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Analysis on why Chegg is the Netflix of textbooks and is positioned to dominate
This analysis comes from Steve Carpenter, an Internet entrepreneur who spends his days analzying high-profile private companies to help provide transparency to this very opaque sector of the economy.
From Steve's analysis: Chegg, the “Netflix for textbooks” that lets students across 6,400 college campuses rent from a virtual bookstore containing 4.2MM books, may very well be the fastest-growing, most successful, second generation e-commerce startup that you never heard of. Based on my analysis, the company, which has raised $140MM, is on track to generate $130MM in revenues in 2010, up from $25MM in 2009, and $10MM in 2008. During the January, 2010 semester, I estimate the company made close to $1MM in revenue a day, up 5X from $200K/day the previous January, and it should double that this coming September. My analysis suggests, Chegg will do close to $50MM in revenue this September alone.
Chegg has disintermediated the $5B+ college textbook market (https://online.wsj.com/article/SB124990362890119179.html) by providing a low-cost, short-term, nation-wide rental alternative to the high-priced university bookstore. This disruptive model will likely shrink industry revenues by half in the coming years, with Chegg in a leadership position to command 80%+ market share. The key questions, of course, are: 1) is this a winner-take-all market, 2) what can Chegg do to fend off the likes of the major bookstore owners, Barnes & Noble and Follet, as well as Amazon and Apple, and 3) is Chegg a harbinger of other startup rental services.
In this interview with Steve, he elaborates on those questions.
Below is Steve's analysis on one of those questions: Is this a winner-take-all market?
The nascent textbook rental market is looking a lot like the early days of the online DVD rental business. Online-only startup, Netflix, managed to out-innovate, out-operationalize, and outlast its deeper pocketed rivals- mainly Blockbuster- that had the added advantages of a local physical storefront and customers that already rented movies!
The potential challenges for Chegg look a lot like those facing Netflix a few years ago (and a key one that does not):
- Lack of a physical footprint on campus
- Industry long dominated by a few, deep-pocketed players; in this case, Barnes & Noble and Follett, which operate more than 1,500 bookstores between them
- Impending threat of digital replacement of physical goods
- A seasonal product need that does not fully utilize operational capacity
But here is what Chegg does better than anybody else, which makes it difficult to compete against and win:
- Test Quickly and Fast Rollout: The company can test concepts in discernable communities with limited risk and capital outlay. At the formation stage, the company could limit the number of books it needed. As it grows, it can roll out new services quickly after proving out the concept at say, Florida State.
- Marketing: There is nothing as viral as a college campus. FTW!
- Operational Excellence: Like Netflix, Chegg is excellent at pick, pack, ship, and return. This is incredibly difficult to do. And will become more so when the company begins experimenting with extending the model to other books. See #1.
- Scalable: Chegg will always have better inventory than local bookstores and better pricing. There is nothing stopping Chegg from offering other books, like Amazon, for rent.
- Customer Service: 30-Day refunds, free return shipping, customer support, tree planting. As I mentioned above, managing for peak and off-peak times is difficult.
Based on my financial analysis above, operating a physical bookstore and running an online rental service require different core competencies. I believe this is a winner-take-all business and that Chegg should control 80%+ market share over time.
In order to further ensure its position as market leader, I believe Chegg should position itself as the “Amazon for College Students” and cater to their unique university needs. The company should also go deep into expanding its classroom offerings, such as class notes and digital goods.
- Partner with bookstores for physical presence and kiosks a la Red Box
- Expand Assortment to leverage its operational expertise and capacity
- Expand classroom offerings and potentially acquire companies in this space, such as lecture capture company, Echo 360
- Embrace digital a la Netflix and partner with publishers
- Work with Apple and startup e-reader company, Kakai (founded by the founder of Chegg)
As a business based on everything that is great about the Internet, Chegg gets an “A”.
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