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Why Chegg Is Abandoning A Business Worth Over $200 Million A Year

The country’s leading textbook rental provider is pulling a Netflix and shifting to digital.

Why Chegg Is Abandoning A Business Worth Over $200 Million A Year
[Photo: Flickr user Peggy2012CREATIVELENZ]

Print textbook rentals to college students generated more than $213 million in revenues for Chegg last year–but CEO Dan Rosensweig would like for that number to be closer to zero.

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Since joining Chegg from Yahoo in 2010, Rosensweig has been studying up on companies like Netflix and Adobe–he calls them his “role models”–while maneuvering for ways to set the education technology company on a digital-only trajectory. His dream is finally coming true: Chegg announced yesterday that it had reached a deal with Ingram Content Group, a book distributor, that will allow the company to hand over its print textbooks and dramatically improve its margins.

“We control the student relationship, we control the catalog, and Ingram controls the capital that it spends on it,” Rosensweig tells Fast Company. Over the next 18 months Chegg will liquidate its print inventory and refocus on its digital products, including self-guided homework help and on-demand tutoring. Students will continue to rent through Chegg’s platform, with the company taking a 20% take on the print textbooks and relying on Ingram to manage operations.

The new strategy will widen the scope of Chegg’s digital operations in order to better serve student needs at a time when other companies in the higher education and professional training markets are looking to do the same. Instructure, for example, a new rival of course management software giant Blackboard, announced last week that it had raised another $40 million and would be launching a companion product aimed at large companies interested in better managing employee learning. Even nonprofit MOOCs like edX have started talking about building stronger relationships with students, rather than institutions.

“We want to create this continuous learning platform. Students come on at the high school level, go on to college, do college courses, go on to jobs,” edX CEO Anant Agarwal told me over coffee last fall, determined to erase the perception that MOOCs are for curiosity-seekers who quickly flame out. “You keep taking courses when you need them. You can pay for it as you go, you don’t have to take out big loans. You become a continuous learner.”

Rosensweig sings a similar tune. “The rental model is where we started; the real product is what you’re seeing today. Everything we think students want is online,” he says, from college admissions research to internship placement. Chegg plans to offer resources along that full spectrum.

So far it’s working, though the company will take a short-term hit on top-line revenue in 2015 while its digital revenue streams continue to ramp up. Chegg projects that digital revenue for the year ahead will increase to $133 million to $143 million, a big jump from last year’s $91 million. Colleges and employers pay Chegg for leads, and students pay for learning materials and services.

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The elephant in the room for any e-commerce business is Amazon, which recently expanded its college presence with on-campus stores at three major universities. According to the Wall Street Journal, the move is an attempt to capture the $10.3 billion students spend each year at college bookstores.

But Rosensweig is unconcerned. “Several years ago we powered bookstores, and decided that bookstores are not the future,” he says, noting that Chegg offers students who rent print books the option to read the text online until their delivery arrives, a rebuttal to Amazon Prime’s student membership rate and next-day delivery.

Plus, Chegg has no interest in selling ramen noodles: “Amazon’s interest is not the books, it’s all the other stuff,” Rosensweig says. “We really want to improve the lives and outcomes of students.”

Education’s Digital Shift

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About the author

Staff writer Ainsley (O'Connell) Harris covers the business of technology with a focus on financial services and education. Follow her on Twitter at @ainsleyoc.

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