flow or at least gross operating cash flow. We are currently
on a multiple of valuing pure play eLearning companies on a multiple of enterprise value
enterprise value (market capitalization plus debt less cash) to projected revenue. Based on
(market capitalization this metric the average eLearning company is trading at 9.2x estimated
plus debt less cash) to calendar 2000 and 4.6x estimated calendar 2001 numbers. There are many
projected revenue. questions you as an investor may be asking.

Why should pure play eLearning companies be valued today on

multiples of enterprise value to forward revenues? We believe that using revenue multiples for the
valuation of the pure-play eLearning companies is justified because they are the best available predictor of
potential profitability. Given that more than 300 companies compete in this industry, we believe it is key to
grab market share at this early stage. Also, as we have argued, getting to scale as quickly as possible and
building brand identity are of paramount importance, and revenue growth is central to both. Of course,
other crucial factors such as management quality, strategic alliances, and aggressive marketing campaigns
play into market positioning and brand building. However, the best quantitative measure of progress in the
land-grab battle remains revenue and trends in revenue. We believe that companies that do not gather
market share early in the game will not be around in a few years when the valuation parameters shift to
multiples of earnings.

Should these companies always be valued in this manner? No, is the short answer to the question.
While in the short term we believe this is the most effective way to quantitatively measure which
companies are gaining market share, the problem with valuing companies on a multiple of enterprise value
to projected revenue over the longer term is that revenue can be bought. Revenue can be bought primarily
in two ways, first by using aggressive sales and marketing tactics, and secondly through deep discounting
or giveaways. Many companies are laden with cash from the professional investment community and are
spending it primarily on marketing and sales in order to grow the top line. We believe that over the long
term, companies will be valued on the viability and profitability of their business models as measured by a
multiple of operating cash flow.

Why are there such big differences in group multiples? For our analysis, we have broken the eLearning
industry into three distinct groups: content, services and technology. A description of the types of
companies we would include in each group can be found beginning on page 37. (For purposes of
comparison, we are excluding DigitalThink when calculating the average multiple of the content group.
We have done this for two reasons: 1) the company’s large multiple tends to skew the overall multiple for
the group, and 2) we believe that an argument could also be made for including the company in either of
the other two categories.) There is a large spread in group multiples, primarily between the technology and
content groups versus the service group. Pure play eLearning companies that fall into our technology
category are trading on average at 10.7x estimated 2000 enterprise value to revenue, which is slightly
above the content group multiple and far exceeds the service group multiple. We believe there are several
reasons for this differential.

1) Market Cap: We have heard over and over again that “content is king”. In the realm of investments,
however, we believe that market capitalization is king. As all the unemployed small cap or micro cap
portfolio managers will tell you, Wall Street has rewarded the larger market cap companies. eLearning
is an emerging industry and no company has more than a $2.5 billion market value (still relatively
small in the bigger scheme of things). However, the larger market cap companies have well
outperformed the smaller. Importantly the technology group has the largest average market
capitalization of all the groups.

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2) Coverage by Sell-side Analysts: In many cases, the companies with the most sell-side support have
performed the best over the last year. In our opinion the eLearning industry, much like many other
emerging industries, is affected by the “herd mentality”. Strong sell-side support increases a
company’s profile among investors, often resulting in better stock performance. We would note that
with the exception of SmartForce (which we include in the technology category), few eLearning
companies have yet to be picked up by any sell-side firms other than the initial underwriters.

3) Technology Companies the First to Benefit from the eLearning Growth Wave: Using the trusty
razor/razor blade model as an illustration of the eLearning industry, technology companies can be
viewed as providing the razor, whereas services and content companies supply the razor blades. In
order to implement an eLearning strategy, a backbone (the razor) must be in place. The backbone of
eLearning is technology. We believe that as customers get past the point
of making major investments in the technology-based backbone of their
In our opinion, select eLearning system, they will begin to spend money on the content and
companies in the services (razor blades) that will actually make the technology investment
technology category worthwhile. In our opinion, select companies in the technology category
will maintain a will maintain a premium to the rest of the group, but only those that
premium to the rest of continually stay one step ahead of the pack in terms of innovation in the
the group, but only field of delivering and managing eLearning for the enterprise. Being a
those that continually leader in the technology field will not be easy – it will require significant
stay one step ahead of investments in R&D. This is why we suggest that only a select group of
the pack in terms of technology companies will maintain a premium to the eLearning group as
innovation in the field a whole. The rest of the companies in the technology group will continue
of delivering and to offer the products that have long since become commodities. These
managing eLearning companies will compete solely on price and therefore will not warrant a
for the enterprise. premium valuation.

4) Visionary and Capable Management: Management that (a) can articulate a global vision by
technological revolution and, more particularly, the value created by transforming knowledge
resources by eLearning, and (b) can explain and execute these conceptions, will garner the favor of the
investment community.

5) Key Alliances: We think investors will look for substantial relationships between established players
& eLearning companies. Such relationships can supplement young companies’ core strengths,
establish advantages of scale and size, and validate technologies. However, we would differentiate
these types of alliances with those that are made simply for press release purposes.

Why are pure play eLearning companies compelling as an investment opportunity over the long
term? We believe that three key issues will drive the eLearning sector over the long term.

• The shift to a knowledge economy has made investments in intellectual/human capital more crucial.

• The learning market (corporate, academic, consumer) is big and getting bigger.

• Given eLearning’s characteristics of scalability, easy access, and timeliness, we believe that the
eLearning model is fundamentally better than that of its traditional education/training counterparts.

Page 23 of 107
 eLearning Comparable Table

Price % Chg %Chg Mkt Cap Enterprise

Company Ticker 07/05/2000 Year High Year Low YTD LTM (Mil) Value* Revenues** Enterprise Value / Revenues # of Analysts

CONTENT LTM CY2000E CY2001E LTM CY2000E CY2001E

ABOUT BOUT $30.58 $105.75 $19.50 -65.9% -35.6% $541.2 $495.2 $26.9 $94.5 $179.3 18.4 5.2 2.8 6
DigitalThink DTHK $35.00 $62.00 $15.00 34.6% 34.6% $1,151.5 $1,096.5 $7.2 $18.6 $38.7 152.3 59.0 28.3 4
Lightspan LSPN $5.81 $25.38 $4.88 -58.5% -58.5% $256.9 $155.9 $16.9 $44.3 $62.9 9.2 3.5 2.5 3
Prosoft POSO $15.00 $29.88 $2.00 44.6% 471.4% $286.5 $282.5 $11.7 $18.0 $30.6 24.1 15.7 9.2 3
Provant POVT $5.50 $26.00 $2.88 -78.2% -62.7% $115.5 $161.5 $211.0 $216.8 $237.3 0.8 0.7 0.7 6
SkillSoft SKIL $13.38 $33.50 $8.50 -25.7% -25.7% $176.6 $164.6 $4.2 $16.2 $42.5 39.2 10.2 3.9 3
Content Average -24.9% 53.9% $421.4 $392.7 40.7 15.7 7.9
Content Average Excluding Digital Think -36.7% 57.8% $275.3 $251.9 18.3 7.1 3.8

SERVICES LTM CY2000E CY2001E LTM CY2000E CY2001E

Learn2.com LTWO $2.13 $9.50 $1.50 -35.2% -57.5% $112.2 $108.2 $13.6 $30.0 8.0 3.6 2
SmarterKids.com SKDS $1.66 $17.13 $1.50 -77.2% -89.4% $34.0 $18.0 $5.4 $40.0 $91.0 3.3 0.4 0.2 3
VarsityBooks.com VSTY $1.44 $13.13 $0.63 -90.8% -88.0% $22.3 -$5.7 $10.6 $33.5 $55.0 (0.5) (0.2) (0.1) 3
ZapMe! IZAP $2.88 $13.75 $1.75 -66.7% -72.6% $126.5 $46.5 $2.5 $34.6 $116.5 18.6 1.3 0.4 3
Services Average -67.5% -76.9% $73.7 $41.7 7.3 1.3 0.2

TECHNOLOGY LTM CY2000E CY2001E LTM CY2000E CY2001E

Centra CTRA $9.44 $40.38 $5.50 -71.8% -71.8% $227.4 $157.4 $8.6 $18.1 $31.0 18.3 8.7 5.1 4
Click2Learn.com CLKS $18.06 $23.00 $3.88 62.4% 325.0% $265.5 $246.5 $34.7 $42.8 $59.7 7.1 5.8 4.1 3
eCollege.com ECLG $4.75 $17.50 $2.63 -56.6% -64.5% $73.6 $58.6 $4.7 $14.7 $38.9 12.5 4.0 1.5 3
Saba SABA $19.00 $41.00 $13.25 -42.4% -42.4% $828.4 $808.4 $6.7 $30.6 $67.6 120.7 26.4 12.0 4
SmartForce SMTF $46.19 $60.88 $14.50 37.9% 160.2% $2,249.3 $2,181.3 $197.8 $157.5 $255.0 11.0 13.8 8.6 11
Vcampus VCMP $8.31 $19.00 $2.25 166.0% 12.3% $67.3 $65.3 $11.5 $12.0 $20.8 5.7 5.4 3.1 1
Technology Average 15.9% 53.1% $618.6 $586.3 29.2 10.7 5.7

Pure Play Average -25.5% 10.1% $371.2 $340.2 25.7 9.2 4.6

*Enterprise Value is calculated by taking market value and adding debt and subtracting cash
**Morgan Keegan and company estimates

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Recent Performance of eLearning Stocks

Year-to-date stock performance data of the pure play eLearning companies show us that the content group
(down 37%, excluding DigitalThink) and the services group (down 68%) have underperformed both the
NASDAQ (down 5%) and eLearning technology group (up 16%). However, the stock performance trends
of the technology and content groups are somewhat more flattering when viewed over the last 12 months.
These sectors both increased more than 53% and 57%, respectively, over the 12- month period compared to
a 47% rise in the NASDAQ.

Why have the content and services stocks underperformed technology stocks since the beginning of
the year? As we argue in our report, the eLearning technology companies provide the “backbone” of the
industry and therefore have been the first group to experience rapid and potentially predictable revenue
growth. We believe that once the technology backbone is better established this sector will undergo a
dramatic consolidation, leaving three to six leading technology companies. We foresee that these leaders
will be able to sustain superior operating margins, and, in turn, superior stock price returns. While we
believe that the content and services sectors will see similar consolidation, we think the industry can
support many more of these types of companies. In the long run, we believe that stocks in the content and
services groups will match or even exceed the performance of the technology group.

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RISK FACTORS
As with all new industries that have high growth potential, the eLearning industry presents investors with
several risk factors that must be understood before making investments in companies within the industry.
Below we list the major issues that we believe pose the most threat to eLearning as a viable investment.

• Young Industry in Flux: While learning itself is certainly not a new concept and learning as a for-
profit venture has been around for a least a few decades, businesses that attempt to profit from
technology-mediated learning have appeared on the scene only within the last few years. As a result,
there is a great deal of uncertainty surrounding the industry and its participants. Many traditional
education and training companies are making significant changes to their business models to capitalize
on the opportunities in eLearning, while many more companies are what
While we believe that we would call “born on the web” and have little to no operating history to
revenue growth rates evaluate.
for many companies
within the industry are • Revenues and Earnings Minimal (or Nonexistent): Many of the
likely to be significant players in this industry are recent entrants to the market, have very small
over the next few years, revenue bases and are generally still losing money. Even the more
the vast majority are traditional education and training companies are experiencing upheavals in
still one to two years their revenue streams as they make the transition to an Internet-based
away from profitability model. While we believe that revenue growth rates for many companies
at the very minimum. within the industry are likely to be significant over the next few years, the
vast majority are still one to two years away from profitability at the very
minimum.

• Confusion Among Customers: Although few investors (or even analysts) would claim to have a
solid understanding of the dynamics at play in the eLearning industry, the investment community
actually has been more exposed to information about the overall marketplace than many of the
customers that vendors are targeting. There seems to be widespread confusion about the various
products and services that vendors are offering. While many companies claim to be a “one-stop-shop”
for learning needs, reality often falls somewhere short of that promise. We believe that many potential
buyers are holding off on making major purchases until they have had a chance to sort through the
hype and gain an understanding of what vendors really have to offer.

• Technology Ahead of Content: The technology involved in eLearning has made dramatic strides
over the past few years. The content that is delivered via the technology, however, is still several steps
behind in terms of sophistication and relevance to knowledge workers’ needs. While we look for the
coming years to deliver a mature content development market in which a premium is placed on high-
quality, specialized material, the content offerings of today are quite simplistic in comparison,
representing more of a commodity-type good. We believe that the biggest risk in delivering this type
of content over a sophisticated technology-based platform is that users may become disillusioned with
the concept of eLearning before it has had a chance to mature into the powerful tool that we believe it
can be.

• Resistance to Using Technology in Learning: Although we believe that this is less of an issue in the
corporate world than in the academic one, both markets face reluctance by certain groups of people. In
academia, for example, there has been resistance from some members of college faculties, as the
advent of technology-mediated instruction introduces uncertainties into the professor’s traditional role.
Likewise, in the corporate world, trainers may see their job as being usurped by enterprise learning
systems that do the work of organizing and delivering training. While we believe that the benefits of
eLearning as a supplement to traditional learning methods are becoming more evident with the passing
months, we do recognize that there will always be opposition from some camps to using technology in
the pursuit of learning.

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• Lack of eLearning Standards: Earlier in the report, we presented a detailed review of why we
believe that the development and adoption of a set of standards for the eLearning world is so
important. Here we feel that it is prudent to restate the fact that this body of standards is still in the
development stage and even upon completion is not guaranteed
acceptance by all members of the industry. We believe that customers
We believe that
will only develop the comfort needed to make significant eLearning
customers will only
purchases when they are free from the concern that a certain technology
develop the comfort
or library of content will be rendered obsolete with the next product
needed to make
release. We believe that only the industry-wide adoption of a set of
significant eLearning
standards, which create interoperability between tools and content, will
purchases when they
create this assurance.
are free from the
concern that a certain
• Legal Issues: As learning is essentially the transfer of knowledge
technology or library of
from one person to another, there will always be issues of intellectual
content will be rendered
property involved in the process of delivering instruction. Colleges and
obsolete with the next
universities face this problem in dealing with the research products of
product release.
faculty members, and eLearning vendors will have to deal with it as
well. Particularly when repurposing the instructional content of a
professor who is employed by a college or university for an eLearning medium, companies will have
to deal with the issue of who owns the rights to the content – the professor, his employer, or the
eLearning company. As eLearning becomes more prevalent and begins to draw more content from
recognized “experts”, the issue of intellectual property is likely to be raised often.

Page 27 of 107
KEY TRENDS AND SIGNPOSTS FOR INVESTING IN THE ELEARNING INDUSTRY

• Companies based on an eLearning model will be more successful than their counterparts in the
traditional education and training industries. We believe that using networked technology to
deliver or supplement learning resources is a fundamentally more effective way to educate and train
citizens of the 21st century. The characteristics that we have used several times to describe eLearning –
scalability, accessibility and timeliness – will drive its adoption as a mission-critical component of
business and education. We continue to assert that there will always be a role for traditional learning
methods, but only as one component of a more complete program that includes networked learning
resources.

• Capital will continue to flow into the learning market. We strongly believe that investors are
beginning to latch on to the idea of learning as a growth industry. To that
end, we look for private investments in the education and training sector
We look for private
(including non-eLearning companies) to continue to grow in 2000,
investments in the
ultimately quadrupling the dollars invested in 1999. This capital will serve
education and training
as the fertilizer needed for smaller companies to grow into the larger
sector (including non-
companies that will look to the public markets for additional infusions over
eLearning companies)
the coming years. We believe that the public comp group will be
to continue to grow in
significantly larger in a year’s time.
2000, ultimately
quadrupling the dollars
invested in 1999. • Having a recognizable brand name will be more important than
being first to market. While some have touted being first to market as the
best indicator of long-term success, we do not necessarily believe this is so.
In some cases, we believe being an early entrant to the market may actually be a hindrance, as a user’s
early experiences with eLearning may not live up to all the hype. The factor that we do believe will be
crucial to a company’s long-term viability is establishing (or aligning with) a recognizable brand name.
We believe that for some companies, being first to market will result in becoming a known brand
name, but other factors are also likely to come into play in determining who is to become the Yahoo!
of the eLearning industry.

• Alliances and partnerships will continue to form, but with more meaningful results. And
speaking of Yahoo!, the trend in the eLearning industry, as in many other sectors of the “new”
economy, is to announce as many alliances and partnership agreements with big-name companies as
possible. This, in essence, is an attempt to establish a brand name (or at least to bask in the reflected
glory of someone else’s). While a handful of these announcements may actually have some
significance, we chalk most of them up to an attempt at generating
hype. Rare (and probably nonexistent) is the “exclusive” The larger technology
agreement with any major technology company. However, we companies will play a role in
believe that as the players with a clear edge on the competition the growth of the eLearning
begin to emerge from the pack, we will see select cases of industry, and we believe it
eLearning companies formalizing meaningful agreements with will be through relationships
larger brand-name companies. The larger technology companies with companies that have
will play a role in the growth of the eLearning industry, and we already demonstrated success
believe it will be through relationships with companies that have in the field.
already demonstrated success in the field.

Page 28 of 107
• The next several years will be marked by rapid consolidation of the industry. In any one niche of
the eLearning industry today, there are at least a half-dozen companies that each want to claim the
market for itself. Many of these companies will simply disappear into the far-reaches of cyberspace,
while others will join up with partners or the competition in mergers designed to increase vertical or
horizontal market share. Again, we would emphasize that the established technology companies are
not likely to sit idly by while a few young upstarts take control of a rapidly growing industry, leading
us to believe that the Ciscos and IBMs of the world will be active participants in the M&A frenzy to
come.

• Content will eventually be crowned king. As much as we hate to use the phrase, we do believe that
five years out, content will indeed be king. The field of companies offering eLearning’s technological
backbone will have been whittled down to just a few players who are consistent and effective
innovators. The services field is likely to undergo a similar (if less dramatic) transformation. In
contrast, we believe that there will be ample room in the field of content creation for a number of
providers developing highly specialized content. No longer will end-users be looking for a $19.95
version of “Word Processors for Dummies;” buyers will instead put a premium on content that truly
addresses the needs of their organizations. Because we believe that content in the not-too-distant
future will be delivered in a learning object format – capable of being sold for uses in a multitude of
contexts – the content development sector will likely be much more profitable than it is today.

• We will see an overall maturation of the eLearning industry. In our opinion, many of the current
ailments of the eLearning industry will be cured with the simple passage of time. As with any
emerging industry, there are too many players chasing the same
goal in too many different ways. The market will determine
who will succeed and who will end up as just a footnote in sell- The market will determine
side analysts’ industry reports. We believe that as standards who will succeed and who
begin to take hold, buyers will gain the confidence to make will end up as just a footnote
major purchasing decisions without fear of near-term in sell-side analysts’ industry
obsolescence. It will be at this point that the eLearning industry reports.
will gain widespread acceptance and will experience the growth
we believe is possible.

Page 29 of 107
MORGAN KEEGAN ELEARNING INDUSTRY REPORT

Page 30 of 107
 SECTION II:
A TOPOLOGY OF THE ELEARNING INDUSTRY
In this section:

• A (brief) history of the eLearning industry

• Private equity investments in the eLearning industry

• eLearning business models characterized

• Descriptions of the companies that made our “pure play” list

Page 31 of 107
A BRIEF HISTORY: THE FORMATIVE YEARS OF THE ELEARNING INDUSTRY
The eLearning industry today is still quite small in terms of revenues (and practically non-existent in terms
of profits), but is populated with literally hundreds of companies already and more are jumping into the
fray everyday. As we might expect from any industry with an “e” prefix, the eLearning industry is still
very immature and highly fragmented. With a tiny public comp group and a mass of private companies
each wanting to take a place in the public markets, the next several years will see more dramatic changes in
the industry landscape, including

• growing private investments,

• more IPOs,
• increased partnership and alliance activity followed by formal mergers and acquisitions, and
• a shake-out of the players that got edged out by competitors.

The formative years of the
eLearning company will be
marked by a great deal of
change for all the players
involved.
What the industry will look like in a few years after all this has taken
place is anybody’s guess, but as the old saying goes, the only thing
certain is change. The formative years of the eLearning company will
be marked by a great deal of change for all the players involved. Our
goal is to furnish the information that will help investors capitalize on
this change, regardless of which form it takes.

First of all, though, where did all these eLearning companies come
from? While some began as traditional learning companies that adopted a business model with more
relevance to the digital age, many others began in the nursery of the net economy – the proverbial garage
(or dorm room or living room). Below we’ll review each type and give our analysis of how each will fit
into the eLearning marketplace.

Teaching Old Dogs New Tricks

Several of the companies that we include in the eLearning group today emerged from the more traditional
education and training sectors. While the core competency of these companies (educating people) did not
change with the advent of the Internet age, their methods of reaching their customers had to if they were to
address issues such as scalability, access, and timeliness. The traditional model of educating people via a
live instructor lacked all three of these characteristics; an individual can only
teach so many people at a time, is not available anytime and anywhere to the We believe that only
learner, and may not be up to date with the most recent information. eLearning can be scaled
Likewise, even a technology-based delivery medium like a CD-ROM does almost infinitely, is
not quite meet these standards, as it must be physically distributed to the user available anywhere
(who may be on the other side of the world) and is rendered obsolete when there is an Internet
any new information surfaces. We believe that only eLearning fits the three connection, and can be
characteristics: (1) It can be scaled almost infinitely, (2) it is available continually updated
anywhere there is an Internet connection, and (3) it can be continually with new information
updated with new information relevant to the learner. relevant to the learner.

The two companies we would give as examples of a successful shift from a

traditional education or training business model to an eLearning business model are Apollo Group and
SmartForce.

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Apollo Group (APOL): Apollo Group’s largest subsidiary, the University of Phoenix (UoP), became the
first accredited for-profit university in the U.S. targeting working adults in 1978. Today it is one of the
largest regionally accredited private universities in the U.S., enrolling more than 74,000 students.
Realizing that its target market of working adults was growing busier by the year and consequently less
able to attend classes in person, UoP created an online arm of the school in 1989. The UoP courses offered
online are in a shared, asynchronous format, meaning that students are in a “class” with other students and
have a common professor, but can log on anytime to receive and complete homework assignments or post
messages to the rest of the class. Online enrollments at UoP have increased at a much more rapid pace than
traditional enrollments in recent years (up 43% from the end of 1998 to the end of 1999), and currently
reach more than 13,800 students.

SmartForce (SMTF): In the training sector, we believe that SmartForce has undergone one of the most
dramatic business model shifts, including a name change from its old CBT Systems. The company had
long had one of the largest libraries of internally-developed IT training titles. In the old model, SmartForce
rented its courses on a yearly basis and disseminated these via the customer’s internal network. For
example, a customer would decide at the beginning of the year which titles it wanted access to for the year
and would not have access to other titles until the contract was up the following year. In October, however,
SmartForce announced a dramatic shift when it unveiled its fully integrated eLearning solution delivered
on an Internet platform. The platform allows SmartForce to offer content in a variety of formats developed
by itself and others and to tailor that information to individual learners.

Born-on-the-Web Startups

In contrast to companies such as Apollo Group and SmartForce, which each had The vast majority of
to undergo fairly dramatic transformations in their old business models to meet companies that fall
the learning needs of the 21st century, the vast majority of companies that fall under the heading of
under the heading of eLearning are relative newcomers to the scene. Being a eLearning are
newbie in the world of eLearning has both its ups and downs. relative newcomers
to the scene.
• Advantages: Start-up eLearning companies lack the baggage from the old
world; they’re more nimble and are free to start from scratch in their attempt
to leverage the Internet in the learning space. There are a multitude of niches to be exploited, and we
believe that many of these start-ups have the potential to essentially create something from nothing –
that is, get customers to spend money on products and services that have never been available before.

• Disadvantages: The disadvantage, of course, is simply lack of credibility and resources. Whereas the
more traditional companies may already have a well-recognized name, or at least a fairly established
revenue stream that can help fund new ventures, start-ups have to fight just to be heard in the midst of
the chaos that characterizes the eLearning marketplace today. Out of the hundreds of companies we
have listed at the back of this report, it is highly unlikely that most people (even within the education
and training industries) have heard of more than just a few of them. Because the Internet is such a
natural medium for addressing the needs of the learning industry, and because Internet companies have
been relatively easy to launch, many companies have attacked the same small niches, making it
difficult to find sector leaders.

Page 33 of 107
Venture Capitalists Smell the Opportunities

The positive aspects of eLearning business models seem to be Eduventures.com

outweighing the negative ones in the eyes of investors, though, because reported that $6 billion
venture capital investments have skyrocketed over the last couple of of private capital has
years. Eduventures.com, a company that aggregates news and research been invested in the
pertaining to the education industry, reported that $6 billion of private education industry since
capital has been invested in the education industry since 1990. Close to 1990. Close to $1 billion
$1 billion of that ($931 million, to be exact) was raised in the first quarter of that was raised in the
of 2000 alone. The firm went on to predict that investments in 2000 will first quarter of 2000
grow to reach $4 billion, up from $2.6 billion in 1999. alone.

Chart 4
Private Investments in Education
$4,000
$4,000

$2,567
$3,000
Millions

$2,000

$1,000 $824
$496 $585 $477
$40 $10 $21 $100 $149
$0

F
90

91

92

93

94

95

96

97

98

99

00
19

19

19

19

19

19

19

19

19

19

Source: Eduventures.com
20

Of the first quarter’s $931 million in investments, approximately 64% went to eLearning companies,
seemingly indicating that investors see the true value proposition to be in the intersection of education and
the Internet.

Page 34 of 107
 Chart 5
Q1:2000 Private Investments in Education Companies (by Type)

36%

64%

eLearning Companies Non-eLearning Companies

Source: Eduventures.com

This increase in the capital needed to get ideas off the ground and into full-fledged operations has also
driven an increase in education IPOs. Whereas IPOs of education companies were in the single digits for
the past three years, there were seven education IPOs in the first quarter of 2000, and the pace only seems
to be accelerating.

Chart 6
Education Company IPOs
33
35

30

25
No. of IPOs

20

15
8
10
5 6
5

0
1997 1998 1999 2000F

Source: Eduventures.com

Page 35 of 107
Performance of recent IPOs has been somewhat spotty, as the following table illustrates. During a certain
short period around the beginning of February, the eLearning IPO market benefited from a little “irrational
exuberance” as eLearning was viewed as a hot, up-and-coming sector and investors went looking for any
entry into the group. Given the pullback in the market since that time period, we expect that investors will
focus more on company fundamentals rather than dumping money into a stock that is simply reflecting the
bright outlook of the eLearning industry as a whole. Given the larger public comp group that we expect to
exist by this time next year, we believe that investors will have a much greater selection of eLearning
stocks from which to choose.

Recent eLearning IPOs

Filing Offering Filing Offer Offer Price % Close on % Return Offering

Company Name Ticker Date Size Range Price Date 07/05/2000 Return Debut on Debut Amount

Saba Software SABA 01/31/2000 4,000,000 $12-$14 $ 15.00 04/07/2000 $ 19.00 26.7% $ 33.00 120.0% $ 60,000,000
DigitalThink, Inc. DTHK 12/09/1999 4,400,000 $10-$12 $ 14.00 02/25/2000 $ 35.00 150.0% $ 29.00 107.1% $ 61,600,000
VarsityBooks.com, Inc. VSTY 10/14/1999 4,075,000 $12-$14 $ 10.00 02/15/2000 $ 1.44 -85.6% $ 9.88 -1.3% $ 40,750,000
The Lightspan Partnership LSPN 11/01/1999 7,500,000 $10-$12 $ 12.00 02/10/2000 $ 5.81 -51.6% $ 13.50 12.5% $ 90,000,000
Centra Software, Inc. CTRA 10/27/1999 5,000,000 $8-$10 $ 14.00 02/03/2000 $ 9.44 -32.6% $ 33.25 137.5% $ 70,000,000
SkillSoft Corporation SKIL 09/10/1999 3,100,000 $12-$14 $ 14.00 02/01/2000 $ 13.38 -4.5% $ 18.00 28.6% $ 43,400,000
eCollege.com ECLG 05/13/1999 5,000,000 $8-$10 $ 11.00 12/14/1999 $ 4.75 -56.8% $ 14.25 29.5% $ 55,000,000
SmarterKids.com SKDS 09/09/1999 4,500,000 $13-$15 $ 14.00 11/22/1999 $ 1.66 -88.2% $ 14.00 0.0% $ 63,000,000
ZapMe! IZAP 08/05/1999 9,000,000 $10-$12 $ 11.00 10/19/1999 $ 2.88 -73.9% $ 9.50 -13.6% $ 99,000,000
Scientific Learning Corp. SCIL 06/10/1998 2,300,000 $14-$16 $ 16.00 07/21/1999 $ 21.81 36.3% $ 17.94 12.1% $ 36,800,000
Student Advantage, Inc. STAD 04/07/1999 6,000,000 $10-$12 $ 8.00 06/17/1999 $ 7.13 -10.9% $ 8.00 0.0% $ 48,000,000
Companies In Registration:
Docent DCNT 04/11/2000 $ 80,000,000
MindLeaders.com, Inc MDLR 09/17/1999 $ 40,300,000
Element K LMNK 05/09/2000 $ 75,000,000

Page 36 of 107
THE BUSINESS MODELS OF ELEARNING
For as many eLearning companies as exist, there are almost as many business models. The companies
within the eLearning industry, as with many industries in the net economy, defy traditional categorization
methodology. Do we characterize them . . .

• by the products or services they provide,

• by how they make money, or
• by the markets they serve?

The truth is that using any one of these characterizations alone would still leave vast holes in the picture of
almost any company within the eLearning market. In addition, whatever categorization method we use
today is likely to be invalid in the near future, as business models are continually (and quickly) evolving in
this nascent industry. As companies seek to define their territory, many are trying to stake out fairly large
areas in the marketplace by claiming to offer everything (content, services and technology) that everybody
(academic, corporate and consumer markets) needs. While we understand the desire to not close any doors
to new business while companies are still in the process of developing their offerings, we also believe that
these claims of being a “one-stop shop” are, for now, simply confusing the marketplace and causing
hesitancy on the part of purchasers.

Instead of using a traditional method of simply categorizing the companies by “what they do” alone (which
is actually not simple at all), we think that it is more instructive to plot the various characteristics and
competencies of individual companies on a table that allows description by more than one variable. This
table uses three key variables, and, we believe, will enable us to provide the most complete description of
companies within this industry. These variables are

• Markets Served: Academic, corporate and consumer

• Revenue Model: Contracts, pay-per-use, and ads/sponsors
• Core Offering: Content, services, and technology
• Types of Content: IT, business skills, lifestyle, academic and custom
• Types of Services: Content distribution, consulting, implementation, eCommerce, and
community portals
• Types of Technology: Learning management tool, content creation tool, delivery platform and
collaboration tool

The matrix that includes all of the various alternatives of these variables looks like this.

Market Served Academic Corporate Consumer

Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portals

The elements of this matrix are described in detail on the following pages. In the sections that follow the
description of the matrix, we give brief descriptions of all the public companies that we believe represent
pure plays in the eLearning industry. Within each company’s matrix, we have highlighted the company’s
primary market, revenue model, and core offering in dark gray. The lighter gray squares represent any
areas that we believe the company is focusing on or offering as well, but to a lesser extent.

Page 37 of 107
By mapping an eLearning company on a matrix like this, we are able to illustrate how it might fall into
more than one category. Below, we expand upon the definitions of these variables and their various
components in order to provide a clearer picture of the competitive landscape.

Market Served

In Section III we will examine the various markets that the eLearning industry serves in great detail. As a
preview, though, purchasers of eLearning include the following markets.

• Academic: Includes people involved in formal education, from kids just starting out in preschool to
older adults going back to college and everything in between.
• Corporate: Corporate customers typically spend money on eLearning for employee training
purposes, but they are increasingly focusing their dollars on other groups within their spheres of
influence, such as customers and suppliers.
• Consumer: While the consumer market includes what we might deem “lifelong learners”, or people
who want to take a quick class on wine selection or building a doghouse, this is a fairly small
component of the (paying) consumer market. The largest part is made up of people taking continuing
education courses. Although some might argue that these learners should go in the corporate category
because of the work-related nature of their learning, we would counter that many of these people are
professionals who bear the responsibility (and cost in many cases) of their continuing education.

Revenue Model

As with business models in the eLearning industry, there are numerous different revenue models that are
currently being used. Pricing itself varies widely across competitors, as is
often the case in an immature market. We believe that as the market matures, We believe that as
we will begin to see some standardization in pricing and revenue models. We the market matures,
have broken the types of revenue models into three main categories. we will begin to see
some standardization
• Contracts: In this category we include any sort of long-term agreement, in pricing and
whether it be a one-year subscription to all the courses you want, tuition revenue models.
for an online degree program, or some type of service agreement.
• Pay-per-use: As the name implies, this category represents one-time
purchases of products or services.
• Ads/Sponsors: For companies who are in the business of providing free content or services,
advertising or other types of sponsorship relationships are usually the main cash generator.

Core Offering

This is the area where definitions and categories really start to get hazy, as many companies could arguably
be put into any of the three categories of content, services, or technology. However, for purposes of
organization we will at least attempt to put each public company into the one main category that best
describes the company’s core offering, while also specifying through the use of our eLearning Matrix any
other categories in which it offers products or services.

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• Content: In the content category we include companies who actually produce and publish their own
content, whether it be text-based, or some type of multimedia content. If the company’s main business
is the development of content, it will fall into this category. We break the content category down into
five types.
• Information Technology (IT): IT includes any type of technical instruction.
• Business Skills: This includes “soft skills” such as management and customer relations, but also
“harder” skills such as finance or specific instruction on a business system.
• Lifestyle: Lifestyle content appeals more to the “lifelong learner” and includes a wide range of
topics ranging from Tai Chi to napkin folding that are typically not work-related (unless you’re
Martha Stewart).
• Academic: This is simply content that is of an academic nature or intended for students in an
academic program.
• Custom: Many companies will custom design content for certain applications or processes.

• Services: This broad “catch-all” category can be roughly broken down into the following five areas.
• Content Distribution: This includes both learning portals and other types of content aggregators,
such as online universities, who are distributing content that comes from an external source (e.g.,
traditional publishers, eLearning publishers, university professors, subject matter experts).
Companies that primarily distribute their own internally-produced content would not fall into this
category.
• Consulting: This includes any sort of advisement services related to developing or using an
eLearning solution.
• Implementation: These companies focus on the physical integration of learning systems into a
school or business.
• eCommerce: This category includes companies that sell learning-related products (either B2B or
B2C) on websites accessible to the public (i.e., not on extranets).
• Community Portal: This indicates a web site that serves as a destination site for a group of people
with interests or other characteristics in common. A community portal may or may not provide
formal learning courses, but is likely to provide information and other resources of interest to a
common group.

• Technology: Companies that fall into this area may be providing content or some type of service, but
it is their technological tools or platforms that constitute their core offering and give them their
competitive advantage. We break the technology category into these four areas.
• Learning Management (Tool) System (LMS): An LMS integrates and adapts the overall learning
initiative (both technology- and non-technology-based learning) for the dynamic student.
• Content Creation Tool: This type of tool allows end-users to develop content on their own.
• Delivery Platform: A delivery platform provides a customized, technology-based (typically
browser-based) interface for learners to access eLearning content and services. As eLearning
technology matures, we foresee a melding together of the learning management tool and the
delivery platform into an integrated learning system (ILS), but at this point, we believe that many
delivery platforms are not sophisticated enough to be considered as a full-blown ILS.
• Collaboration Tool: A collaboration tool allows real-time interaction between learners and
instructors via the Internet in the setting of a classroom or meeting. This type of tool may or may
not have voice over IP capabilities.

Page 39 of 107
We would again emphasize that very few of the companies that we believe comprise the eLearning industry
fit neatly into one category, which is the reason for our matrix approach to characterizing them. The
depictions of these companies are certainly subject to our interpretation of
available information and may not completely represent all the attributes of a We emphasize that
company. However, we believe that this is the best way to provide a very few of the
standardized comparison of the companies within the eLearning industry. companies that we
believe comprise the
eLearning industry
“Pure Play” eLearning Companies fit neatly into one
category, which is
In the following pages we show the companies we consider to be “pure play” the reason for our
eLearning companies organized by the companies’ core offerings. We have matrix approach to
categorized each company by the market served, the revenue model and the characterizing them.
core offering. We then further sub-classified each company’s core offering
according to the definitions listed above. Again, within each company’s matrix,
we have highlighted the company’s primary market, revenue model, and core offering in dark gray. The
lighter gray squares represent any areas that we believe the company is focusing on or offering as well, but
to a lesser extent. Finally, we provided the website of each company to facilitate further research. (Note:
At the end of this report, we have also provided a classification of some 300 private companies.)

Content Companies

ABOUT (BOUT)
www.about.com

ABOUT provides highly-targeted content on a wide range of topics that are directed toward individual
consumers. The network includes more than 700 topic-specific sites, each overseen by a professional
guide. Each site provides Internet link directories, original content, community features, commerce
opportunities, and how-to's. The ABOUT network is organized into 36 channels, covering more than
50,000 subjects with more than 1 million links to the Internet. The company has partnership agreements
with other web sites that drive traffic to the ABOUT web site. Revenues are generated through advertising
and electronic commerce.

ABOUT
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portals

DigitalThink, Inc. (DTHK)

www.digitalthink.com

DigitalThink provides business organizations with more than 180 proprietary courses via a hosted
eLearning environment that consists of a content delivery system and learning management elements such
as course enrollment options, a tracking and reporting system, tutoring, collaboration, and assessments.
These offerings are targeted to achieving three types of learning goals: workforce transformation
(achieving organizational learning objectives), sales performance (either for internal or external sales
channels), and customer advocacy (providing eLearning to customers).

Page 40 of 107
 DIGITALTHINK
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

Lightspan, Inc. (LSPN)

www.lightspan.com

Lightspan develops curriculum-based educational software and Internet products and services for students
to use both in school and at home. The company’s software products for students in kindergarten through
eighth grade cover core curriculum areas, such as language arts, reading and math, and is sold exclusively
to schools and school districts. An online subscription service also provides curriculum-based content that
is correlated to state academic standards, and includes tools to assist students in using the Internet to learn
and communicate, as well as assessment tools for measuring student progress against standards. Lightspan
also develops software for use by under-prepared college students to address deficient math and writing
skills.

LIGHTSPAN
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

ProsoftTraining.com (POSO)
www.prosofttraining.com

Prosoft develops courseware and provides instruction focused on vendor-neutral Internet and Linux skills.
The courses that the company develops are structured to prepare learners to participate in the company’s
Certified Internet Webmaster program, which is a certification program built around the job roles of
Internet professionals. The main distribution channel for Prosoft’s content is its worldwide network of
authorized training centers and academic institutions, but the company also licenses its content for
distribution by eLearning vendors and major publishers. Instruction is delivered both in person, by the
company’s internal instructors and by certified instructors at authorized training centers, and via an online
learning environment.

Page 41 of 107
 PROSOFTTRAINING.COM
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portals

Provant (POVT)
www.provant.com

Provant develops and provides content and services geared toward performance improvement training. The
company’s main areas of expertise include subjects such as leadership development, human resource issues,
sales productivity, customer service, and career and organizational development. Provant delivers its
solutions via a range of methods including live instructors, audio/visual, CD-ROM, print and the Web, for
which the company is increasingly converting its content today. The company also provides customized
web-based learning management systems designed to automate the enrollment, tracking and measurement
functions of an organization’s learning initiatives.

PROVANT
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portals

SkillSoft Corporation (SKIL)

www.skillsoft.com

Working in cooperation with outside content developers, SkillSoft assembles courses focused on
professional effectiveness (e.g., management, leadership, communication, etc.) and business expertise (e.g.,
finance, sales, operations, etc.). The company’s library now contains approximately 275 such courses that
are deployed to corporate users via intranets or the Internet. SkillSoft’s courses include not only text-based
instruction, but also audio instruction, practice exercises, assessment components, behavior modeling, and
simulations. Other services deployed through the company’s web-based architecture include online job
aids, online mentoring, intelligent search capabilities, and access to a wider array of web-based learning
resources.

Page 42 of 107
 SKILLSOFT
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portals

Service Companies

Learn2.com, Inc. (LTWO)

www.learn2.com

Learn2.com provides eLearning products and services to both individuals and corporate customers. The
company’s website serves as a portal into its catalog of online learning titles. The content within the portal
is developed and owned almost entirely by the company and focuses on life skills, technology skills, and
workplace-related skills. The company also sells CD-ROM and videotape-based tutorials through catalogs,
technology retailers, its direct sales force, resellers, and distributors. For the corporate customer, the
company works to develop custom eLearning environments that are hosted by Learn2.com and are
delivered and managed by its proprietary eLearning environment.

LEARN2.COM
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

SmarterKids.com, Inc. (SKDS)

www.smarterkids.com

SmarterKids.com is an online retailer of educational books, toys, games, and software for children ages 0 to
15. Beyond simply selling products, though, Smarterkids.com also provides educational content on its web
site to help parents choose the right materials for their kids. Product reviews, learning style surveys, and
personalized product recommendations based on confidential educational profiles of kids help purchasers
make informed decisions. The site links teacher-reviewed toys, games, books, software, and hands-on
activities through a patent-pending evaluation process.

Page 43 of 107
 SMARTERKIDS.COM
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

VarsityBooks.com (VSTY)
www.varsitybooks.com

VarsityBooks.com is an online retailer of new college textbooks. Through this eCommerce avenue, the
company has established a large customer base in the college market, which it uses to attract marketing
agreements with other businesses that target the college demographic. In addition to textbook sales, the
company also offers general interest books, scholarship opportunities, free e-mail, and job and career
information. VarsityBooks.com has recruited a large network of student representatives to increase
awareness of the company’s brand on college campuses.

VARSITYBOOKS.COM
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

ZapMe! (IZAP)
www.zapme.com

ZapMe! provides computer labs with “always on” Internet connections to schools at no cost. The
company’s package includes from 5 to 15 high-end multimedia PCs with monitors, a satellite-ready
computer server, a laser printer, and broadband access to the Internet. The company provides a proprietary
browser-based interface that links to thousands of pre-selected websites, as well as other content and
services, including productivity applications such as word processors, spreadsheets and presentation tools.
ZapMe!’s proprietary interface also includes school-related e-commerce and school fundraising
opportunities. Funding for this system, which is free to schools, is provided by corporate sponsorships and
e-commerce relationships.

Page 44 of 107
 ZAPME!
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

Technology Companies

Centra Software (CTRA)

www.centra.com

Centra’s core offering is software that provides the Internet infrastructure for live collaboration.
Components of the software include voice-over-IP capability (web browser-based conference call), real-
time data exchange, application sharing and shared workspaces. In addition to learning, Centra’s
collaboration software can be used for selling, marketing, and other types of meetings. The company offers
several levels of service, from an enterprise-level application designed to support large numbers of users
with multiple functionalities, to a free service designed to provide base-level services to smaller groups of
users without having to rely on technical assistance.

CENTRA SOFTWARE
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

Click2learn.com, Inc. (CLKS)

www.click2learn.com

Click2learn.com provides corporations with a complete “virtual university” platform on which learning
resources are available. The company’s hosted offering includes an extensive catalog of third-party
eLearning courseware and other learning products, as well as a learning management system, a suite of site
management tools, and authoring and publishing tools, all accessible in a browser-based environment. For
corporate customers who want a “behind-the-firewall” implementation, the company can customize and
implement an enterprise eLearning solution that is based on its proprietary learning management and skills
assessment system. The company also has a services group using a rapid content development engine that
allows custom content to be quickly developed.

Page 45 of 107
 CLICK2LEARN.COM
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

eCollege.com (ECLG)
www.ecollege.com

eCollege.com uses its proprietary software to build and host online campuses, courses, and course
supplements primarily for the academic market, but also for the corporate market to a lesser degree. The
company works with faculty and staff members to convert traditional courses into an online format using
automated authoring tools. The company can also provide integration of existing back-office systems with
the online campus, creating a web-based front-end to the entire system.

ECOLLEGE.COM
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

Saba Software (SABA)

www.saba.com

Saba licenses software that allows organizations to offer a wide array of third-party learning content to
users. The software also manages the learning process, both in its online and offline manifestations, by
assessing learning needs, selecting and purchasing learning materials, and tracking the progress of
individual learners and the organization as a whole. Saba also offers a platform for third-party learning
providers (content vendors) to develop, market, sell and distribute learning materials to end-users. The
company also offers strategic consulting and implementation services for both end-users and content
vendors.

Page 46 of 107
 SABA SOFTWARE
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

SmartForce (SMTF)
www.smartforce.com

SmartForce’s main offering is a fully-hosted Internet platform for corporate learning that provides access to
the company’s library of more than 1,300 courses on business and IT subjects. Also included in the
company’s integrated eLearning solution is access to online seminars and mentoring, customer-created
content, news articles, white papers, case studies, peer-to-peer collaboration, assessments, and progress
tracking. The company strives to offer continuously-updated material that is personalized to the learner
using mass customization technology.

SMARTFORCE
Market Served Academic Corporate Consumer
Revenue Model Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning Mgmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

VCampus Corporation (VCMP)

www.vcampus.com

VCampus develops and hosts eLearning environments for both corporate and academic customers that give
access to the company’s library of online courses. The infrastructure of the eLearning environment
consists of a proprietary courseware delivery platform that has both content creation and learning
management capabilities. The company’s library of courseware is a compilation of acquired material,
internally-developed courses, and content supplied through relationships with third-party suppliers.

VCAM PUS CO RPORATION

M arket Served Academic Corporate Consumer
Revenue M odel Contracts Pay-per-use Ads/Sponsors
Core Offering Content Services Technology
IT Content Distribution Learning M gmt. Tool
Business Skills Consulting Content Creation Tool
Lifestyle Implementation Delivery Platform
Academic eCommerce Collaboration Tool
Custom Community Portal

Page 47 of 107
MORGAN KEEGAN ELEARNING INDUSTRY REPORT

Page 48 of 107
 SECTION III:
THE LEARNING MARKET
In this section:

• In-depth discussions of the academic, corporate and consumer learning markets

• Examples of eLearning companies targeting the various sectors of the learning

markets

Page 49 of 107
THE ACADEMIC MARKET
The academic market has a number of very different sectors, making it difficult to describe in general
terms, but one thing is certain: It is big. More than a quarter of the U.S. population is involved in formal
education in some way.

In the fall of 1999, about 68.1 million persons were enrolled in American schools and
colleges. About 3.8 million were employed as elementary and secondary school
teachers and as college faculty. Other professional, administrative, and support staff of
educational institutions numbered 4.2 million. Thus about 76 million people were
involved, directly or indirectly, in providing or receiving formal education. In a nation
with a population of about 273 million, more than 1 out of every 4 persons participated
in formal education.

-Digest of Education Statistics 1999

National Center for Education Statistics
U.S. Department of Education

To put things into historical perspective, we would note that the above figure for total enrollment in schools
and colleges (68.1 million) is actually 19% higher than it was just 15 years ago in 1985. While part of this
growth is attributable to growing populations, the rest (particularly in higher
education) is a result of higher rates of participation in formal education. In In 1998, total
1998 (the most recent year for which there is estimated data), total expenditures for all
expenditures for all educational institutions were $618.6 billion. As a educational
percentage of GDP, educational expenditures have held steady at 7.3% institutions were
(representing the second largest component of GDP) for about the past ten $618.6 billion.
years, but the dollar figure has grown by over 42% since 1991.

Chart 7
U.S. Expenditures on Public and Private Education
(Total and as a percentage of total GDP)
$700.0 7.4%

$600.0 7.2%
7.0%
(Billions of dollars)

$500.0
6.8%
$400.0
6.6%
$300.0
6.4%
$200.0
6.2%
$100.0 6.0%
$- 5.8%
97 (P)

)
19 1

19 2

19 3

19 4

19 5

19 6

19 7

19 8

19 9

19 0

19 1

19 2

19 3

19 4

19 5

96 6

(E
-8

-8

-8

-8

-8

-8

-8

-8

-8

-9

-9

-9

-9

-9

-9

-9

7
80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

8
-9

-9
19

19

19

Total expenditures As % of GDP

Source: National Center for Education Statistics

Page 50 of 107
Pre-Primary Education

Before we launch into an overview of the K-12 and higher ed markets, we want first to note the growth
trend in the pre-primary education markets. The enrollment percentage of 3- and 4-year-olds in school has
grown from just under 11% in 1965 to over 52% in 1998. Although the overall market is smaller and data
harder to come by, we believe that this dramatic growth (which is considerably higher than for any other
age groups) illustrates the growing importance that is placed on education in America.

A study conducted by the RAND Institute in 1999 suggested that kids who participate in “high-quality
early childhood programs” are likely to grow up to earn 60% more than their peers who do not. States also
have an incentive to provide pre-primary education for their residents; the same RAND study indicates that
for every $1 invested in early childhood development, $7 is saved in the cost of remedial education,
welfare, and incarceration. Therefore, whether you look at it from the reward-seeking or risk-avoiding
perspective, it appears that the earlier kids start learning, the better off they’ll be later in life.

Certainly part of the growth in pre-primary enrollments is a result of an increase in the number of working
mothers. However, we believe that it is also driven by parents’ desire to give their children a leg up on all
those other tots with whom they’ll be competing for admission to college in 15 years and for jobs in 20
years. Given this awareness, we expect to see continued growth in the amount of money parents are
shelling out not only on formal pre-primary education, but also on materials (both traditional and
technology-based) that they can use with their child before even reaching school-age.

ELEARNING IN ACTION

SmarterKids.com (SKDS), an online retailer of educational materials, appeals to the parent who wants to
provide her child (from birth to age 15) with learning opportunities before the child reaches school or (for
older kids) in addition to what they get in school. The site doesn’t just sell books and other materials, but
aids the parent in making selections based on product reviews and confidential profiles that parents enter
based on their kids’ age, test scores, learning styles, etc. We believe that this approach is particularly
appealing to the parents of very young children who face an abundance of choices, but who are not yet
receiving guidance from their child’s school about what type of materials are appropriate.

Primary and Secondary Schools

Current Size: Since 1985, primary and secondary (K-12) enrollment figures are up approximately 18% to
53.2 million. Expenditures in 1998 were $371.9 billion, representing 4.4% of GDP.

Projected Growth Rate: According to the NCES publication Projections of Education Statistics to 2009,
K-12 enrollments are expected to continue to rise (although at a slower rate) through the first half of the
decade. Net growth by 2009 is forecasted to be just under 2%, with primary enrollments staying about the
same and secondary enrollments increasing by 8.5%. In the near future, we also expect that total spending
will remain at a steady 4.4% of GDP, but we would not rule out the possibility of that percentage increasing
over time as social and political pressures mount to reform the public school system.

Page 51 of 107
 Chart 8
Enrollment in U.S. Public and Private
Elementary and Secondary Schools
60,000

50,000
(Thousands of students)

40,000

30,000 Total 9-12

20,000 Total K-8

10,000

-
88

90

92

94

96

E
98

00

02

04

06

08
19

19

19

19

19

19

20

20

20

20

20
cation Statistics"
Source: National Center for Education Statistics

Growth Drivers: The forecasted growth of K-12 enrollments is largely a result of the spike in births
between 1977 and 1990, a phenomenon known as the baby boom echo. As enrollment rates for K-12 have
remained fairly steady in recent decades, population sizes will continue to be
the key determinant of enrollment figures. However, we do not look for simple
increases in enrollment to have the most dramatic impact on spending growth We look for greater
in the K-12 arena. Rather, we look for greater involvement by all members of involvement by all
the community, from the students themselves to the businesses that will members of the
eventually hire them, to drive increased expenditures on education initiatives. community, from the
As this growing focus on education is increasingly supported by private students themselves
individuals and industries, we look for a much higher percentage of to the businesses that
expenditures to be directed to the private sector. Today, revenues of for-profit will eventually hire
education companies account for less than 10% of total education expenditures. them, to drive
increased
In addition, we believe that much of the increase in spending on K-12 expenditures on
education will go toward technology. As technology continues to achieve education initiatives.
greater acceptance as a teaching tool, we believe that expenditures will ramp
up dramatically, not only for hardware, but for applications and services that aid in the day-to-day
instruction and management of the student population. IDC forecasts an 18.9% CAGR in spending on
instructional technology between 1998 and 2003.

Page 52 of 107
 C h art 9
E s t im a t e d U .S . K - 1 2 P u b lic S c h o o l S p e n d in g
8 o n I n s t r u c t io n a l T e c h n o lo g y
7

5
$Billions

0
1998 1999 2000E 2001E 2002E 2003E

S o u rc e : ID C

Some of the parties with an interest in increasing the amount and quality of K-12 education through the use
of technology include the following.

• Students: With competition for entry into top universities growing fiercer by the year, many students
seem to be taking their education more seriously. More students are taking the difficult courses
offered by their high schools, including advanced placement (AP) courses that can earn them college
credits. According to the Department of Education’s publication The Condition of Education 1999,
between 1984 and 1997, the number of students taking AP examinations (in any subject) increased
from 5.0% to 13.1% of high school seniors. Demand for courses that focus specifically on
standardized test preparation has also grown as a result of the increased competition for college
admissions, but can rarely be met within the confines of the school day. Similarly, students are
increasingly seeking outside help in searching for and applying to colleges. At the other end of this
spectrum are the students who may need remedial help in certain areas or adults looking for assistance
in getting a GED.

Implications for eLearning: Although Internet access in schools has been spotty over the past several
years, we believe that a number of initiatives by government, businesses, and even private individuals
has begun to alleviate this issue. While access within the classroom is still just over 60%, the
percentage of schools that are wired reached 95% in 1999, representing a dramatic increase over the
previous six years.

C hart 10
I n te r n e t A c c e s s in U .S . S c h o o ls
100% 95%
89%
90% 78%
80%
70% 65% 63%
60% 50% 51%
50%
40% 35%
27%
30%
20% 14%
8%
10% 3%
0%
1994 1995 1996 1997 1998 1999
S c h o o ls w ith In te rn e t a c c e s s In str u c tio n a l ro o m s w ith I n te rn e t a c c e ss

S o u rc e: N a tio n a l C e n te r fo r E d u c a tio n S ta tis tic s

Page 53 of 107
 We believe that one of the major opportunities for eLearning companies is to provide both the
advanced and remedial coursework via online learning that high schools may not be equipped to offer
because of constraints in both the number of teachers and gaps in teacher proficiency. The nation’s
schools will need to hire more than 2 million teachers over the next ten years, but the coming wave of
baby-boomer retirements will make this difficult. Particularly in the areas of math, science and
technology, schools are finding it more and more difficult to offer salaries that are even remotely
competitive with the private sector. eLearning, therefore, may become a more valuable tool for
students as teachers become ever scarcer resources.

ELEARNING IN ACTION

The offerings of eLearning companies catering to the needs of high school students are many and varied.
Below are just a few examples.

Online AP Classes: Providing Advanced Placement (AP) classes online gives students the opportunity to
get a head start on earning college credits even if their school does not have the teaching resources to
dedicate to an AP class.
• Apex Learning – www.apexlearning.com

Online High Schools: Several companies are now offering accredited high school courses for home
schoolers or adults looking to finish up a high school education.
• Class.com – www.class.com
• Keystone National High School – www.keystonehighschool.com

College Admissions: Wading through college applications can be difficult and time-consuming for the
students. However, the following are some of the companies that provide resources and services to make
the experience easier for all parties involved.
• Embark.com – www.embark.com
• Achieva College Prep Services – www.achieva.com

Homework Help: When Mom and Dad just aren’t much help with homework on cell reproduction or
geometry, students can turn to the Web for tutorials and interactive simulations.
• Homeworkhelp.com – www.homeworkhelp.com
• TopTutors.com – www.toptutors.com
• Tutor.com – www.tutor.com
• Tutornet.com –www.tutornet.com

Online Communities: Academic help isn’t all the web has to offer high school students, of course.
Sometimes it's just a good place to hang out and meet other kids.
• HighWired.com – www.highwired.com
• IHigh.com – www.ihigh.com

• Teachers: As we just mentioned, teacher resources are stretched pretty thin these days. Between
coping with onerous administrative record-keeping, keeping up with new state educational standards
and accountability requirements, communicating with parents, doing their own continuing education,
integrating new technologies into the classroom, and actually teaching, the demands on teachers are
overwhelming. We believe many teachers feel that they are not adequately prepared with the proper
training or tools to teach 21st century kids. The National Center for Education Statistics reports that
although 99% of public school teachers indicate that they have access to computers or the Internet in
their schools, only a third of them feel well prepared to use them in their teaching.

Page 54 of 107
 Chart 11
Teachers’ Feelings of Preparedness to Use the Internet in Teaching

Very well prepared Not at all prepared

10% 13%

Well prepared
23%

Somewhat prepared
54%

Source: National Center for Education Statistics, U.S. Dept. of Education

Implications for eLearning: The list of web-based tools and services available to aid teachers in
organizing their classroom, communicating with students and parents, developing lessons, and simply
teaching continues to grow everyday. On the organizational end, tools are available that facilitate
record keeping and that allow teachers to securely make grade and homework information available to
parents. The web is also not only an excellent source for raw information that can be used to
supplement lessons, but also serves as a venue for teachers to collaborate with their peers. A main
problem that teachers face in using online resources in their teaching is information overload: It is
difficult to sort through the plethora of “help” being thrown at them. We believe that companies that
can not only provide quality control services, but also assist teachers in becoming comfortable with
using technology in the classroom will achieve success in the K-12 market. As will be the case in
many other industries, we think that online continuing education will be big for teachers, especially
because limited time and financial resources often prevent travel.

Page 55 of 107
 Schools: Particularly for larger schools, keeping track of student progress and making sure that no one
slips through the cracks of the educational system has become an enormous task. Now that standards-
based testing is showing up in most states, schools are increasingly being held responsible for the
performance of the students in their care. In many cases, where testing is deemed as “high stakes”,
state funding or even student graduation rates are dependent upon the results of these tests. And
sometimes half the battle of getting kids up to par with state standards is simply scheduling them in the
proper classes and getting them to show up. Again, for large school systems, particularly in areas that
have a large “at-risk” population, these can easily become the most formidable hurdles.

Implications for eLearning: Schools are increasingly turning to technology to help with both the
organizational aspects of managing the academic careers of their students and with curriculum
development. Sophisticated student information systems and even more extensive enterprise resource
planning (ERP) systems not only help with the day-to-day management of a school district, but also
help keep track of and analyze students’ educational records. Systems like these can be useful in
highlighting areas of weakness so individual students can receive help before it’s too late. These tools
can also be valuable in keeping parents apprised of assignments, tests, activities, and overall progress.
In addition, services and tools exist today that can help a school precisely map its curriculum to state
learning standards in order to achieve accountability requirements. We believe that the trend in
primary and secondary education is toward more accountability, not less, and schools will only be able
to keep up with these requirements through the use of technology.

ELEARNING IN ACTION

Education Supplies Procurement: In addition to the high-profile expenditures on expensive student

information systems and back-office integration, schools are also faced with the more mundane tasks of
buying things such as workbooks and lunch trays. Several companies have been formed recently to create
B2B purchasing networks for education-related supplies.
Epylon.com – www.epylon.com HigherMarkets.com – www.highermarkets.com
simplexis.com – www.simplexis.com

• Parents: Both research and anecdotal evidence support the notion that parents who are themselves
well-educated tend to place more emphasis on education and therefore offer more support to their
children in their academic pursuits. Between 1972 and 1997, the percentage of 6- to 12-year-olds
whose parents completed at least high school rose approximately 20 basis points to about 84%. Over
the same time period, the percentage of 15- to 18-year-olds whose mothers were college graduates
nearly tripled from 7% to 19%, and the increase for fathers was from 15% to 26%. We believe that
these numbers indicate that family support for educational attainment should continue to rise, and is
being demonstrated not only with greater moral support, but also with increased spending on
supplemental educational opportunities. We believe that most parents if given the opportunity would
also like to be more involved in their child’s formal education through increased communication with
teachers and the school itself. Another trend that supports our belief that parents are growing
increasingly concerned with the quality of their child’s education is the growth of home schooling.
Although estimates vary widely, the National Home Education Research Institute has reported that the
home-schooled population has grown from 400,000 in the 1990-1991 school year to an estimated 1.3-
1.7 million in 1999-2000, and continues to grow at a rate of 7 - 15% per year.

Implications for eLearning: We believe that parents may become ready purchasers of eLearning
products. Whether for formal homeschooling purposes or simply supplemental learning, we believe
parents are looking for more types of academic products and services to aid in their child’s education.
Many parents are starting to teach their children to use technology at a very early age and are looking
for appropriate educational applications for kids from preschool through high school. Whether the
child needs remedial help in a particular subject to keep up with classmates or is looking for more
advanced resources, the Web has a bounty of educational offerings. In addition, we believe that parent
groups will be strong supporters of schools implementing web-based tools that will enable parents to
better keep up with their child’s progress through monitoring assignments and grades and
communication with teachers.

Page 56 of 107
ELEARNING IN ACTION

Technology for All

Although the percentage of schools that have connections to the Internet has skyrocketed over the past
several years, there are still schools that have little to no Internet access, putting both students and teachers
at a disadvantage. A company called ZapMe! (IZAP), a self-described education-based broadband
Internet media network, is installing free computer labs in schools, complete with satellite-delivered
broadband Internet, giving teachers, parents and students access to a network of pre-selected resources for
teaching and learning. The free equipment and services are funded by corporate sponsors, whose
promotions appear on the ZapMe! network.

Other companies are on a mission to give kids access to technology, but are taking a slightly different
approach: They’re equipping the entire population of a school with rugged laptop computers that have
wireless access to the school’s network, including Internet capabilities. Although not a free solution like
ZapMe!’s, laptop computers give kids a tool that is with them all day at school and then also at home. Two
of the companies in the business of equipping schools with wireless networks are NetSchools and
EarthWalk Communications.

Websites:
www.zapme.com
www.netschools.net
www.earthwalk.com

So, once schools get all this hardware, what are they doing with it? There is certainly no shortage today of
companies looking to make the connection between students, teachers, parents and administrators through
the use of web-based interfaces. The services of these companies are many and varied, but some of the
features include the following.

• Guides to help schools line up curriculum with state standards

• Tools to help teachers integrate technology into the classroom
• Pre-screened websites students can use for research purposes
• Tools to allow communication of grades, homework, and other information between teachers, parents
and students
• Calendaring functions that allow interested parties to keep up with school events
• eCommerce applications that allow parents to purchase supplies needed for school and extracurricular
activities

A sample of the companies offering these types of services includes the following.

• bigchalk.com – www.bigchalk.com
• Classroom Connect – www.classroomconnect.com
• iMind education systems – www.imind.com
• K12Planet.com – www.K12planet.com
• LearningPays.com – www.learningpays.com
• Lightspan.com (LSPN) – www.lightspan.com
• nschool.com – www.nschool.com
• PowerSchool – www.powerschool.com

We would emphasize that this is certainly not a complete list of all the companies targeting schools with
technology-based services designed to bridge the gaps in academic achievement, nor do all of the
companies necessarily provide all of the services listed above.

Page 57 of 107
U.S. Government: While parents, students, and even teachers and schools tend to look at education from a
smaller, more individual point of view, the federal government in general sees the nation’s educational
system through the statistics it generates, which are all too often not very encouraging. Although education
has long been a hot-button issue in political circles, helping to pave the way for achieving nearly universal
participation in education at the secondary level in the U.S., overall student achievement has failed to live
up to expectations. Results of the Third International Mathematics and Science Study (conducted in 1995)
showed that as students in the U.S. progress through primary and secondary school, they fall behind
international standards. In both mathematics and science, U.S. students scored above the international
averages in grade 4, close to the international averages in grade 8, and considerably below the averages at
the end of secondary school.

Chart 12.a
International vs. U.S. Science Scores
(in the Third International Mathematics and Science Study - 1995)
560
545
534
540
529
516
520
Test score

500 International Average

500
480 US Average
480

460

440
Grade 4 Grade 8 Grade 12

Source: Third International Mathematics and Science Study

Chart 12.b
International vs. U.S. Math Scores
(in the Third International Mathematics and Science Study - 1995)

580
565
560

540
524
Test score

513
520 International Average
500 500
500 US Average

480
461
460

440
Grade 4 Grade 8 Grade 12

Source: Third International Mathematics and Science Study

Page 58 of 107
 Likewise, the NCES publication, Overview of the Condition of Education, 1999, reports that there has
been little change in long-term trends in students’ reading performance since the early 1970s. Also, in
addition to moral concerns about the lingering discrepancy, it is alarming that minorities have
continued to underperform whites academically, given their growing importance to the overall
workforce. Government leaders realize that if the U.S. is to remain the leader in the knowledge-based
economy, all members of society must participate actively, and that means that overall outcomes, and
the equality of outcomes, from the public education system must be improved.

Implications for eLearning: Government has always been a proponent of incentive programs to get
and keep people in school. Tax credits, scholarships and grants have all been tools used in the quest to
better educate America. In recent years, though, government efforts to improve education have taken a
digital bent. Much emphasis has been placed recently on “bridging the digital divide”, a term that is
synonymous with getting more technology into more hands, particularly in poorer areas of the country.
With programs like E-Rate, which has committed $3.65 billion in its first two years of existence to
connecting one million public school classrooms to modern telecommunications networks, government
leaders have demonstrated their willingness to spend money in order to ensure that all American
children grow up tech-savvy.

ELEARNING IN ACTION

Although the E-Rate program gets the biggest headlines considering the large sums of money it is
dishing out to schools in an attempt to “bridge the digital divide”, it’s not the only K-12 education
technology-related program that the U.S. government has ventured into.

• The Congressional Web-Based Education Commission will advise policymakers on the potential
for learning through technology.
• The Department of Education has given grants to train 400,000 teachers in the use of technology
in the classroom.
• The Academy of Information Technology program, which is a joint effort of the federal
government and the business community, is working to prepare high school students for careers in
information technology fields.

• Business: Last, but certainly not least in terms of financial support of education, is the American
business community. For businesses, supporting education is as much a business strategy as it is
community service. Business leaders realize that the workforce of tomorrow is sitting in the
classrooms of today, giving corporations a vested interest in ensuring that students are receiving the
best education possible. (Plus, the positive PR that is generated by doling out cash or equipment to
schools doesn’t hurt either.)

Implications for eLearning: Much of the support that the business community (particularly from
members of the high tech industry) is giving to the education community these days comes in the form
of technology. The cable industry’s deployment of free, high-speed cable modem Internet access to
almost 6,000 schools and public libraries, AOL’s recent announcement that it will provide free Internet
service to schools, and Oracle’s intent to donate more than 1,100 of its
new simplified computers to schools in Dallas are all good examples of U.S. businesses know
business getting involved in education. Not only do these “charitable” that in order to
actions provide benefits to schools, but they also generate goodwill among retain their
potential customer bases and serve as powerful marketing tools for leadership positions
products and services. Technology companies such as Intel and Microsoft in the world market,
have launched major initiatives to get technology into schools through their future
donations of hardware and software, and also (and perhaps more employees must get
importantly) to train teachers to use the new tools in the classroom. U.S. an early start in
businesses know that in order to retain their leadership positions in the learning how to use
world market, their future employees must get an early start in learning technology.
how to use technology.

Page 59 of 107
Higher Education

Current Size: Over the period from 1985 to 1999, total higher education enrollments grew by 21.5% to
14.9 million, and if you go back another 15 years to 1970, enrollments are up more than 73%. Enrollment
figures increased mainly because more high school graduates went on to college and more older women
made the decision to go back to school. Overall expenditures in 1998 were $246.7 billion, representing
approximately 2.9% of GDP.

Chart 13
Total U.S. Higher Education Enrollments
18
16
Millions of enrollments

14
12
10
8
6
4
2
0
1970 1975 1980 1985 1990 1995 2000E 2005E 2009E
Source: National Center for Education Statistics, U.S. Dept. of Education

Projected Growth Rate: Over the coming decade, the U.S. Department of Education looks for college
enrollments to grow by another 10% mainly as a result of an increasing college-age population. In an
article entitled “Crosscurrents and Riptides” that was published in the January/February 1999 issue of
Change, author Clifford Adelman analyzes several scenarios that take into account not only the growing
population, but also increased enrollments due to better preparation of high
We believe that the school students for college, more aid for students in taking the steps necessary
financial to continue education past high school, and higher college retention and
repercussions of not degree completion rates. Under these scenarios, he believes that the
being adequately postsecondary student rate of entry could actually grow in the 20-30% range
educated will over the next seven to eight years.
continue to grow,
leading to greater Growth Drivers: While the U.S. government’s baseline expectations for
participation in growth in the postsecondary education market take into account only increases
postsecondary in the college-age population, we believe that there will be other factors,
education. including those mentioned by Adelman, that will drive growth in the number
of people participating in some form of postsecondary education. In the
knowledge economy a good education is a worker’s greatest asset, and the
divide between those with an education and those without is growing larger
every day. Between 1971 and 1998 the employment rate of males aged 25-34 with a bachelor’s degree
stayed at a steady 93%. On the other hand, over the same period, the employment rate of high school
dropouts fell from 88% to 79%. Similarly, although the employment rate for females who dropped out of
high school increased by 12 percentage points over this time period, it increased by 27 points for female
college graduates. The income disparity between college graduates and non-college graduates has also
continued to ramp up. The NCES reports that the “earnings advantage” of a male bachelor’s degree holder
over a male high school completer was 19% in 1980, but had grown to 50% in 1997. We believe that the
financial repercussions of not being adequately educated will continue to grow, leading to greater
participation in postsecondary education, particularly by adults who need to “refresh” educations that have
grown stale in the knowledge-based economy.

Page 60 of 107
 Chart 14
Earnings and Unemployment for Full-Time,
Year-Round Workers Age 25 and Older
$80,000 8.0%
$70,000 7.0%
$60,000 6.0%
$50,000 5.0%
$40,000 4.0%
$30,000 3.0%
$20,000 2.0%
$10,000 1.0%
$- 0.0%
Less than high High school Some college, Associate Bachelor’s Master’s Doctorate Professional
school graduate no degree Degree Degree Degree Degree
diploma

Median annual earnings, 1997 Unemployment Rate, 1998

Source: U.S. Dept. of Labor, Bureau of Labor Statistics

Implications for eLearning in Higher Ed: Distance learning has, in the past several years, already begun
to see fairly dramatic growth: Public four-year institutions saw the number of enrollments in all distance
education courses approximately triple from the 1994-1995 school year to the 1997-1998 school year
according to the NCES publication Distance Education at Postsecondary Education Institutions: 1997-98.
We would expect to see a similarly large jump if this information were gathered again today.

Chart 15
Enrollment in Distance Education Courses
(by size of institution)
1800000

1500000
No. of students

1200000 801570
10,000 or more students
900000
3,000 to 9,999 students
600000 404570 476900 Less than 3,000 students
300000 232750
353870
0 116320
1995 1997-98
Source: National Center for Education Statistics, U.S. Dept. of Education

Although other means of delivery besides the Web are counted in these numbers, no other delivery medium
(audio, video, or CD-ROM) has seen an increase in usage over the time period. The percentage of two- and
four-year institutions using asynchronous Internet delivery, on the other hand, grew from 22% to 60%.

Page 61 of 107
 Chart 16
Plans to Start or Increase Use of Technologies in Distance Education
(Percentage of institutions using or planning to offer distance education in 1997-1998)
1
82%
0.8
61% 60%
0.6

0.4 35% 31% 30%

17% 14%
0.2 9% 9%
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Source: National Center for Education Statistics, U.S. Dept. of Education

Scant traditional resources and more government support will push students onto the Web while the
flexibility and focus of the Internet will pull adult learners, international students and those seeking
technical expertise.

• Larger Population of Adult Learners: From 1980 to 1996, the number of college students over the
age of 25 grew by 34.7%. This non-traditional student population has a lot more baggage in terms of
work and family obligations, and therefore needs more flexible options for getting an education.

Chart 17
Fall Enrollment in Institutions of
16 Higher Education by Student Age
14
Millions of Students

12
10
8
6
4
2
0
1980 1990 1996
19 years and younger 20 and 21 years
22 to 24 years 25 years and older
Source: National Center for Education Statistics, U.S. Dept. of Education

Page 62 of 107
For these types of students, we believe that eLearning provides a viable alternative in terms of being
able to take classes on a less rigid schedule and in more convenient locations than traditional classes.
In addition, eliminating many of the constraints of time and distance from the equation by taking an
online class allows students a much broader selection of classes to choose from. Even if the local
university does not offer the class a student is looking for, there is nothing to stop him from signing up
for an online class offered by an institution anywhere in the world.

ELEARNING IN ACTION

Earn a Degree on Your Home Computer

The choices for a person wanting to work on a degree via the Internet are growing daily. Below are
just a few of the options.

• University of Phoenix: UoP is the adult education school of the for-profit Apollo Group
(APOL). In recent years, the school has seen its online enrollments growing faster than traditional
enrollments, with enrollments growing more than 43% in 1999 and reaching approximately
13,800 students today. The online division, which has actually been in existence since 1989,
offers a number of undergraduate and graduate programs, and even one doctorate program, but
only for working adults – students must be at least 23 years of age and a member of the workforce.
UoP is accredited by the North Central Association of Colleges and Schools (NCA).
• Jones International University: Differing from UoP in that it is a fully online program (no
physical campus exists), JIU offers several business-related degree and certificate programs,
although students can also choose just to take an individual class to brush up on a particular
subject. JIU is accredited by the NCA.
• Capella University: Capella is also a fully online school and is targeting people in the workforce
whose companies will pick up the cost of the student’s education. The school offers a number of
traditional degree and certificate programs, as well as some more suited to eBusiness. The Capella
site is home to its online campus, complete with an alumni center, a bookstore, online course
tutorials and other learning resources, and (our favorite) the “cybrary”. Capella University is
accredited by the NCA.
• Pensare: While Pensare does not yet have any programs underway, last fall the company
announced a strategic alliance with Duke University’s Fuqua School of Business to co-produce
and deliver an accredited Duke MBA program. In addition to developing the Duke MBA program
the partnership will work to create a design process for other business schools to offer similar
programs.
• UNext.com: Taking a slightly different approach to offering eLearning opportunities using
content from top business schools is UNext.com. The company has created Cardean University,
an online learning community for people in the field of business that delivers courses created by
the all-star faculties of such prestigious business schools as Columbia University, the University
of Chicago, Stanford University, The London School of Economics and Political Science, and
Carnegie Mellon University. Cardean currently does not offer full degree programs, and in fact, is
not even open to the public for enrollment yet, targeting mainly large corporate customers at this
time.
• NYUOnline: NYUOnline is a for-profit arm of New York University offering accredited,
asynchronous courses and certificate programs targeting career-oriented areas. The school also
serves as a consultant to businesses who seek to align learning with day-to-day activities.
NYUOnline is based on the resources and work of faculty in the NYU School of Continuing and
Professional Studies.
• KaplanCollege.com: The same company that helped get you through the SAT in high school is
now offering fully online degree programs, including among other things, a law degree (although
graduates are currently only eligible for to sit for the bar examination in California).

Page 63 of 107
• International Demand for U.S. Higher Ed: And speaking of taking classes anywhere in the world,
we believe that distance education will be popular among international learners. Although we do
believe that there will still be large numbers of international students who will want to physically
attend classes in the U.S. for the cultural aspects the experience provides, we also know that there are
many more international students for whom finances are a barrier to studying in the U.S. We believe
that institutions will begin to focus on tailoring online academic programs for these audiences in a bid
to take advantage of the international desire for a U.S. education.

• Capacity in Postsecondary Institutions Getting Tighter: In a number of states, capacity at

institutions of higher education is growing tighter every year. In Washington, for example, the state’s
Higher Education Coordinating Board is projecting that an additional 70,000 students (the equivalent
of two more Universities of Washington) will enroll in the state’s colleges and universities over the
next ten years. In order to avoid having to construct new buildings or campuses to support the growth,
the board is asking the state legislature to increase spending on online education. By doing so, they
believe that eventually students will take an average of 1.5 hours worth of classes online out of the 15
course-hours normally taken in a semester. Similar measures are being undertaken in states such as
Texas and California to alleviate capacity constraints. While some may view this as a poor substitute
for face-to-face interaction in the classroom, research suggests that students themselves are already
leading the trend by enrolling in online classes in addition to their traditional classes. At the State
University of New York, as many as 80% of students in the school’s online program were either full-
or part-time students on campus.

ELEARNING IN ACTION

Universities Fight Back

Not to be upstaged by their for-profit counterparts, many institutions are taking their course offerings
online. Even for classes that are not offered in a purely online format, schools are beginning to realize that
the benefits of using technology to supplement in-class lectures are too good to pass up. Giving courses an
online component allows greater personalized communication between students and the instructor, gives
the instructor the ability to use technology-based materials to provide supplementary instruction, and
allows instructors to track and report student progress. Whether they actually create the online courses for
a school or if they provide schools with the platform and tools needed to do it themselves, the following
companies help colleges and universities make the jump to technology-enhanced learning.

• Blackboard.com – www.blackboard.com
• Convene.com – www.convene.com
• eCollege.com – www.ecollege.com

Another provider of web-based course tools, WebCT, recently announced an alliance with SCT (SCTC)
and Campus Pipeline to provide institutions of higher education with an end-to-end solution for
integrating administrative services, online learning resources, the campus intranet and other community
tools into one system requiring only a single login. SCT’s enterprise information systems is combined with
WebCT’s eLearning platform and Campus Pipeline’s Internet infrastructure for campuses to create this
integrated system.

Websites:
www.webct.com
www.sctcorp.com
www.campuspipeline.com

Page 64 of 107
• Students’ Need for Technological Fluency in Job Market: The U.S. Department of Labor recently
identified the 54 jobs with the highest growth potential between now and 2005 – only eight of them do
not require technological fluency. The challenge then becomes finding
the people to fill these jobs, as it is estimated that 60% of the jobs now We believe that using
available require skills currently held by only 20% of the workforce. education technology
While companies will certainly spend money to train and retrain their will become a prime
current workforces, they will look to the nation’s colleges and way of delivering
universities to turn out a fresh supply of tech-savvy graduates every year. technology education
The shortfall is compounded by the desertion of qualified teachers to to more students with
industry. Therefore, we believe that using education technology will fewer full-time
become a prime way of delivering technology education to more faculty members.
students with fewer full-time faculty members.

• Increased Government Support for eLearning: As it has in the primary and secondary education
arenas, the federal government has come out as a proponent of using online learning to supplement (or
even replace) traditional higher education experiences. A couple of Department of Education
programs deserve mention. The Distance Education Demonstration Project, which will relax
restrictions on using financial aid for distance education, is a change from the previous policy that
reigned from days when online learning opportunities were often seen as scams. In a further step, the
Learning Anytime Anywhere Program will encourage the development of distance learning programs
by providing grants to universities to get new online programs started. We believe that policymakers
foresee the coming (and in many cases, present) shortage of knowledge workers as well as industry
does, and is attempting to create as many educational avenues as possible to keep the U.S. workforce
up to speed with changing marketplace dynamics.

ELEARNING IN ACTION

Playing to the College Demographic

eMarketers are falling over each other to capture the current crop of wired and wealthy college students.
The average student spends approximately 5.6 hours per week online and as a group spends about $105
billion per year according to Student Monitor. Several companies have popped up on the web hawking
goods such as textbooks and electronics, or simply providing affiliation portals targeted directly at the
college-age demographic. However, besides simply selling goods and creating communities, these sites
serve as prime advertising real estate for other businesses that target the college demographic but that may
not be natural destination sites (e.g., financial institutions or apparel retailers).

Some of the players include the following.

• CollegeClub.com – www.collegeclub.com
• eCampus.com – www.ecampus.com
• Mascot Network – www.mascotnetwork.com
• VarsityBooks.com (VSTY) – www.varsitybooks.com

Page 65 of 107
THE CORPORATE MARKET
The obvious candidates to include in a profile of the learning market are students. Today, however,
students (in the conventional sense) only represent a small portion of learners. As we have already pointed
out, learning has become an essential part of our existence throughout our lives, particularly within our
jobs. Consider this: Each year General Electric spends $500 million on training and education. GE is not
alone; corporate America is a huge investor in intellectual, or human, capital.
While the corporate training market is not nearly as big as the academic market Each year General
in the U.S., it is still large and continues to grow. In addition, corporate Electric spends $500
America’s adoption of eLearning has come at a much more rapid pace. We million on training
believe that this trend has been driven by the simple fact that companies are and education. GE is
finding it is the only way that they are able to keep their workforces up-to- not alone; corporate
speed in a business environment in which an organization must be able to turn America is a huge
on a dime. We would again emphasize that we do not believe that eLearning investor in
will (or should) ever completely replace the more traditional methods of intellectual, or
learning (classroom, text, etc.), but it is increasingly being used to a significant human, capital.
degree as a supplemental form of instruction.

Current Size: While counting the number of people who are actually involved in workplace-related
training of some sort is virtually impossible, it is a little easier to come up with a dollar figure for the size of
the market. According to Training magazine’s 1999 Industry Report, approximately $62.5 billion was
budgeted for formal training by U.S. organizations, which was about 24% higher than it was in 1993. Of
this, approximately 44% is spent on trainer salaries, 24% goes to outside providers of training products and
services, and the rest is spent on things such as facilities, materials, hardware, seminars and conferences.
The main part that we are concerned about, of course, is the 24% that is outsourced, which currently
represents about a $15-$17 billion market. More specifically, we are looking at the eLearning component,
which totaled a little over $1 billion in 1999.

Chart 18
1999 Corporate Training Budgets

Ouside services
4%
Facilities/overhead
Custom materials 7%
3%
Off-the-shelf
materials
4% Hardware Training staff salaries
7% 44%
Seminars and
conferences
7%

Total outside
expenditures
24%

Source: Training Magazine

Page 66 of 107
Projected Growth: IDC is currently predicting that spending on outsourced services, content and
technology for training will grow from approximately $14.9 billion in 1998 to $33.7 billion in 2004. While
information technology (IT) training currently dominates the mix, outsourced business skills training is
expected to reach parity by 2004. IDC is currently projecting the corporate eLearning market to grow to
$11.4 billion in 2003, representing an 83% CAGR since 1997.

Chart 19
Total U.S. External Education and Training Revenue, 1998-2004E
40
35
30
25
$Billions

20
15
10
5
0
1998 1999 2000E 2001E 2002E 2003E 2004E

IT training Business skills training

Source: IDC

Chart 20
U.S. Corporate eLearning Revenues by Component
12
10 Delivery Solutions
8
($Billions)

Learning services
6 Content

4
2
0
1997 1998 1999 2000E 2001E 2002E 2003E

Source: IDC

Page 67 of 107
Growth Drivers: Underlying these growth forecasts are assumptions about a continued increase in the
need for skilled employees and increasing levels of outsourced training. We believe that growth in overall
training expenditures will continue to be driven by the increased importance of knowledge in the economy.
It seems like a simple statement, but we believe it represents a fairly dramatic change from the past as far as
training needs are concerned. As management guru Peter Drucker stated in a recent article in Forbes, “For
most of human history a skilled worker had learned what he needed to learn
by the time his apprenticeship was finished at 18 or 19. Not so with the We believe that
modern knowledge worker. Physicians, medical technicians in the pathology growth in overall
lab, computer repair people, lawyers, and human resource managers can training expenditures
scarcely keep up with developments in their fields.” We believe Mr. Drucker will continue to be
has hit the nail on the head in explaining training’s importance to the driven by the
knowledge economy. increased importance
of knowledge in the
Implications for eLearning: All indications suggest that eLearning is economy.
gaining on traditional instructor-led training (ILT) in the corporate
environment. Although ILT currently represents more than 70% of delivered
training, this percentage is expected to fall to 35-40% by 2004. Replacing it is technology-based training,
the largest component of which will be eLearning. Radical improvements in offerings, an insatiable
demand for IT skills, the extension of the enterprise, and government sponsorship will each spark the
growth of eLearning in corporations.

Page 68 of 107
ELEARNING IN ACTION

The Wide, Wild World of Corporate eLearning

If you’re a corporate trainer looking at implementing eLearning for your organization, the good news is that
your options are vast and varied. The bad news is that the wide array of options is creating a great deal of
confusion in the marketplace for corporate eLearning. Some eLearning vendors provide training portals
that are external to the company, while others may help an organization develop an integrated learning
platform for its own personal use. Some actually do both and some provide solutions somewhere in
between the two. Below we take our best shot at breaking the group down into two main choices and then
give a few examples of each.

Training Portals
We define a training portal as a company that provides a central location for purchasers to browse a wide
variety of eLearning products. While a portal may sell some internally-developed content, it is generally a
marketplace for content developed by third parties. Today the value added by a training portal is somewhat
limited given that most content developers deliver only full courses. However, we believe that content will
increasingly be developed in a learning object format, allowing highly-customized courses to be created for
a learner using content components from multiple vendors. When the industry reaches this stage, we
believe that portals (if they prove to be up to the task) will be able to truly add value to the eLearning
purchase by creating these customized courses from their repositories of content. Some examples include
the following.

Headlight.com – www.headlight.com THINQ – www.thinq.com

TrainSeek.com – www.trainseek.com

Customized Learning Platform

Defining a customized learning platform is quite tricky. Probably the only characteristics common among
all of the providers are company-specific, web-based front ends that give access to some sort of repository
of learning materials. A vendor is also likely to offer the option of hosting the platform for the customer.
The rest is pretty up in the air, but some of the components of a customized learning platform might include
the following.

• Content (preferably in learning object form, although this is rare today)

• A content management system that serves as a repository for content
• A content delivery platform
• Learner tracking, assessment, and reporting capabilities (ability to align training with job performance)
• Web authoring tools that can be used to create custom content
• Web-based collaboration tools
• Integration capabilities (with legacy applications)

We would hesitate to say that any of the vendors offer a system that lives up to the full promise of a
customized learning platform yet. We believe that several are making great strides toward that goal, while
others are relying on dated architectures. Some examples of companies that offer various combinations of
the above capabilities include the following.

click2learn.com (CLKS) – www.click2learn.com Docent – www.docent.com

Learnframe – www.learnframe.com Lotus Development Corp. – www.lotus.com
MindLever.com – www.mindlever.com Pathlore Software – www.pathlore.com
Saba Software (SABA) – www.saba.com SmartForce (SMTF) – www.smartforce.com
VCampus (VCMP) – www.vcampus.com

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• IT Training: In 1999, core IT occupations (which includes computer scientists and engineers,
systems analysts and computer programmers) numbered more than 2.2 million in the United States, up
from less than 750,000 just 15 years earlier. By 2008, this field is expected to grow to 3.2 million
workers. These figures indicate that core IT specialties are not only the fastest growing occupations in
the country, but also compose the largest groups in absolute size, comparable to nursing or
engineering. When you add to the picture “non-core” IT jobs (as the Information Technology
Association of America did in a recent study), today’s overall IT workforce grows to around 10
million. The study indicates that roughly 1.6 million new positions have been or will be created in
2000, and half of those will go unfilled.

Chart 21
Projected Growth in IT Employment
1,200

1,000
New Jobs

Net Replacements
800
1996 Base Year 520
(in thousands)

Employment 34
129
600

177
19 15
400
249 235
568
506 471
200 391

212 193 216 201

0
1996 2006E 1996 2006E 1996 2006E 1996 2006E
Computer Computer Systems Computer
Scientists Engineers Analysts Programmers

Source: Bureau of Labor Statistics, U.S. Dept. of Labor

Although Training magazine reports that “fully a third of all employer-sponsored training in the
United States is devoted to teaching people about computers,” the apparent shortage of IT workers is
still an issue of great concern for many companies. The disparity between the still-growing demand
for IT-savvy employees and the growth rate of the overall labor force highlights the need for the fast,
effective training that eLearning provides. IDC is currently predicting that technology-based IT
training revenues in the U.S. will grow from approximately $2.3 billion in 1999 to $9.6 billion in 2004,
or a 33.4% CAGR. While eLearning is currently a small part of this market in comparison to CD-
ROM delivery, it is expected to represent more than 80% by 2004. Perhaps what is most surprising,
though, is that it is live (or synchronous) eLearning experiences that are expected to dominate the
medium, as opposed to self-paced (or asynchronous) courses. We believe that both will have a place
in the market, as some students are attracted to the flexibility of asynchronous learning and others are
attracted to the interactivity of synchronous learning.

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 Chart 22
U.S. Technology-Delivered IT Training
Revenue Share by Segment, 1999 and 2004E
$9
$8
$7
$6
Billions

$5
$4 1999
$3 2004E
$2
$1
$0
Satellite video Videotape eLearning CD-ROM
broadcast
Source: IDC

ELEARNING IN ACTION

Are You Certifiable?

Want to be a part of the Internet revolution, but don’t have the skills? Not to worry – two companies,
ProsoftTraining.com (POSO) and iGeneration (formerly HyCurve), are vying to be the dominant
providers of Internet-related education to prepare people for technical jobs. Both companies also offer
vendor-neutral certifications in various Internet job roles and provide the courseware for test preparation.
While both companies rely more heavily on instructor-led training, they also offer instruction via an online
environment.

• Business Skills Training: We think improvements in the range and quality of eLearning offerings
will help drive the demand for business skills training, bringing expenditures for these products and
services to parity with IT training. While much of the business skills training that is done today is in-
house, costs, time pressures and distance
constraints are leading many companies to turn Basic Blue: IBM’s Venture Into eLearning
to outside vendors. Another growing limitation Who: IBM’s 30,000 first-line managers
to training management from within is the What: “Basic Blue”, a 12-month blended
increase in Baby Boomer retirements; when online (75%) and classroom (25%) learning
they leave, they often take a vast store of program
management experience and institutional When: Deployed in 1999, Basic Blue is
memory with them, leaving younger workers to available 24 hours a day, 7 days a week
pick up the reins of managing the business. For Where: On every manager’s desktop or laptop
many companies, the solution to training a How: Just-in-time information and insights,
large and spread-out workforce in areas such as worksheets and tools, IBM and external web
customer service, sales, and leadership (to resources, search features, a manager’s
name just a few) is eLearning. Again, IDC is glossary, simulation modules, collaboration
predicting significant growth in technology- tools, in-person action-learning workshops
based business skills training, with revenues Why: The company is able to provide “five
reaching $10.4 billion in 2004 (a 46% CAGR) times the learning at one third the cost”
and eLearning representing upwards of 80% of
those dollars.

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 Chart 23
U.S. Business Skills Training
Revenue Share by Delivery Segment, 1998-2004E (%)
100%
90%
80% Text-based
70% training
60%
50% Technology-
40% based training
30%
20% Instructor-led
training
10%
0%
1998 1999 2000E 2001E 2002E 2003E 2004E
Source: IDC

Customer Training: Some of the most valuable training that a company pays for may be directed not
toward its employees, but rather its customers. GartnerGroup predicts that by 2003, 40% of eLearning
activities will be aimed at customers. Surprised? Think about it. Aren’t you as a consumer more likely to
make a purchase (especially a large or complex one) when you’re more informed about the product or
service? And wouldn’t you be more willing to spend the time to take a course if it’s on someone else’s
nickel? A number of companies offering free online education, like Dell Computer Corp., 3Com Corp.,
and Charles Schwab, are betting that you will be. Each company offers extensive learning opportunities
through their websites that are designed to make customers more comfortable with their purchase. Even
those courses that are not directly aimed at selling a product or service benefit the company by
strengthening brand names and creating goodwill among clients (or potential clients) by virtue of offering
free educational opportunities. As products and services grow increasingly complicated, we believe that
learning (and eLearning more specifically) will become a large component of developing brands and
maintaining customer relationships.

ELEARNING IN ACTION

Smart Customers

So who’s behind the advent of customer-focused training? While several larger eLearning vendors offer
services related to developing customer-focused content in addition to their other services (e.g., Digital
Think, SmartForce), two smaller companies in particular specialize in educating the consumer.

• LearningBrands – www.learningbrands.com
• notHarvard.com – www.notharvard.com

notHarvard.com gives customer training a 21st century moniker by calling it “eduCommerce”. The
company uses the following characteristics to define the term.

eduCommerce: (1) The next big thing. (2) Using free education as a powerful acquisition tool –
enhancing your customer value proposition. (3) Free online education as a sales and marketing weapon to
drive greater stickiness, deeper customer intimacy and higher brand loyalty resulting in incremental
revenue. (4) Because sellers need to teach and buyers want to learn.

Source: notHarvard.com

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• Government Training: As we have mentioned previously, the federal government has been a strong
proponent of integrating technology into the classroom for the kids of the nation, but what about
educating their own in the workplace? Have they embraced eLearning for the training of government
workers? Actually, yes. In what some would consider a rare case of practicing what they preach, the
federal government is increasingly adopting eLearning-based education and training for its employees.
As a huge employer, the federal government spends a great deal on educating and training its ranks
every year, and although only a small portion of it is currently being delivered online, eLearning is a
solution that certain arms of the government are turning to. The Department of Defense, for example,
which has to provide critical training for forces around the globe, has been one of the earliest adopters
of technology-based learning. In fact, the Advanced Distributed Learning initiative (which is
cosponsored by the DOD and the White House Office of Science and Technology Policy, but involves
commercial and academic members as well) is one of the groups on the cutting edge of instructional
object-based eLearning. The ADL recently published one of the first workable models for
implementing sharable learning objects. Suffice it to say that the federal government is a little more on
top of the eLearning game than you might expect.

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THE CONSUMER MARKET

The size of the consumer learning market is harder to pin down than the academic or corporate markets.
However, we believe that in time it could actually prove to be one of the largest targets for eLearning
vendors.

Lifelong Learners

The group that immediately comes to mind when thinking about participants in the consumer market are
“lifelong learners”, or those who are pursuing learning opportunities that relate to their personal hobbies or
interests. While many of these people are currently participating in informal learning activities on the
Internet, we believe that some lifelong learners are turning to more formal learning experiences in the form
of courses as these types of resources become more abundant and sophisticated. Whether people want to
learn how to cook, get a refresher on Shakespearean literature, or read a primer on the wildlife in a
particular region, the Internet is likely to have a multitude of offerings. We believe that as broadband
Internet connections become more prevalent in households, enabling more interactive learning experiences,
this type of recreational learning will become more commonplace, for entertainment as well as educational
purposes.

We do believe that it is important to realize that as this type of learning is generally avocational, the prices
consumers are willing to pay will likely be lower than for “required” work- or academic-related online
learning. In fact, we believe that much of the eLearning that consumers end up participating in will be
provided by businesses at little or no charge to them. We are increasingly seeing learning opportunities
being used as a marketing tool by companies to promote their products or services. Whether it’s L.L. Bean
giving tips on fly-fishing or Dell Computer offering courses on programming languages, businesses realize
that informed customers are likely to be better customers. Gartner Group is currently predicting that by
2003 there will be an $8 billion market in customer-directed eLearning.

ELEARNING IN ACTION

Everything You Always Wanted to Know About . . . Everything!

Probably the most common way for consumers to find online courses on subjects of interest to them is
through a learning portal. Within these portals, customers can browse through listings of courses by
subject or do a search for a particular topic. Prices for courses vary widely, from free to several hundred
dollars. In addition to providing eLearning opportunities, many portals also offer customers the
opportunity to buy books or other physical media that relate to their topic of interest. We would also note
that most portals offer more than just avocational learning opportunities; they often feature academic or
professional development courses as well.

• About.com (BOUT) – www.about.com

• Hungry Minds – www.hungryminds.com
• Learn2.com (LTWO) – www.learn2.com
• SmartPlanet – www.smartplanet.com

Continuing Education

In addition to general “lifelong learning” opportunities, we are including professional continuing education
in the consumer market because we believe that although continuing education is typically work-related,
those participating in it are, in most cases, personally responsible for the purchase and completion of the
courses. That is to say, even though they may be reimbursed by an employer, people taking continuing
education are typically professionals of some kind who do not necessarily work in an organization that has
a separate training department. Therefore, these individuals are likely to make purchase decisions based on
their own unique needs and circumstances (e.g., learning styles, schedules, etc.).

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We believe that education (not to be confused with job-specific training) within the context of professional
advancement will continue to grow. Currently, continuing education is required for 25 professions in the
U.S. Continuing education is not only mandated by many states, but
is also taken by many professionals voluntarily in order to improve
“Every year, 10 million seats their own marketability within an industry. As we have continually
for sporting events are sold, 97
stressed in this report, we believe that the economy is increasingly
million airline tickets are
growing more dependent on knowledge and knowledge workers.
purchased and 200 million Job roles tend to change more often and even in the short term, new
continuing education courses information must be incorporated into one’s work. Even if there is
are taken.” no further growth in the amount of state-required continuing
Jeff Creighton,
education, we believe that professionals will begin to see education
founder and chairman of
as more and more of a necessity as we head into the 21st century.
EduPoint.com
Continuing ed is arguably the fastest growing segment of the
education market.

Professionals That Require Continuing Education

Accounting Nursing
Architects Optometrists
Banking Pharmacists
Certified financial planners Physical therapists
Chiropractors Psychologists
Clinical lab technicians Radiographic technicians
Dental hygienists Real estate
Dentists Securities
Doctors Social workers
Funeral directors Speech pathologists
Insurance professionals Veterinarians
Land surveyors Engineer professionals
Lawyers
Source: IDC

Because continuing education is, by definition, work done in addition to a job, we believe that flexibility is
a key issue for people making purchasing decisions, making eLearning a natural alternative to traveling to a
course or conference, or even doing continuing Ed by mail. Certainly, some professions have a set number
of hours that have to be completed in person, but we believe that there is certainly room for a significant
portion of the continuing ed market to be offered in an eLearning format.

ELEARNING IN ACTION

Never Stop Learning

Whether they’re taking courses to meet official continuing education requirements or tapping online
information repositories for the latest research on a particular subject in their field, we believe that
professionals will increasingly rely on Internet resources to keep themselves up to date with new
information related to their jobs. Some of the websites that hope to become key destination sites for
continuing education include the following.
• Acadio – www.acadio.com
• CLEonline.com – www.cleonline.com
• HealthStream (HSTM) – www.healthstream.com
• Medschool.com – www.medschool.com
• MedCases – www.medcases.com
• NetCE – www.netce.com
• WebCE.com – www.webce.com
• WebEd – www.webed.com

Page 75 of 107
MORGAN KEEGAN ELEARNING INDUSTRY REPORT

Page 76 of 107
 SECTION IV:
LEARNING TECHNOLOGIES
In this section:

• The evolution of learning technologies

• Evolving technologies that will transform eLearning

• eLearning standards

Page 77 of 107
FROM ABACUS TO LMS: THE EVOLUTION OF LEARNING TECHNOLOGIES
As the eLearning industry begins to mature, we are seeing product offerings that are far beyond the simple
click-and-read courses that have characterized the industry to date. However, long before education
migrated to the Web even in its most rudimentary form, learners were using technology to enhance
educational experiences. Most recently, CD-ROMs were the delivery medium of choice, but even before
that, distance learning was accomplished through the use of video- and audiotapes in learning experiences
when being there in person wasn’t an option. Although the absolute costs of these latter technologies may
be low in comparison to the networked technologies being introduced today, we would argue that
limitations in their effectiveness and scalability make them more expensive solutions over the long run.
The chart below, which was developed by SRI Consulting’s Learning on Demand group, illustrates the
changes that learning technologies are undergoing and the effect of those changes on the effective delivery
cost.

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The early days of CBT: Early versions of computer-based training relied mainly on CD-ROM. One of the
main benefits of this type of CBT is that it does not face the bandwidth problems that web-based training
(WBT) does. Because of its large storage capacity, a CD-ROM can deliver rich multimedia presentations
without clogging up a network by downloading large audio or video files. Many would even argue that the
presentation of content has taken a step backward as it has migrated from CD-ROM to the Internet because
of the relative lack of multimedia components. The downside of training on a CD-ROM, though, is its
static nature. Once produced and distributed the content on the CD-ROM cannot be changed no matter
how fast it becomes outdated. Organizations that utilize CD-ROMs for training soon find that they have
invested in a library of titles that quickly reach the point of obsolescence. In addition, it is extremely
difficult for organizations to track users’ performance with CD-ROM-based training (if, indeed, they’re
using it at all).

Baby Steps onto the Web: The early stages of Internet acceptance in the mid 1990s provided education
and training providers with a natural platform on which to offer learning opportunities. Distance education
offerings sprouted up on the Web, sometimes offered by accredited academic institutions or reputable
training providers, but more often as the products of no-name providers. While some of the unbranded
content was no doubt of high quality, the programs that were not (equivalents of the “Can you draw me?”
tests in the back of magazines that led to an art “degree”) left a bad taste in the mouths of consumers and
educators alike. The term “digital diploma mill” entered our lexicon for the first time, and subsequent
eLearning providers faced a significant credibility hurdle. In terms of technology, online courses were
primarily comprised of various hyperlinked web pages through which the learner advanced by clicking.
Collaboration with other learners or the instructor was generally limited to what could be accomplished via
e-mail. And, as almost all users accessed the Web via dial-up connections, multimedia components were
virtually non-existent.

Where We Are Today: While the vast majority of learning opportunities on the Web are still of the fairly
dull “read-and-click to next page” variety, we would deem 1999 as a breakout year for advances both in
content and technology related to eLearning. Today, the tools to author and publish courses are much more
readily available to creators of content. Content delivery tools are growing in sophistication. Web
collaboration tools are ready for prime time, and learning management
We believe future systems (LMS) have been developed that can track, manage, and tie together
manifestations of an entire enterprise-wide program of learning. A number of vendors have
eLearning will allow begun to bundle all of these tools together into one package to create
the learner to be integrated learning systems that can either be hosted by the customer or the
more in control of vendor (in an application service provider, or ASP, model) to address
his own learning organizational learning needs. Bandwidth limitations still hamper the
experience, thus widespread use of multimedia applications, but the growing base of
making it more subscribers to broadband technologies is alleviating this problem and creating
timely and relevant, more demand for interactive content that goes beyond the boring “read-and-
both to the individual click” model.
and to the
organization. Where We’re Going Tomorrow: Although the past several years have been
characterized by eLearning that looks a lot like traditional learning slapped on
a Web site and decorated with a few bells and whistles, we believe that the
coming years will see fundamental changes to the learning model, enabled by networked technology. We
would again stress that we believe future manifestations of eLearning will allow the learner more control
over his own learning experience, thus making it more timely and relevant, both to the individual and to the
organization. The following are some of the major developments we expect in eLearning.

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• Highly relevant content will be easy to find, purchase, and deliver through an organization’s learning
platform.
• More sophisticated content management tools will be able to create highly customized courses on the
fly for learners, using reusable learning object technology.
• Learning management systems will monitor and adjust an individual’s learning program, taking into
account the learner’s existing proficiencies, job role, learning objectives, learning style, and preferred
delivery method. The LMS will also be able to carefully track and analyze a user’s progress in
programs of learning over long periods of time.
• Training will be linked to performance on both an individual and organization-wide level, so that the
return on the investment in learning can be more accurately measured.

Vendors are already touting features like these in their product offerings today, We believe that
but we believe that today’s “integrated learning systems” will pale in today’s “integrated
comparison to the powerful capabilities of the ILSs that will be available in as learning systems”
little as five years. The advancements described above may only be fully will pale in
realized when all eLearning tools and content are based on an accepted set of comparison to the
industry-wide standards, which will allow reusability of content and powerful capabilities
interoperability of technologies. We will provide a more in-depth discussion of the ILSs that will
of the development of eLearning standards at the end of this section. be available in as
little as five years.

eLearning from the Learner’s Perspective

A number of the developments mentioned above are already becoming reality, and we expect the rest to
follow in short order. But these capabilities, for the most part, represent the value-added surrounds of
eLearning – that is, the features that make eLearning a valuable organizational asset from the point of view
of an administrator or corporate trainer. They don’t actually address the value to the learner. Therefore,
let’s now take a look at how an end-user might actually experience eLearning.

eLearning today comes in various forms. While you might consider your “Word of the Day” e-mail to be a
pretty good form of eLearning (and it is), we will focus this discussion on the more formal types and tools
of eLearning currently in use. But first of all, let’s figure out what the world of eLearning looks like from
where the learner sits.

Before the Internet revolution, anyone wanting to become educated on a particular subject had a few
options:

• Take a class at the local university.

• Attend classes through his employer’s training center or a commercial training center.
• Take a correspondence class through a distant university.
• Do independent study.

While attending a class involves face-to-face learning and is likely to provide a quality educational
experience, there are a lot of variables at play, particularly for working adults with a very specific learning
objective.

• What if the class doesn’t meet when I’m free?

• What if the class meets in a location far from where I live or work?
• What if the instructor is bad?
• What if I’m just wasting my time because the subject of the course does not meet my needs?

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If these issues do hinder the learner from taking the class, there’s always the correspondence course option.
Because the learner can select a course from a much greater pool of universities, the odds are better that
he’ll find one that is closer to what he needs. Plus, he won’t have to worry about traveling and scheduling
conflicts because he’ll do his learning in the comfort of his own home. However, we believe that many
citizens of the 21st century are likely to be put off by the thought of receiving lessons and sending
homework through the mail. The pace of this method of study is not likely to appeal to someone looking to
get up to speed on a particular topic quickly. Interaction with the instructor and other students taking the
class is also likely to be minimal.

The last option, then, is independent study. While this certainly doesn’t solve the problem of being able to
collaborate with other learners, it does fit the other criteria of scheduling, relevancy, and speed. The learner
can study whenever and whatever he wants, at any pace he feels is appropriate. The problem? No credit.
While an academic institution or employer might admire the learner’s initiative in conducting independent
study, there is no way of knowing if the learner actually accomplished or learned what he said he did.

So, if none of the above options works for the learner, what are his other options? Not long ago, the answer
to that question would have been “Not much.” Today, through the
emergence and development of networked technologies, learners can Through the emergence
participate in a variety of different learning experiences, at least one of and development of
which is likely to meet anyone’s requirements for topic, schedule, and networked technologies,
format. Learning experiences can range from a quick tutorial on how to learners can participate
choose a wine to go with dinner, to a 10-week course on a programming in a variety of different
language, to actually getting an accredited MBA. But how does it work? learning experiences, at
There are basically three formats for eLearning, each of which meets least one of which is
different needs and uses different technical elements. likely to meet anyone’s
requirements for topic,
schedule, and format.
Synchronous Shared Learning (SSL)

SSL could probably be most closely compared with a traditional classroom learning experience. The
learners and instructor are all logged on to a live, web-based collaborative learning environment and are
participating in the class at the same time. This format allows the students to ask questions and receive
answers, contribute to a discussion, or ask the professor to alter the pace of the class -- all in real-time. Just
as in a live, in-person class, the instructor can quickly adapt his teaching to meet the needs of the students,
by going faster or slower, or by following a particular stream of discussion or questions. The main
difference is that the students are not all sitting right in front him; they could actually be spread out all over
the world. The benefit of SSL is that any group of people with a keen interest in a certain subject can have
a shared learning experience, without geography being an obstacle. Some instructors may protest that not
being face-to-face makes them unable to pick up body language cues that tell them when the students don’t
understand. However, learners who are shy or afraid of sounding unintelligent in an in-person setting may
be more likely to participate in class discussions in an online environment.

SSL Technical Elements: The SSL experience is likely to take place in the context of a collaborative Web
environment. There are a number of vendors that provide this type of collaboration tool for SSL.
Depending on the sophistication of the tool, features of SSL might include the following.
• Registration: This allows the learner to sign himself up, or an administrator to sign up a large group
of people for a session via the Internet.
• 1-way Video: This allows the students to see the instructor via live or recorded streaming video.
• 1- or 2-way Audio: This allows either the students to hear only the instructor, or (in 2-way audio) for
students to be given the floor for discussions. (We are referring here to voice over IP, or VoIP,
capabilities. Virtually all SSL experiences will use audio, but if the web collaboration tool is not
capable of providing VoIP services, a separate conference call must be set up.)
• Application Sharing: Members of the group in different locations can all work on an application
(e.g., a spreadsheet) at the same time.
• Power Point: Most all applications will allow the instructor to show a Power Point slide show.
• Whiteboarding: This feature allows the instructor to make real-time notes or use some type of
pointing or highlighting tool on the screen.

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 • Polling: The instructor can ask the learners a question and receive an immediate response by having
the learners choose from a given list of answers.
• Hand Raise Feature: A learner who has a question can indicate as such by clicking on a “hand-raise”
icon. The learner will then either be given the floor to ask the question audibly if 2-way audio is
available, or will be prompted to type in the question.
• Web Touring: The instructor can navigate the web within the confines of the collaborative learning
environment.
• Chat: This allows learners to chat privately with other learners or with the instructor.
• Testing: This gives instructors the ability to test the learners on the material presented.
• Tracking: This allows the instructor to view the progress of the learner if testing is available as a
feature.
• Archival Access: This records the collaborative session and stores it for later replay.

Asynchronous Shared Learning (ASL)

While the SSL format maintains the shared learning aspects that many see as the primary benefit of
traditional instruction, it does not address the issue of scheduling. One of the main reasons that a learner
may opt for an online course is because of time-constraints associated with work or family obligations.
However, if the learner can’t attend an on-campus class at 7:00 on Tuesday nights because of Junior’s
soccer games, it’s unlikely that he’ll be able to log on to the online class at that time either. That’s where
the benefits of ASL become most evident. Particularly for people who travel frequently, have unusual
work schedules, or are just all-around busy (and who isn’t these days?), ASL may make the most sense
because they can log on whenever they have free time. Certainly the collaborative dimension of the class is
likely to be diminished somewhat, as the main instruction will likely come from reading a lesson or playing
video or audio clips, but learners still have the opportunity to interact with other students and the instructor
using vehicles like message boards or e-mail.

ASL Technical Elements: Because ASL does not take place at a set time, no live (real-time) collaboration
tool is necessary. The context of the ASL experience is likely to be a password-protected website that is
based on some type of course platform. A variety of different vendors offer this type of platform, and most
are geared either for the academic or the corporate market, although we are seeing each type of vendor
cross over into the other’s traditional market. Some of the important features of ASL include the following.

• Registration: Again, it is important that the learner is able to register online, and that someone who is
administering a large group of learners is able to register them as a group.
• Tracking: Because the instructor is not interacting directly with and getting immediate feedback from
the learner during his learning experience, it is even more important that the instructor be able to keep
up with the learner’s progress. This includes tracking how many times the learner logged on, how
long he spent on each session, areas where he spent an unusual amount of time, his performance on
tests, etc.
• Multimedia Capabilities: ASL is likely to be fairly dull if the learner is only given text to read.
Sound, video, or animation clips can make for a much richer experience.
• Subject Matter Expert (SME) Assistance: Because in an ASL experience there is no live instructor
to answer questions, some ASL setups will have built-in forums where learners can ask questions to
an SME that will be answered quickly, if not immediately.
• Threaded Discussion: This is a way for members of the ASL “class” to communicate with one
another on topics that they are studying. ASL experiences will also likely make use of e-mail to keep
in touch with one another and the instructor.
• Simulation Exercises / Virtual Labs: This element of ASL is still in its early stages, but we believe it
will have strong implications for the reinforcement of learning objectives. Because the learner
working in an ASL format is doing so at her own pace, she has more freedom to spend time on
putting what she has learned into practice.
• Testing: In any eLearning experience, testing of the learner’s understanding of the material will be a
critical component if results of the learning experience are to be tied to changes in performance.

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Independent eLearning (IEL)

IEL is just what it sounds like. The learner is not a part of a “class” with other students, and most likely
does not have an instructor. It is more likely that the course will be offered by a commercial vendor, rather
than by a university, although this is not always the case. Whenever the learner realizes that she needs to
brush-up on a certain subject, she can simply find the course she needs from an online catalog and take it at
her leisure. She can go at her own pace when learning the material, focusing on the sections she needs
particular help in. The IEL format can also be more of a “just-in-time” experience; in other words, the
learner does not have to operate on the time frame dictated by the course provider, as she would in a shared
learning experience. We believe that courses taken in an IEL format will be better suited to take advantage
of a modular learning object-based structure that will allow the learner to receive a truly personalized
learning experience. Using pre-assessment tests and the learner’s digital profile, the learning management
system will be able to construct the optimal course for the learner. Despite what we see as the many
benefits of shared learning experiences, as described in preceding
paragraphs, we believe that the IEL format may become one of the most We believe that the IEL
frequently used means of learning via networked technology because of its format may become one
just-in-time nature and customizability. of the most frequently
used means of learning
IEL Technical Elements: A course taken in an IEL format will have via networked technology
many of the same features as a course in the ASL format. However, because of its just-in-time
because there will generally not be an instructor in an IEL experience, the nature and
learning management system should be designed to give feedback to the customizability.
learner himself, or his supervisor, that will assist in achieving stated
learning objectives. One of the most important features of the LMS will be
its ability to conduct pre-assessments so that relevant courses can be built from modular learning objects.
We believe technology that allows highly-customized courses to be built on the fly based on a learning
profile and learning objectives will become increasingly more sophisticated in the years to come, and will
be the “killer app” of the eLearning industry. Again, we would refer readers to our research on eLearning
standards at the end of this section.

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NEXT ON THE AGENDA FOR ELEARNING?
While we believe that current eLearning technologies are exciting, we believe that today’s applications are
only scratching the surface of what is possible. Below we talk about some of the advances in technology
(from the general to the specific) that we expect will make eLearning an indispensable part of our daily
lives in the years to come.

Broadband Options

Today, the richness of an eLearning experience is most severely limited by bandwidth constraints. The use
of multimedia components such as audio, video, animations, and simulations are only feasible if the
learner has ample bandwidth to receive them. However, the ability to include multimedia components is
often what makes eLearning options attractive in the first place. According to U.S. Department of Defense
data, people have short-term retention of what they hear, 40% retention of what they see and hear, and
75% retention of what they see, hear, and do. Therefore, building in components that allow the learner not
only to read and listen to material, but also to practice it using simulations is critical to an effective
eLearning experience. We believe that coming high-bandwidth, or broadband, technologies will remove
many of the barriers to rich eLearning experiences. While only about 3
million North Americans now have access to broadband services, that We believe that coming
number is forecasted to grow by six to eight times in the next three years. high-bandwidth, or
Some of the broadband options include the following. broadband, technologies
will remove many of the
• T1 Line: For most mid-size to large companies that intend to be barriers to rich eLearning
heavy users of eLearning, a T1 line will be the likely choice. T1 experiences.
lines are digital circuits between a long-distance carrier and the
customer, providing access at rates up to 1.54 megabits per second
(mbps). Though expensive, a T1 line has the ability to transfer large amounts of information both
downstream (to your computer) and upstream (away from your computer), a feature necessary for the
transmission of large files.

• Cable Modems: For home-based eLearners, probably the quickest and most affordable Internet
connection you can get is a cable modem, delivered to you by the same people who bring you ESPN
and CNBC. Although actual rates will depend on who else in your neighborhood is using a cable
modem at the same time, cable is capable of delivering downstream access at up to 10 mbps and
upstream connectivity at between 200 kbps and 2 mbps. This always-on technology (no dial-up) is a
viable solution for learning from the comfort of your own home. IDC predicts that the cable modem
subscriber base in the U.S. will grow to 9 million users by 2003. We believe that cable modem access
will be big in schools too, where more classrooms today are cable-ready than have phone lines that
can be used for dial-up access. The cable industry has already gotten into the education act by
installing free cable modem service in more than 5,700 schools and public libraries in the U.S.

• DSL: Digital subscriber line (DSL) technology is cable’s main competition for delivering broadband
access to the home. Provided by the telephone company via the existing copper wire, DSL comes in
two flavors: asynchronous (ADSL) and synchronous (SDSL). ADSL is capable of providing
downstream access at up to 8 mbps and upstream access of 1.5 mbps, while SDSL provides equally
broad bandwidth in both directions. Again, the rates mentioned are maximum rates; actual DSL rates
will depend on how far away you are from the phone company’s switching site.

• Satellite: For rural areas where cable and telephone companies haven’t gotten around to providing
broadband service, satellite access is an option. If you have an open view to the southern sky, data can
be beamed to your dish and on to your computer at a rate of about 400 kbps. However, because
satellite transmissions are one-way, you also have to have a separate ISP connection to send data back
upstream. So, if you need to send large homework files to your professor across the country, you may
be out of luck with satellite service.

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ASP Model

Application service providers host software applications on their own servers for clients who can then
access them remotely via a Web browser. Particularly for companies implementing enterprise-wide
learning systems or educational institutions looking to affordably offer a wide variety of applications to
students with minimal management and maintenance effort on the part of the institution, we believe that the
ASP model of delivery may make a lot of sense. Although ASPs are not yet used widely, especially in the
education and training industries, there are a number of vendors now pursuing this strategy within the
eLearning industry. We expect growth in the number of eLearning applications offered via an ASP model
for several reasons.

• IT Personnel Shortage: IT staffs at companies and educational institutions all over the world are
stretched thin. Outsourcing the day-to-day management and maintenance of learning applications
relieves the IT department of that burden.

• Fast, Affordable Implementation: Using software applications via the ASP model may be the most
efficient for a couple of reasons. First, the customer does not have to buy the software or any of the
other equipment used to run it (e.g., servers, operating systems, etc.). Second, in the time it might take
an organization to install an application in the traditional (client/server) model, an ASP-delivered
application can be up and running and being productively used by
learners. Third, the customer does not have to deal with the costs of Although the ASP model
installing software upgrades in the following years. has several obstacles to
overcome in terms of
• Ubiquitous Access: Because the application is delivered via a Web bandwidth and user
browser, learners are able to access it not only from their desk at the comfort with the security
office or the school computer lab, but also from home, their laptop, of outsourcing critical
or a Web café. applications, we believe
that its time in the
Although the ASP model has several obstacles to overcome in terms of marketplace is coming.
bandwidth and user comfort with the security of outsourcing critical
applications, we believe that its time in the marketplace is coming.

Wireless Technology

We believe that one of the main reasons that technology has been integrated into the classroom to a very
limited extent in our nation’s K-12 schools is the lack of personal computers for students and teachers.
Greg Nadeau, the CTO at the Massachusetts Department of Education, describes in a May 2000 Converge
article the consequences of this shortage. In general, he says, students wanting to use a computer at school
have to wait their turn. Computers in schools are limited either to the computer lab or a few machines in
the back of the classroom. In either case, using technology is often more disruptive for teachers than
beneficial because it requires a trip from the classroom to the computer lab and the division of the class into
groups that cannot work simultaneously. Those of us in the “grown-up” world, who generally have
computers of our own, use them as tools for virtually every work task (writing, calculating, planning,
communicating). Few of us would be able to function for even a day without our computers constantly at
our fingertips. In schools, on the other hand, computers are usually employed for one-time projects that are
often more for the purpose of “edutainment” rather than education. Computers end up serving more as toys
than tools. Nadeau says, “While browsing the Web has changed the way students research, the work that
results from the research (student achievement) is still pretty much the same.”

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So, what exactly does all this have to do with wireless technology? We strongly believe that the integration
of wireless personal computing technology into schools goes a long way in
getting students more involved in the work they do and, by association, We strongly believe that
making their work better. Why wireless? The simple answer is logistics. the integration of wireless
Kids move from classroom to classroom all day and need rugged tools that personal computing
can go where they go, including home at the end of the day. Desktop technology into schools
computers certainly don’t fit the bill for portability, and laptops that have to goes a long way in getting
be plugged into the network with each class change would cause more than students more involved in
a little disruption to the typical school day and reduce flexibility. That’s the work they do and, by
why we believe that many schools looking for networked computing association, making their
solutions in the future may turn to wireless solutions. work better.

A recently approved high-speed wireless standard has made investing in a

system both less risky (less chance of obsolescence), less expensive (fewer access points are required to
support the same number of students), and faster (rates up to 11 mbps versus 2 mbps under the old
standard). Manufacturers already have equipment on the market that is standards-compliant, and we expect
to see more school districts go with a wireless network as these vendors start making their pitches to
schools.

ELEARNING IN ACTION

Wireless U

Some universities are also starting to take steps toward a wireless campus. This fall at Buena Vista
University, which has campuses at multiple locations in Iowa, students and faculty will all be
equipped with notebook computers that will be able to connect wirelessly to the campus network
through a program called eBVyou. The 130 wireless access points located across campus will allow
students to access the network anywhere from classrooms to dorms to the local lake.

In similar fashion, the Owen Graduate School of Management at Vanderbilt University started a test
run of a wireless network for the business school in January 2000. The incoming MBA class of
August 2000 will be required to have an Owen-configured laptop, which will have access to the
network throughout the school, into the courtyards and even reaching to local coffee shops. The
recent improvements in rates of data transfer and costs have been cited as key reasons the school
decided to go with a wireless campus.

Admittedly, the cost today of outfitting younger students with laptops designed to withstand the punishing
effects of life with a kid is, in general, still prohibitively high for most schools. However, some schools
around the country have already begun implementing such programs, and although there are not yet enough
such cases to provide statistical proof of performance improvement, the anecdotal evidence is encouraging.
Particularly for students who have not demonstrated academic success in the past, the use of laptops seems
to create a better attitude toward and engagement in learning, resulting in improved academic performance.
While we do not expect to see laptops on the desks of every middle and high school student in the next
couple of years, we do look for this trend to grow over the coming decade. In the meantime, we believe
that more schools will invest in temporary wireless solutions, such as mobile carts equipped with laptop
computers that connect wirelessly to an access point on the cart that can be wheeled to classrooms when
they are needed. However, we believe that personal laptops for students will eventually become a reality
with financial support from federal, state, and local government, parents, and also corporations who are
increasingly realizing that the development of a tech-ready workforce must begin at a young age.

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Internet2

Thought one Internet was more than you could handle? Well, just wait because Internet2 (I2) is on its way.
For those of us who get impatient with even the high-speed cable and DSL options, I2 is just what we’ve
been waiting for. A record-setting data transmission via I2 was recently clocked at over 900 mbps (more
than 1,000 times faster than a typical modem), leaving even the above-mentioned high-speed options
solidly in its dust. Perhaps even more impressive is its ability to guarantee that content will arrive at its
destination on time and in its proper form, meaning, for example, that transmitted video would come
through in a full-screen format completely clearly, without jerkiness or dropped frames; the picture quality
will actually be better than today’s television broadcasts. For now, though, access to I2 is limited to a
group of universities, corporations, and government agencies who are trying to get back to what the
Internet was originally intended for: academic collaboration.

Started in 1996 as a university project to allow the transfer of huge amounts of data and streaming video
over networks for the purpose of learning and research, I2 went live in February on a $500 million fiber-
optic backbone. The possibilities for learning and research over I2 are endless – students working together
in a virtual lab, real-time observation of medical procedures in better-than-TV-quality video, eerily real
simulations, complete access to vast digital libraries . . . the list goes on.

As an example of how I2 is being used today, an announcement was made recently that 11 of the world’s
leading astronomical observatories located on the peak of Mauna Kea in Hawaii have been hooked up to I2,
allowing greatly enhanced capabilities for remote use of the telescopes. While the main purpose of this
connection is certainly for scientific research, there are already plans to share findings with the public via
virtual observatory tours that can be transmitted to libraries, planetaria and classrooms all over the world.

Plans for I2 are not for it to remain locked in the grip of academia, We believe that I2 has
though. More than 60 corporations and 30 other organizations have enormous implications
joined the team of 170 universities in the I2 project, all hoping to benefit for eLearning down the
from this joint effort to develop the Internet and, perhaps more road, simply because it
importantly, its various applications beyond our wildest imaginations. will make concerns about
Recently, the I2 consortium announced that K-12 school districts would the capabilities of the
also be allowed to partner with universities to participate in the I2 project. technological medium
We believe that I2 has enormous implications for eLearning down the secondary to providing
road, simply because it will make concerns about the capabilities of the meaningful educational
technological medium secondary to providing meaningful educational experiences.
experiences.

Games and Simulation as Training

Any parent will attest to the fact that nothing holds a kid’s attention like video games. With their high
levels of interactivity, video games present users with numerous (and sometimes complex) sets of decisions
and then provide immediate feedback from those decisions. Although the feedback from your Nintendo
system may be a little unrealistic, the concept is the same as in eLearning: The user gets to see the outcome
of a decision in a virtual setting. This type of training goes straight to the heart of the phrase “practice
makes perfect”. Simulation technology can be effectively used not only in business applications (e.g.,
participating in a virtual contract negotiation), but also for more active jobs, like flying a helicopter. The
U.S. military is actually one of the more active users of simulation technology. Since the tasks that
members of the military are expected to perform may only arise in the event of an actual conflict, they must
have alternative ways to practice their skills in a setting that reduces the possibility of dangerous
consequences. Technology-based simulations fit the bill perfectly. While video games and simulations
today are much more advanced in the entertainment world than they are in the realm of learning, we look
for this to be a big area of growth for content publishers.

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Electronic Performance Support Systems (EPSS)

If we view the key goal of eLearning as being performance improvement, then electronic performance
support systems put us one step closer to that end. Although an EPSS can be defined in several different
ways, it is basically a system that allows its user to accomplish a task with little or no previous training and
without help from a human. The website epss.com! defines an EPSS as a computer system that “integrates
software tools, knowledge and learning experiences to improve business performance by (a) bringing
individuals up to speed in their work as quickly as possible and with the minimum of support from other
people, and (b) providing an electronic infrastructure to enable organizational learning.”

In his article, “EPSS: Expanding the Perspective”, Bill Miller describes an EPSS as software that has the
following characteristics.

• Process simplification: Reducing the complexity or number of steps required to perform a task
• Performance information: Providing the information an employee needs to perform a task
• Decision support: Enables an employee to identify the action that is appropriate for a particular set of
conditions

Electronic performance support ranges in scope from the automatic spell-checker on your word processor
to wearable computers that create an “augmented reality display” complete
with instructions and graphics that appear on the surface of the area on which The beauty of an
you’re working. Although we do not believe that an EPSS and an integrated EPSS is that it allows
learning system will ever be (or even should be) completely interchangeable the user to learn while
technologies, we do believe that they are highly complementary. While actually accomplishing
traditional learning experiences, and even eLearning experiences, can the task at hand. In
provide a solid base of understanding for performing a task, we believe that other words, EPSS
most people agree that the best way to learn is by doing. The beauty of an allows just-in-time
EPSS is that it allows the user to learn while actually accomplishing the task learning at its best.
at hand. In other words, EPSS allows just-in-time learning at its best.

In addition, while much of our discussion thus far in this report has focused on eLearning as it relates to
what we call “knowledge workers”, EPSSs also have important applications in jobs that require more
manual labor. In an article entitled “Wearable Training” in the April 2000 issue of Inside Technology
Training, author Kim Kiser describes the wearable computer that Florida postal clerks can use to fix sorting
equipment. The system is comprised of a tiny computer, a holster with a 4-inch monitor, a battery pack,
and an audio transmitter. When faced with broken equipment, the user can connect to the server in order to
retrieve diagnostic and repair information about the machine in question. Similar systems have been
designed for auto mechanics who are increasingly dealing with unfamiliar computerized equipment in the
cars they work on. Instead of having to constantly refer to a growing stack of manuals, the necessary
information was loaded onto wearable, voice-activated computers that could retrieve and display
sophisticated diagnostic help on the attached monitor. Kiser goes on to describe coming advances in touch
screens, speech recognition software, and displays that are integrated into eyeglasses that will enhance the
usability of a wearable EPSS.

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ELEARNING STANDARDS: CREATING A BLUEPRINT FOR THE FUTURE
To put it as simply as we can, we believe that learning standards will allow for the interoperability of the
various products and services offered by eLearning vendors, and the interoperability of these components
will enable the customization of learning programs to the learner’s needs. We do not think it is too strong a
statement to say that learning standards are the Holy Grail of the eLearning industry.

What follows, as promised, is our in-depth explanation of these learning standards we have been
mentioning. Frankly, we believe that this report places more emphasis on the issue of open, industry-wide
standards as it relates to eLearning than many other investment-oriented reports have, but there is a reason
that we are focusing on it. While it can be a confusing topic, particularly in
Companies that are not light of the still-developing standards environment, and may seem to be
on board with the more of an academic than financial discussion at this point, we believe it is
standards issue early in crucial to understand. We believe that the widespread adoption of a set of
the process will, we learning standards will be a critical turning point for eLearning and will
believe, be at a significant mark the inflection point of dramatic growth for the industry. Companies
competitive disadvantage. that are not on board with the standards issue early in the process will, we
believe, be at a significant competitive disadvantage.

We make the above statements without apology for their scope. We will spend considerable time
reviewing the specifics of the emerging set of learning standards, but we believe that the truth in our
assertion of the importance of standards has been proven in innumerable other areas throughout history.
Imagine, for example, a railroad system without standards for track width, or stereos without a standard for
the CDs we play in them, or the Internet without standards such as TCP/IP, HTTP, and HTML. When it
comes right down to it, standards are an integral part of virtually everything. There is a reason that we
don’t worry about whether the copy of The Godfather we rent at Blockbuster will play on our VCR at home
or if the size 8 shoes we order on the Internet will fit. The reason is that just about everything, from home
video technology to shoe sizes, is based on accepted sets of standards. Whether the standards were
developed through a formal process (de jure) or simply evolved through time (de facto), the existence of
standards is largely responsible for the relative ease with which we accomplish most tasks in our daily
lives.

eLearning Takes on the Standards Challenge

Given this argument, it is relatively easy to understand why a set of standards for the eLearning
environment are essential. If I want to run course content authored by one vendor on a learning system
from another vendor and then assess my performance with a test from yet another vendor, then it only
makes sense that there should be some set of operational standards on which they are all based, making
these separate components interoperable. In fact, we do not believe that a mature eLearning economy can
develop without the existence of such standards.

It may come as a surprise then, that such a set of formal standards does not yet exist. We believe it is
because of this lack of standards that the industry is as fragmented and immature as it is today. We
strongly believe that once a set of standards exists in a workable form and
consumers are educated on their merits, purchasers will begin demanding We believe it is because of
standards-compliant products, and the industry will undergo a dramatic the lack of standards that
transformation in terms of organization and efficiency. Although the next the industry is as
couple of years will be characterized by overt efforts to implement fragmented and immature
learning standards, the ultimate result will be that everyone will be using as it is today.
standards-based products without even thinking about it. (When was the
last time you gave much thought to why your VCR works, no matter what
video you put in it?)

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The key benefits that we believe will result from the industry-wide adoption of a set of learning standards
are best summed up in the following list of “abilities.”

The “ABILITIES” list of content enablers

Accessibility: Access instructional components from one remote location and deliver them to
many other locations.
Interoperability: Use instructional components developed in one location with one set of tools or
platform in another location with a different set of tools or platform.
Adaptability: Tailor instruction to individual and situational needs.
Reusability: Incorporate instructional components into multiple applications.
Durability: Operate instructional components when base technology changes, without redesign
or recording.
Affordability: Increase learning effectiveness significantly while reducing time and costs.

Source: M. Parmentier, 1999

Virtually all of these “abilities” deal with the issues of efficiency and effectiveness – efficiency and
effectiveness in design, in development, in finding, in purchasing, and in
using. As product life cycles grow shorter and shorter, companies are
increasingly searching for quick, inexpensive ways of getting their We believe that the
employees, suppliers, and customers up to speed on the latest need for speed is one
developments. We believe that this need for speed is one of the key factors of the key factors that
that is driving demand for eLearning, and only through the use of standards is driving demand for
will eLearning vendors be able to deliver the products and services that will eLearning.
meet that demand. However, the standards must first be developed.

Who’s Who in the Standards World

Fortunately, for all parties involved (vendors and purchasers alike), the process of creating standards for
learning is well underway, and, for certain standards, is nearly complete. There are a number of groups,
each comprised of various participants from business, academic and government domains, that have been
hard at work for the past several years on the development of specifications (the precursors to standards)
for learning. Some of the key groups involved in the effort have been the Aviation Industry CBT
Committee (AICC), EDUCAUSE’s Instructional Management System (IMS) Project, the U.S.
government’s Advanced Distributed Learning (ADL) initiative, the Alliance of Remote Instructional
Authoring and Distribution Networks for Europe (ARIADNE), and others. Each group has a somewhat
different agenda and, in some cases, a vastly different constituency. However, even without discussing
who is involved or what their specific agendas are, we can appreciate the fact that these groups have
invested the time they have in the specification development process for a reason. That reason is that the
members of these groups see a critical need for a uniform way of creating, publishing, indexing,
distributing, finding, buying or selling, and using learning content and tools.

While it may seem that the involvement of so many groups in the development of learning standards may
result in a “too many cooks spoil the broth” kind of situation, we believe that just the opposite is happening.
Each of these groups is working to develop specifications (again note the contrast to standards) which
address the needs of its particular constituency. The outcome of all these efforts is a comprehensive body
of work that is now converging in order to create an accredited set of standards through a process being
conducted by the Institute of Electrical and Electronics Engineers (IEEE) Learning Technology Standards
Committee (LTSC). The members of the original specs development groups will eventually take back to
their domain the components of the set of standards that apply to their unique work, but what will be left
behind is a (generally) comprehensive set of learning standards that they all work from. We are aware that
this is confusing and would be happy to discuss the details of the standards development process further
with anyone who is interested. However, we believe that at this point it should be sufficient for investors to
know that an accredited set of standards, developed by many parties with a stake in its existence, is well on
its way to becoming reality.

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Learning Objects: What the Standards are Standardizing

The next question you should be asking yourself, “So what exactly is this alphabet soup of groups trying to
standardize?” Glad you asked, because this is where it gets good. Everything that we’ve been saying in
this report that eLearning will be capable of – customizing courses, tracking progress, offering “just-in-
time” learning opportunities – will only be feasible if the basic infrastructure of an eLearning component is
designed to be interoperable and communicate with components from a variety of sources. Within the
context of this discussion on standards, these elemental units can be
We predict that, within a called “learning objects” and are the basis for the standardization
few years, much of the movement. There are numerous definitions of a learning object, but it is
content that is created for basically a small “chunk” of learning content that focuses on a specific
the eLearning learning objective. These learning objects can contain one or many
environment will be in components, or “information objects”, including text, images, video, or
object form. the like. Reusability will be supported both at the learning object and
information object levels, and because of the standardized way in which
these objects will be built and indexed, both learning objects and
information objects will be easy to find and use. We predict that, within a few years, much of the content
that is created for the eLearning environment will be in object form. Why? Developers recognize that
content available in “chunked” form is more likely to be purchased and used for a variety of different
contexts by a much broader audience. Also, this granulization of content will allow content providers
incredible leverage of their knowledge repositories.

Again, let’s return to our video example. Imagine if the VCR you bought was only designed to play
movies released by Miramax. You may like Miramax’s edgy style, but every now and then, you feel the
need to see something that’s a little more on the sappy side, which is not exactly up Miramax’s alley.
Because your VCR only played Miramax videos, you would have to invest valuable time and money in the
purchase and set up of a completely different VCR before you could watch Titanic. Companies would face
similar but far greater problems if they invested in the purchase and implementation of an enterprise-wide
learning system only to figure out later that they couldn't use much of the available training content because
it wasn't compatible with their system. You can see why interoperability of eLearning products and
services is such a huge issue and why customers who understand it will demand that eLearning products
comply with the relevant learning standards.

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Cisco’s RIO Strategy

As a specific example of how learning standards might be put into use in actual application, we offer the
learning object model developed by Cisco, called the Reusable Information Object (RIO) Strategy. Cisco
defines an information object as a “granular, reusable chunk of information that is media independent,”
whereas the reusable learning object (RLO) is the “wrapper” that is put around a group of 7 +/- 2 RIOs (see
diagram). An RLO can best be thought of as a complete lesson that contains an overview that introduces
and presents the objective of the lesson, several RIOs, and a summary, which will review the RLO and
provide a transition to the next step in the learning program.

Each RIO has a learning objective that supports the RLO's overall objective, and is made up of content
items that are used to communicate knowledge, practice items that allow the learner to apply the
knowledge, and assessment items that measure the learner’s competency with regard to the content. The
following are types of RIOs and examples of each.

Concept – What is a car? What are the different types of cars?

Fact – That car is a 1999 Honda Accord. An Accord can get X miles per gallon on the highway.
Procedure – How to change the oil in an Accord.
Process – How an engine works.
Principle – Guidelines for taking care of your Accord.

We believe that the development and refinement of strategies like this will make an object-based learning
economy a reality in the years to come.

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Finally . . . The Learning Standards

In order to structure our description of the standards that are being created in a way that makes sense with
the development efforts that are currently underway, we will simply describe the topics that the various
study and working groups in the IEEE LTSC are focusing on. These groups will not necessarily represent
the totality of the standards development effort, but certainly comprise the most comprehensive list as of
now. Without further ado, let’s delve right into the key stuff that’s being standardized.

Data and Metadata: Metadata is best defined as information about

information. The metadata that will describe learning objects will include Metadata will enable
such attributes as author, subject, date, price, etc. Going back to our video learning objects to be
example, you can think of metadata as the information provided on the more easily indexed and
video’s box – things like its title, producer, cast, length, rating, etc. If the stored in content
video tapes were put on the shelves without their boxes, we would have a repositories, and
much more difficult time finding the movie we wanted to see. Likewise, subsequently found and
metadata will enable learning objects to be more easily indexed and stored in retrieved.
content repositories, and subsequently found and retrieved. The standards in
this area will

• specify the syntax and semantics of learning object metadata, so that the objects can be described in a
standardized format that is independent of the content itself. The standard will specify the fields to be
used when describing learning objects;
• facilitate the translation of human languages (to repurpose content for use in different cultures);
• define a semantic framework that allows the integration of legacy and developing data exchange
formats; and
• provide a common lightweight protocol (like FTP or HTTP) for exchanging data among clients,
servers, and peers.

Content Related: Standards related to the content used in learning will exist basically to inform users (and
the systems they’re using) of what they’re getting, how they’re getting it, and the best way to use it. Think
of these standards as the “How-to” manual for learning content. The specific standards will focus on
• the language used to describe and reference the various media components (e.g., audio, video,
animations) of CBT. This will be useful in establishing the means for the portability of the
components from one system or tool to another;
• a mechanism for managing and adapting the presentation of lessons according to the needs of the
learner in order to dynamically create customized instructional experiences; and
• the packaging (format, coding, encoding, environment, attributes, and interactions) of learning content.
This type of standardization will allow simple transmission and activation of learning content.

Learning Management Systems and Applications: Learning management systems will play an
important role in the facilitation of a learning object strategy. The management system will serve as a type
of gateway where content enters, is assembled into meaningful lessons based on the learner’s profile, and is
presented to the learner, whose progress is then tracked by the management system. It is crucial, therefore,
that the system be able to operate with content and tools from multiple sources. The standards developed in
this category will

• allow lessons and courses to move from one computer managed instruction (CMI) system to another,
while maintaining its ease of use and functionality;
• make it easier for learning technologies to be implemented on various types of browsers and operating
systems; and
• establish a protocol that aids in the communication between the software tools (e.g., spreadsheets and
text editors) that a learner is using and the instructional software agents that provide guidance to the
learner.

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Learner Related: The main purpose of the movement to develop learning standards is to create a more
effective and efficient way for people to learn using technology. The learner-related standards focus on
creating a connection between the learner and the technology (and its developers). The working and study
groups involved in this effort are working to create standards that will aid in characterizing, identifying,
and tracking learners, and in profiling their competencies. The availability of this information will enable
the development of more appropriate instruction for the learner. More specifically, the standards will deal
with

• the language used in a “Learner Model” that will maintain a characterization of the learner, including
such attributes as knowledge, skills, abilities, learning styles, records, and personal information. This
will create a sort of electronic learning portfolio that can be used by the learner throughout his lifetime
to enhance learning experiences;
• a means for identifying learners for sign-on and record-keeping purposes; and
• the components of a user-centered system that will aid in the process of managing life-long learning. It
will help with goal-setting, planning, execution, tracking, and documentation in order to provide
learners with guidance that will help them achieve independence in reaching learning goals, as well as
provide documentation of achieved competencies.

But Don’t Forget the Technical Standards

Everything we have discussed thus far has been in relation to learning standards, but also critical to the
adoption of industry-wide learning standards are the technical standards on which they will be based. The
standard that is emerging as the format for the exchange of eLearning information over the Internet is XML
(Extensible Markup Language). Whereas HTML (Hypertext Markup Language), the publishing language
of the Web, tells a system how to present (format) content on a page, it is unable to tell the system what the
content is.

For example, HTML can’t pick out the name of the author or the price of the course from a Web-based
eLearning catalog. XML, on the other hand, uses tags that describe the various elements of a page’s
content. In other words, XML enables the separation of content from its formatting. XML could, for
example, allow a search of the contents of all the various eLearning
catalogs from different vendors, no matter how they were formatted, and XML is key to the
return a list of all of the courses on a certain subject, along with their reusability and
prices and other information. As another, and probably more powerful, customization aspects of
example, a piece of content from one course, say a simulation exercise, eLearning.
can be plucked out and reused in a different course. XML is key to the
reusability and customization aspects of eLearning.

We should specify, however, that XML is not unique to the eLearning industry, but rather has been
developed by the W3C consortium as a standard that can be adapted by various industries for their
particular needs. We emphasize that XML is a standard for creating a specified markup language and is
not a language itself. The key goal of XML is to enable the automation of information exchange, and is
particularly suited to business-to-business transactions and integration of data. Any entity with a need to
exchange data among its members (e.g., a company, a supply chain, or an industry) can establish a common
“vocabulary” that is used to tag information. Many groups, including the ones involved in the development
of eLearning specifications, have already begun this process, creating languages for the exchange of
information on everything from genealogy to chemistry. Because XML is relatively simple and
inexpensive to use (in terms of both programming and implementation), we believe that it will experience
adoption levels above those of some of its predecessors that were designed for similar purposes.

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Learning Standards Summary

Just to review, we believe that the key benefits of the emerging learning standards are the following.

• Tagging material with metadata will make it much easier to find and deploy the appropriate learning
material and to track its use.
• Standardization will allow you to use instructional material in any management system.

• Standardization will enable the granularization of content (its breakdown into smaller learning objects)
so that content can be reused in various customized courses.

• Standards can help make courses richer and more effective by allowing the instructor to track and
adjust the courses immediately based on student performance.

• Standardization can help create a commercial infrastructure for the development, sale and distribution
of instructional material throughout the world.

We believe that each of these issues is critical to the large-scale commercial implementation and
acceptance of eLearning. Fortunately, learning standards are well on their way to becoming a reality and
some vendors are already incorporating the specifications on which they’ll be based into their products.
The next major hurdle for the industry is to increase the awareness of learning standards among potential
customers. We believe that customers who understand the significance of standards and the related issue of
interoperability will be much more willing buyers of eLearning.

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MORGAN KEEGAN ELEARNING INDUSTRY REPORT

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CONCLUSION

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 CONCLUSION
In this report we have presented an in-depth examination of the eLearning industry with an eye to
uncovering the exciting investment opportunities it offers. We first argued that with powerful growth in
demand for eLearning products and services, exceptional leveraging opportunities, and with thorny issues
of valuation notwithstanding, the eLearning space should provide excellent returns for investors. We then
established a system of classification for companies in this space and divided the public and private players
accordingly in terms of the principal markets served, core offerings, and revenue models. In the third
section we discussed our projections for the academic, corporate, and consumer markets. In the final
section, we explored the technology behind this industry--past, present and future--and discussed the
crucial issue of industry standards. While we believe it is important for investors to have a thorough
understanding of all these issues, the bottom line is that we are recommending investments in the eLearning
industry because we believe that the learning industry is set for rapid growth and that technology will
transform this industry, as it has many others.

eLearning Addresses the Learning Needs of the 21st Century

We believe that eLearning stands at the crossroads of the information economy and the knowledge
economy. While the Internet generates an unwieldy excess of information, it also enables products that can
empower workers, students, and private individuals to harness this information. We expect networked
technology to transform learning just as it has virtually every other technology.

• eLearning is not simply a new way to carry out the same old education and training activities that have
driven the learning process for centuries, but rather is a fundamentally more efficient and effective way
to organize and deliver knowledge resources to businesses and individuals competing in the knowledge
economy.

• For organizations that need to deliver learning resources, eLearning allows scalability, accessibility
and timeliness – issues that are critical to global enterprises operating on Internet time.

• For learners, eLearning provides a learning experience that is personalized, interactive, just-in-time,
current and user-centric.

eLearning Will Experience Powerful Growth

We expect that eLearning companies will spearhead the growth of the learning industry that was kicked off
during the late 20th century. The eLearning industry will be pivotal to the economy and society as the
ability to learn becomes the core and defining capacity of organizations and individuals.

• Comprised of academic, corporate and consumer sectors, the learning market is huge.

• Growth of the learning industry has occurred because the products and services it offers address the
large (and rapidly growing) demand for human capital. Human capital is the key to success in the
knowledge economy.

• The for-profit eLearning companies that are targeting these sectors have only cornered a minute
portion of the market but capture a rapidly expanding share of this growth industry.

The information contained herein is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed. The opinions expressed
herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of every material fact respecting any company,
industry or security. Morgan Keegan & Company, Inc. and its officers, directors, shareholders, employees and affiliates and members of their families may make investments in a
company or securities mentioned herein before, after or concurrently with the publication of this report. Morgan Keegan & Company, Inc. may from time to time perform or seek
to perform investment banking or other services for, or solicit investment banking or other services from any company, person or entities mentioned herein. Neither the
information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any security.

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PUBLIC COMPANIES MENTIONED IN THIS REPORT NOT ELSEWHERE PRICED
(Price as of 7/5/00)

3Com (COMS - $57 9/16)

Advantage Learning Systems (ALSI - $16 3/4)
Amazon.com (AMZN - $36 1/2)
America Online (AOL - $54 3/4)
American Education Corp. (AEDU - $0.5625)
Apollo Group (APOL - $30 3/16)
Arel (ARLCF - $10 1/8)
Aris (ARSC - $2 7/8)
Caliber Learning Network, Inc. (CLBR - $4 1/8)
Charles Schwab Corp. (SCH - $32 11/16)
Cinar Corp. (CINRE- $7)
Cisco Systems (CSCO - $61 7/8)
Dell Computer Corp. (DELL - $47 7/16)
Eduverse.com (EDUV - $0.5001)
eKnowledge Group (EKNO - $3)
FatBrain.com (FATB - $6 13/16)
Futurmedia PLC (FMDAY - $1 1/2)
General Electric (GE - $49 13/16)
HealthStream (HSTM - $5 13/32)
IBM (IBM - $104)
Infonautics (INFO - $4 5/8)
Intel Corp. (INTC - $131 5/8)
Lands’ End (LE - $34 7/16)
Microsoft Corp. (MSFT - $78 1/2)
National Computer Systems (NLCS - $48 5/16)
Oracle Corp. (ORCL - $72 5/16)
PLATO (TUTR - $14)
Riverdeep (RVDP - $19 3/8)
Scientific Learning (SCIL - $21 13/16)
Sun Microsystems (SUNW - $86 1/2)
Yahoo Inc. (YHOO - $120 13/16)
Youthline USA, Inc. (YLNE - $3)

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MORGAN KEEGAN ELEARNING INDUSTRY REPORT

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RESEARCH STAFF
David M. Guthrie, CFA – Director of Research (901) 529-5430
Geoffrey D. Check, CFA – Assistant to the Director (901) 579-3525

CONSUMER SERVICES REAL ESTATE

Retailing Manufactured Housing and Real Estate
John R. Lawrence (901) 579-4203 David H. Tannehill, CFA (901) 579-4534
Kevin C. Sowers – Associate Analyst (901) 531-3227 Jennifer M. Russell – Associate Analyst (901) 579-3520

Softlines TECHNOLOGY
Rick L. Snyder (901) 531-3261 Telecommunications / Transaction Processing
Leah M. Hollstein – Associate Analyst (901) 531-3397 Ramkrishna P. Kasargod, CFA (901) 579-4246
Tavis C. McCourt (901) 579-4545
Leisure and Recreation Ajay P. Kasargod – Associate Analyst (901) 531-3331
Robert DeLean (901) 524-4191 Laura A. Champine – Associate Analyst (901) 531-3370
William R. Renovich – Associate Analyst (901) 579-4451
Harold L. Goetsch (901) 579-4560
Restaurants
Lynne L. Collier (214) 706-7504 E-Services
Michael D. Carney – Associate Analyst (214) 706-7508 D. Andrew Shipman, CFA (901) 579-4292
Clare C. Hodge III – Associate Analyst (901) 531-3278
DIGITAL MEDIA AND ENTERTAINMENT
Murray J. Arenson (214) 706-7502 System Area Networks
B. Michael Poustovoi – Associate Analyst (214) 706-7503 Robert M. Montague (901) 579-4311
Steven L. Denegri (901) 579-4916
ENERGY Thomas H. Curlin – Associate Analyst (901) 531-3260
Oil Service Brian S. Freed – Research Assistant (901) 531-3327
W. Neal McAtee, CFA (901) 529-5316
Amy K. Dobson – Associate Analyst (901) 531-3407 TECHNOLOGY DISTRIBUTION
Will E. McKinney – Associate Analyst (901) 531-3366 David C. Childe, CFA (901) 531-3242
Michael J. Coleman – Associate Analyst (901) 531-3348
Shipbuilding and Offshore Construction
Brent D. Rakers, CFA (901) 579-4427 John R. Lawrence (901) 579-4203
Kevin M. Carlucci – Associate Analyst (901) 531-3345 Kevin C. Sowers – Associate Analyst (901) 531-3227

Exploration & Production TRANSPORTATION

Subash Chandra, CFA (713) 402-3718 TL Carriers/LTL Carriers/Special Situations
P. Donatello Pitts – Associate Analyst (713) 402-3717 Douglas L. Col (901) 579-3547
L. David Traywick - Associate Analyst (901) 531-3377
FINANCIAL SERVICES
Financial Institutions Air Freight/Railroads
Christopher T. Kelley, CFA (901) 579-4559 Arthur W. Hatfield (901) 579-4868
Letitia M. Thompson – Associate Analyst (901) 579-3521 Danna E. Wright – Associate Analyst (901) 531-3461
J. Cory Shipman – Associate Analyst (901) 531-3417
W. Gustav Johnson – Associate Analyst (901) 531-3350

HEALTHCARE
Healthcare Services
Kelly R. Crowe (901) 579-4301
Theresa L. Womble – Associate Analyst (901) 531-3365

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