The Rise of Online Education Continues: Zuoyebang's

Market Play
equalocean.com/analysis/2020101214940

Consumer Discretionary Author：Yue Liu , Qasim Editor：Luke Sheehan Oct 12,

2020 11:55 AM (GMT+8)
The obligation to study at home has made the online education industry one of the few
industries to have flourished during the COVID-19 pandemic.

► With the invasion of the Internet giants on the field, the online education battle is
getting exceptionally fierce.
► Zuoyebang's competitive advantage lies in the transformation of the app and its
traffic. 67% of the increase in trainees comes from their own traffic. But another strong
opponent, Yuanfudao, also received an investment from Tencent in August 2020.
Coupled with Tencent's strong traffic support, such as the WeChat portal, the unicorn
competition between Zuoyebang and Yuanfudao has become more intense.
► Online education has promoted the popularization of high-quality educational
resources through technical means. And the epidemic has generally accelerated online
education and opened a larger window for industry development.
► Online education is not merely moving offline classrooms online. Classroom
interaction, curriculum design, data analysis, platform environment and the
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combination of work and rest need to be taken into consideration.
► The company doesn't have much cooperation with schools currently, and 70% of its
focus is on the K12 large class.

The sudden onset of the epidemic has led to the closure of traditional offline education,
just like the catering and retail industries. The strong market demand has ushered rapid
development for the online education industry.

In the past, although many offline institutions began to start an online business, the
process of transformation was not easy. On the one hand, due to the complexity of the
online education system, it is incredibly difficult to withstand the traffic pressure caused
by many students being online at the same time. On the other hand, due to teachers' and
students' traditional habits, online education's penetration rate has always been low.
But during the epidemic, online education became the only option.

On January 26, Xueersi mobilized hundreds of teachers across the country, covering all
courses from the first grade of elementary school to the third grade of high school.
Starting from February 1, classes were offered for free throughout the day. On February
3, Yuanfudao and Zuoyebang also launched related courses and created a historical
record of the number of people online at the same time.

We also witnessed multiple Internet giants enter the industry. As of February 10,
schools in more than 30 provinces and more than 300 cities, including Hubei,
Guangdong, and Jiangsu, had joined Alibaba-backed Dingtalk's 'School at Home'
program. Tencent Education has now established contacts with more than 40 education
bureaus, and more than 1 million teachers have used Tencent Classroom, Tencent
Meeting and other platforms to lead classes. Douyin has also entered the online
education battlefield with Tsinghua University, broadcasting its public courses through
it.

According to iiMedia's data, Zuoyebang, 17zuoye and Yuanfudao are in the online
education industry's first echelon. Zuoyebang ranks first with a grade of 66.3 and 42.9%
of user preferences, followed by Yuanfudao's 54.1 and 22.0% of user preferences.

Backed by Baidu, Zuoyebang claims to have an advantage on the traffic side. According
to the company's data, total daily active users have exceeded 50 million, the monthly
active users exceeded 170 million, and the cumulative active users exceeded 800
million.

Zuoyebang has presented its views on itself and the industry through answering
questions asked by EqualOcean during a recent meeting at the firm's headquarters in
Beijing. It can be seen that since Baidu incubated the company, there is no concern
about traffic. But another strong opponent Yuanfudao also received an investment from
Tencent in August 2020. Coupled with Tencent's strong traffic support, such as the
WeChat portal, the unicorn competition between Zuoyebang and Yuanfudao has

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become more intense. Also, with Alibaba, Douyin and other Internet giants entering the
online education battlefield, the advantage of Zuoyebang is fattening. Only by seeking a
more effective way of monetization can the company have a long-term foothold.

We decided to consult with the company directly to gain an insight into Zuoyebang's
views on itself and the industry as a whole.

Zuoyebang Q & A:
EqualOcean: Since your company was established in 2013, have you encountered any
difficulties in the process of achieving such a large scale?

Zuoyebang: We founded the company in 2015 and fought two battles. 1: The tool
traffic side battle in the first two years. 2. The course battle. This is a protracted battle,
as service, experience for users and students, business efficiency and organizational
efficiency are the main focus.

EqualOcean: 'Dual-teacher large classes' is the core of the business model, but
companies such as US-listed GSX also follow the same model. Where is your company's
competitive advantage? How do you attract users?

Zuoyebang: Our competitive advantage lies in the transformation of APP and its own
traffic. The transformation of external delivery is carried out rationally, and the strategy
of dual circulation of internal and external traffic and mutual promotion is
implemented. Companies in the industry are like the story of a pony crossing the river.
The pony, squirrel, and old cow are on the same river, but they face different situations
as each has a different height. In other words, the cost of customer acquisition that each
company can bear is different—the more robust flow of its own traffic, the lower cost of
customer acquisition.

EqualOcean: How is the company's monetization rate compared with competitors.

What is the number of paying users?

Zuoyebang: We are leading the industry as for the number of students enrolled in
2020. The total number of paid students is 7.8 million, an increase of more than 390%
year-on-year. Besides, the number of regular-priced summer students enrolled has
exceeded 1.71 million, increasing over 350% year-on-year. 67% of the rise in trainees
comes from own traffic, increasing by 14% compared with 53% in 2019. And the overall
customer acquisition cost is less than half of the industry average.

There is no direct loss of traffic, which has not been converted into students. More than
two-thirds of that traffic is deposited in the app, and it has been continuously activated
for a long time, becoming our own user.

EqualOcean: What is the company's future breakeven and profit outlook?

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Zuoyebang: The external customer acquisition cost that the online education K12
large class track can bear is CNY 2,300. If it exceeds this critical point, it will fall into a
permanent loss. In summer 2020, various companies' customer acquisition costs on
Douyin, WeChat and other external channels generally rose to CNY 3,000. That is to
say, if some companies mainly rely on investment, then they may have fallen into
permanent losses.

EqualOcean: The epidemic positively impacted the online education industry as

students have to learn online, which ushered in an outbreak. But considering that the
pandemic is short-lived, will online education continue to develop so rapidly in the
post-epidemic period?

Zuoyebang: Since the epidemic, 194 million elementary and middle school students in
China have completed a migration of learning, moving from offline to online. In this
large-scale online education experiment, our most heartfelt feeling is threefold:

First, primary school students, teachers, parents and relevant authorities have become
more aware of and accept online education. They have put forward higher requirements
and challenges to the industry. Online education must further improve the curriculum
system and platform construction following the laws of education and teaching to better
protect users' rights and interests and enhance service quality.

Second, online education has promoted the popularization of high-quality educational

resources through technical means. This may be one of the main ways to promote
education equity in the future further.

Third, through big data, it is found that children in third- and fourth-tier cities and
rural areas are increasingly demanding high-quality educational resources. There is an
urgent need to establish a sound system and mechanism that integrates online and
offline, on- and off-campus education, and benign interactions, to give full play to their
respective advantages.

At the CIFTIS, national leaders' speeches specifically mentioned that online education
was an essential digital economy area. Therefore, the epidemic has generally
accelerated online education and opened a larger window for industry development.

EqualOcean: What are the advantages of online education compared to traditional

education?

Zuoyebang: While taking into account the scale of online education, it can use big data
and AI to gain insights into the learning situation, characteristics and weaknesses of
each student, and help teachers tailor each child to customize learning plans and
achieve personalized training and further help students improve learning efficiency and
effectiveness.

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Online education is not merely moving offline classrooms online. Only by combining the
characteristics and needs of students' online learning and systematically reengineering
the hardware, software, pre-class, in-class, and after-class, can an online education
course be organized.

EqualOcean: In face-to-face lectures, teachers can take timely measures against

dozing off and playing with mobile phones, but how does online education ensure that
users learn something? And online electronic products can easily cause vision problems
for teenagers. How to solve these drawbacks and improve users' retention rates?

Zuoyebang: First, pay attention to classroom interaction, which is one of the critical
factors affecting students' concentration in class. For example, the frequency of Q&A
interaction should be once every 5 minutes. Simultaneously, vivid pictures, gif
animations and videos can be added to the courseware to activate the classroom
atmosphere and reduce the appearance of wandering and sleepiness. If there are
interactive functions such as virtual online experiments on the platform, they should
also be fully used to enrich the forms of online teaching.

Second, focus on curriculum design, which is the key to determining online education
courses' quality. The study's content should be small and refined to reduce the content
that needs to be memorized. The teaching rhythm of each class is specially designed by
the students' characteristics to avoid a rhythm throughout. It is recommended that the
teacher conduct a trial lecture before the formal class and correct and improve time
problems.

Third, pay attention to data analysis, which is a magic weapon to improve each
student's online learning effectiveness. The online learning platform's data advantages
should be used to accurately grasp each student's knowledge mastery, learning ability,
and understanding characteristics to promote the adaptation and improvement of
teaching. Simultaneously, based on the learning situation in class, appropriate and
targeted exercises will be sent during and after class to allow students to consolidate
their knowledge in time.

Fourth, pay attention to the platform environment, which is the necessary support for
ensuring students' online learning experience. Most teachers are unfamiliar with live
broadcast equipment and software and need to create a live broadcast environment
before starting the class. For example, a computer that can smoothly run various
teaching software, a high-definition camera, a silent keyboard and mouse, and a bright
and quiet live broadcast place can be considered to avoid messing around.

Fifth, pay attention to the combination of work and rest, which is an effective way to
protect eyesight and prevent addiction to the Internet. Each live broadcast class cannot
exceed 40 minutes, and the break between classes is no less than 10 minutes. Students
are encouraged to exercise more offline. Many children have myopia, not only because
they use too much electronic equipment, but also because there are too few outdoor
sports.
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Besides, it needs to be noted that some teachers' platform-based live broadcast software
during the epidemic is not specifically prepared for education. They can only meet basic
remote video needs and lack lively online interactive tools, big data recording and
analysis, academic reports and feedback services, so teachers should strategically
choose teaching platforms.

EqualOcean: Does your company cooperate with various offline schools? If so, how
many schools have you collaborated with and what is the form of cooperation? If not, is
there any plan?

Zuoyebang: There is not much cooperation with the schools currently, and it is still in
the exploratory stage. In the future, we will continue to cooperate with schools and
governments in various places to explore opportunities for integration between on- and
off-campus, online and offline.

EqualOcean: With all the investments, the millions of users and the boost in the
industry, where is Zuoyebang going next?

Zuoyebang: 'One horizontal and one vertical' strategy. The core is to put 70% of the
energy on the K12 large class. The horizontal is to expand the sub-categories of the class,
including teaching materials, smart hardware and other more subdivided tracks. The
vertical is to develop to the junior and university stages to extend the users' life cycle.

Challenges ahead
1. Burning money has always been the only way for online industry circuit players, and
how to make money is currently the biggest worry. According to QuestMobile's data, in
the first half of 2020, the average marketing investment of K12 online education
companies increased by 71.2% year-on-year. In June, Yuanfudao, Xueersi, and
Zuoyebang's online advertising fees reached CNY 475 million, CNY 418 million, and
CNY 220 million, respectively. The peak value during summer is as high as CNY 70-80
million a day.

In the summer of 2020, GSX, Zuoyebang, Xueersi, and Netease Youdao all offered a
low-price attracting-traffic course package of CNY 9 for 13 hours and CNY 9 for 9 hours,
while the number was CNY 49 for the same period last year. In the second quarter of
2020, GSX had an operating loss of CNY 161 million, and NetEase Youdao recorded a
net loss of CNY 258 million. This means that the top players must think about reducing
the high customer acquisition costs caused by intensive advertising and marketing. As a
result, increasing repurchase and renewal rates should be taken into consideration.

Through burning money, Didi in the field of ride-hailing and Meituan in the food
delivery track stand out. However, the moat of online education is different from ride-
hailing and food delivery. The latter two are demand-oriented, high-frequency
consumption, low-cost, and low trial and error costs. Simultaneously, online education
is service-oriented, with long consumption cycles, high customer unit prices, and high
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trial and error costs. Choosing Zuoyebang or Yuanfudao is naturally different from
choosing Didi or Hello Bike. If there is no practical way to reduce the cost of acquiring
customers, one possible result is that the more money those companies burn, the
greater the losses. And if the subsequent investment cannot keep up, the capital chain
may break.

On September 30, 2020, the market reported that Zuoyebang plans to raise USD 650
million at a valuation of USD 10 billion. Zuoyebang claimed that the financing data was
inaccurate and no more details were disclosed. However, burning money in the online
education industry is not over yet, but no company can burn money forever. Ofo is a
lesson from the past. Therefore, only by seeking a more effective way of monetization
can the company have a long-term foothold.

2. As stated above, products and services are the most critical barriers for online
education companies. Then the quality of teachers must meet high standards.
According to Sina Technology, there are 307 teachers in Zuoyebang and 247 teachers
with teacher qualification certificates. There are 376 teachers in Yuanfudao and 294
teachers holding teacher qualification certificates. However, no public data is showing
the source and quality of these teachers. Zuoyebang stated that the research and
teaching team totals about 800 people (not including tutors), and the online class
teachers are all certified.

However, Yuanfudao has been exposed to rumors that individual teachers' teaching age
does not match the time of obtaining the qualification certificate. Although a single case
cannot represent the teaching quality, it can reflect that some top online education
brands are still burning money to win customers, spending money to hire famous
teachers, so further efforts are needed in product polishing.

Pain points of K12 education in China

The current pain point of K12 education in China lies in the contradiction between the
lack of high-quality educational resources and the country's growing educational needs.
Education is not a question of model or technology at all, but a question of talent
supply. Economically underdeveloped areas are difficult to provide high-quality
educational talents. Prefecture-level cities and counties with low economic strength
have difficulty attracting and supporting teachers with higher income requirements. On
the one hand, the average household income in these places is low. On the other hand,
parents in these areas are less aware of education investment and are unwilling to spend
on education. Therefore, those who can provide instruction to students in these areas
are teachers with lower income requirements. If these teachers can be trained, and the
quality of teaching is not inferior to the teachers who teach in Beijing, it will largely
solve the pain points of K12 education in China.

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