Udemy is one of the largest online education platforms in the world and it just went public this week. To better understand the company's present and future, we will explore their S-1, which is the document companies file before going public, and dive deep into their strategy and numbers. In this piece I will talk about:
Let’s do this!
Udemy is an online learning marketplace founded in 2009, and one of the largest online learning platforms in the world with 44 million users. Udemy operates a marketplace where instructors make courses, list them in the Udemy platform, and consumers (or learners) buy them.
Udemy has always been about instructors: over 165,000 independent instructors have created more than 180,000 courses on the Udemy platform, whereas on other platforms the courses are created primarily by universities or by the platform itself.
Having independent instructors build the courses is beneficial in many ways: the instructor community can adapt to new technologies and skills in high demand a lot faster than larger institutions, and thus make more relevant courses with shorter turnaround times.
To learn a new discipline like machine learning, would you rather have a university teach you, or an industry professional? This skews their catalog to short-term courses around technology and business.
But relying on instructors is also a risky strategy. Udemy instructors make the courses, but not all benefit from the marketplace in the same way: a small number of instructors take an overwhelming majority of course revenue, leaving a long tail of instructors who barely sell any courses at all.
One way to think about it is that instructors don’t have a middle class.
Lately, I’ve been really interested in the distribution of money among online creators. It's become clear to me that there is no middle class for content creators in platforms like Twitch who can make a decent side-income from their work or even go pro. Instead, that revenue is largely dominated by the few top creators.
There is a similar distribution for instructors on Udemy and other learning marketplaces: only 5% of instructors generated as much as 71% of course enrollments. This means there's an instructor elite that captures most eyeballs from consumers. Class Central found that the top 20% courses by enrollment account for 90% of all enrollments, whereas they have to clean out the long tail of non-performing courses from the platform.
You can think of this as a country with high income inequality.
Here's a funny analogy: if Udemy instructors formed a country just for themselves (let’s call it Udemyland), it would be the most unequal country by income distribution in the world, by far. I checked!
The way I read this graph, this inequality poses a major risk for Udemy. Only 8,000 instructors serve over 30M users with their courses, meaning Udemy needs to make sure they keep those instructors happy and recruit new ones.
But what’s in it for those great instructors? They already have their own audiences, so do they even need Udemy to distribute their content in the first place? The risk for Udemy is that it could become dependent on the interests of the top instructors, and their revenue would become very sensitive to a handful of instructors leaving the platform. I called this “instructor risk” on my research notes.
Udemy has tried to compensate for this using a hybrid revenue-sharing model. Instructors earn a share of the revenue from every course purchase, but that share depends on whether they found the buyer or if Udemy did.
💸 If the instructor finds a learner for their own course through their own audience, instructors receive 97% of the revenue, Udemy gets only 3%.
📬 If Udemy finds the learner through their ads or their platform, instructors get 37% of the revenue for Udemy's 63%.
But these top instructors are only getting stronger with new tools and platforms. They can reach their users directly without relying on Udemy, and may choose to go solo or run their programs on Teachable or Thinkific for a monthly fee instead of a commission.
Anecdotally, I found one leading Udemy instructor who actually offered the course on both platforms.
Relying on instructor-created content for all of its business would be risky for Udemy. In fact, gross margins have been very volatile, and their instructor courses actually shrunk in revenue in the last quarter.
To address this, Udemy started investing in an enterprise learning division a few years back, and that bet has paid off: Udemy is doubling down on its enterprise learning product to reduce its “instructor risk”, and it’s quickly becoming a big part of their story.
Their S-1 mentions the word "consumer" 178 times, but the word "business" appears a total of 209 times. Not a very profound research point, but it shows where Udemy is going.
Udemy has gone the enterprise route to reduce its exposure to “instructor risk”, as it has higher margins than its consumer product and is growing faster.
Udemy for Businesses (or "UB") bundles a selection of top courses from the Udemy platform (only 11k courses out of the 180k courses available) and sells that bundle to businesses for a monthly subscription ($360 annually per user).
Udemy has built more tools to offer enterprises on top of the course bundle like learning paths (curating courses to get to a skill), skills assessments, labs (project simulations for real-world practice), internal course builders, analytics, or leadership development (intensive courses for executives and managers, launched after the CorpU acquisition).
Because these tools and products are created by Udemy and not instructors and have recurring subscription revenue, they have higher margins that are more stable than its consumer product.
The UB product also has higher retention as a subscription product than the consumer courses (which consumers only pay for once), and they can also upsell to enterprises who bring in more employees into the platform (evidenced by their Net Dollar Retention of 120%).
More importantly, new UB customers are slowly getting larger. New customers per quarter have remained flat around 1,300 enterprises, but revenue is growing, so each account is getting bigger.
This is important for Udemy: their competitor Coursera has an average customer value that is 10x larger than theirs, meaning they cater to much larger or higher-paying customers. I can imagine Udemy salivates at the idea of reaching those larger customers.
Below is a comparison of both companies’ enterprise divisions in Q2.
Udemy’s enterprise business is larger and has better retention than Coursera, with virtually the same growth rate and margins.
Overall, the move towards enterprise has gone well for Udemy.
Total revenues went up by 56% in 2020 to $430M, and their margins grew by 7%. Udemy still posted a net loss of $77M last year, but it is not unreasonable to project a path to profitability in the coming years.
UB only represents 24% of total revenue in 2020, but given their consumer product is actually shrinking, I expect Udemy for Business will represent a majority of the company’s revenue within five years as their consumer business isn’t likely to grow much more in the coming years given the risks and challenges associated with creator-led content.
My main area of concern is that most of their new revenue comes from operating in a highly competitive market. Let's unpack that market.
Udemy is competing with other organizations on two fronts: attracting the best instructors and serving enterprise learning customers.
Having instructors that create high-quality, relevant courses is central to both their consumer and business products.
Platforms today are fighting fiercely to attract the best creators. Below are some categories from competing organizations, all using different models to incentivize instructors to join them:
Udemy's business division serves companies in need of training and upskilling. This is a very competitive market with new players like Coursera or LinkedIn, but also established training providers like Skillsoft or Franklin Covey.
Udemy's value proposition is that it can serve mid-sized companies well, and below are several examples of competitors for this value proposition:
There are 5 directions I could see Udemy going to grow into a $10B company in a couple of years.
While the CBC term means a thousand things now, Udemy could move into more social, live learning experiences that help their top creators monetize their courses beyond their low-cost self-paced courses they currently offer, and can plug these into their enterprise offering as well. Skillshare recently launched its cohort courses product, and I wouldn't be surprised if Udemy acquired one of the many new cohort-based courses platforms growing today.
Imagine Udemy partnering with platforms to offer their creators and influencers a way to monetize their content exclusively through Udemy, in exchange for better rates and training. This is a big part of the LinkedIn Learning vision – converting LinkedIn social influencers into instructors and helping them monetize with courses.
Udemy earns $4,800 per enterprise customer a year, whereas Coursera earns 10x that amount ($48k) serving larger enterprises and governments. Udemy can position itself as the tool for SMBs, but eventually should move to get larger customers given the higher retention and higher margins they could find there.
Udemy is looking to beef up its business offering to serve larger customers. It has already bought a leadership development platform, and now could add a coaching platform that connects employees to coaches (internal or external) to upsell customers who want more than courses.
One advantage Coursera has over Udemy (which 2U is also pursuing through its acquisition of edX) is its stackable platform with a large top of the funnel. Coursera can engage students for a week-long course, and then upsell that user all the way up to a multi-year degree or master’s, whereas Udemy can’t. Udemy could offer short courses that earn credits towards industry or employer-specific certificates.
Udemy is going public at a really interesting time for the company: in the midst of a transition from a consumer marketplace towards an enterprise learning platform. This transition is best understood through the lens of the creator economy, and the lack of a middle class of creators that prompted Udemy to move to enterprise.
My prediction is that within five years, enterprise revenue will be the main source of earnings, and that Udemy will find ways to earn more from each customer yearly by adding cohort-based learning, coaching, or partnerships to their product.
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