(Bloomberg Opinion) — Investors looking for an angle on the coronavirus crisis have naturally landed upon the online education sector in the hopes that tens of millions of quarantined school kids will turn such providers into profit-making machines on par with China’s hottest internet companies.

Almost every mainland province and city has pushed back the starting date of the spring term by weeks. Most students haven’t seen the inside of a classroom since Lunar New Year in late January. Not wanting to be left behind, students, their schools and parents have turned to online alternatives, including options not offered by traditional education businesses.

Giant Alibaba Group Holding Ltd., for example, added 100,000 servers to support its free DingTalk messenger, which is being used across the country to help pupils communicate with teachers and watch online classes. A similar tale is told at WeChat provider Tencent Holdings Ltd.

Even San Fransciso-based Seesaw Learning Inc., developer of an early-childhood learning and communication app with less than 10{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of revenue from China, saw a 31{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} jump in traffic from there and 21{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} from Hong Kong. Co-founder Adrian Graham admits it’s hard to tell whether that spike is due to normal post-new year usage increases or the impact of quarantined kids at the mostly international schools in the Greater China region that use the product.As a result, this could be the biggest sustained, mass experiment in online education since the internet was founded in the 1980s. But for those who specialize in education as a business, there’s little to suggest a surge of online students will boost the bottom line.

In China, the commercial education business is driven chiefly by demand for after-school tuition (AST) classes. In physical classrooms, also known as cram schools, which are owned and operated by these providers, children as young as kindergartners spend an extra few hours after their normal day (and on weekends and during school holidays) to bone up on core subjects of Chinese, English and mathematics.

To deal with the quarantines, TAL Education Group, one of China’s largest education companies, is moving students from offline classes to its programs and refunding the difference in tuition fees, with online up to 50{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} cheaper, Daiwa Capital Markets HK Ltd. analysts John Choi and Candis Chan wrote this month. New Oriental Education & Technology Group Inc., the other big player in Chinese education and a leader in test-preparation courses, is also moving students to its web and app platforms, they wrote. 

A key narrative supporting the thesis for big online education profits is that the massive home-schooled education program now under way will work as great marketing for companies like TAL and New Oriental, which spend a lot of money just getting students to enroll in their classes. A captive market of kids forced to learn via the internet might then be converted to long-term online tuition customers. That’s the theory, anyway.

In truth, they’d better hope that doesn’t happen. Online is not as profitable as physical classrooms, competition is tougher, and average prices are falling faster. 

Take TAL as an example. Revenue for the three months to Nov. 30 climbed 47{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} from the previous year. Online sales were the major driver, climbing 86{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}. But actual enrollments grew 107{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}. In other words, student numbers rose faster than revenue because average prices actually fell 9{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} for the period.

So while online has expanded, it still accounts for only 18{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of total revenue. The glass-half-full scenario would tell you that there’s great potential ahead. A more pessimistic analysis would suggest that if TAL needs to cut prices this early, then there’s not a lot of room to boost profitability as time marches on. And the company is already suffering pressure that is hurting the bottom line. Operating margin shrank to 9{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} from 12{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in the previous year, with net income plunging 77{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}.

New Oriental isn’t faring much better. Online education accounted for 6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of its revenue in the latest fiscal year. The company gets more than 80{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of sales from language training and test preparation. That indicates that internet-based programs have great potential. Yet data show New Oriental is struggling to scale. Subsidiary Koolearn Technology Holding Ltd., which it spun off and listed in Hong Kong, posted revenue growth of just 19{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in the six months to Nov. 30. What’s more, operating loss tripled with margin deteriorating from -4.6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} to -16.5{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}.

One company might have nailed it, however. GSX Techedu Inc. describes itself as “a leading online K-12 large-class after-school tutoring service provider.” GSX’s niche is massive live online classes — it boasts being able to host 100,000 students in a single broadcast — that allow it to rake in cash while saving on teacher salaries, which account for a major proportion of the costs borne by rivals.

That scalability helped it turn profitable in 2018, a feat repeated last year, earning it an operating margin of 10.7{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}, in line with TAL and New Oriental.

GSX has since been joined in offering massive classes. More than 2.4 million users are reported to have tuned in for some TAL elementary-school classes during the coronavirus period. Others are jumping aboard, too. Alibaba, for example, developed DingTalk for enterprise use. While it launched a campus-focused program for the product last year, it wasn’t until the current crisis that its popularity in education really took off. Worse for GSX, Alibaba is offering it for free and allowing schools to make use of existing teachers and materials.

So while the outbreak is necessitating internet-based education options, it’s also highlighting how cheap online learning can be. The great thing about the internet is its ability to allow anyone to deliver content easily and cheaply. That may not be the outcome education companies really would be hoping for.

To contact the author of this story: Tim Culpan at tculpan1@bloomberg.net

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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Virus Investors Don’t Need No (Online) Education