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May 13, 2009

Rosetta Stone (RST) -- Not the Key

Rosetta Stone has gone where few other companies dare these days, pulling off a successful IPO in a tough market. The company's proposition is that it is the undeniable leader in language teaching software, supporting a wide and ever expanding list of the world's languages. The company grossed nearly $210 million last year with a profit of near $14 M

Rosetta Stone has an interesting price structure with an entry level of $259 for Spanish Level 1, or a package price of $549 for the three supported levels that include Spanish 1,2 &3. Compared to the cost structure of a student seeking a private tutor or even enrolling in a class, the software price is highly competitive. Rosetta Stone's teaching method does not require translation so that an English (substitute this for any other language supported), say, can be sold to students from one end of the globe to the other. In an increasingly global world, Rosetta Stone is positioned to supply what must be an ever growing market. The company offers some 27 living languages as well as Latin, and supports in some cases various flavors like American and British English and Spanish and Latin American Spanish.

Rosetta Stone, it would seem, has done the hard work, developed a sound method that includes tools for learning to speak, read, write and pronounce with unlimited opportunities for practice. The emphasis is on what the company calls total immersion whereby students use pictures to absorb vocabulary without translation. Grammar and syntax, too, are only taught through this immersion method.

But what about the product?  Having used the discs and having had some experience learning a few languages both on the spot and remotely, there's no disputing that Rosetta Stone is on the right track. They have a philosophy that contrasts them with traditional academic approaches that put an emphasis on grammar, syntax rules and vocabulary.  A typical Rosetta Stone lesson --each Level includes 80 of these-- combines 40 brief, somewhat repetitive phrases or sentences, read by native speakers and accompanied by a photo or video.  You learn gradually by combining building blocks. Users can test their comprehension skills by listening without the pictures, reading written phrases, seeing, repeating and digesting as long and as often as they need.  There is an included microphone and headset so that users can test their pronunciation skills against the voice pattern of the instructors. There are other files meant "to go" for the car or portable player and for students who also wants to learn to write, there is a built in language-centric keyboard function that allows for typing and testing.

Nonetheless, there are a couple of problems with the method that make it less than optimum. Spoken language is most often a first person, interactive process, wherein comprehension must be matched with the ability to express needs, desires, orders and ideas, etc. on the spot. There is something oddly third person about the Rosetta Stone levels, lots of he, she's and they's and few I's and you's. Remember, this is a learning tool aimed at helping someone insert himself into the spoken language to a point where he or she can begin to cope and it's on this level that it should be judged the harshest.

Many students will also find the pace frustrating, the repetition seems to come at the cost of not introducing complete conjugations, useful tenses or the gamut and range of everyday things like all the possessive pronouns.

Rosetta Stone says it has done the IPO in order to develop a new series that will be web based.  Perhaps the new approach will overcome what I would have to call a major gap in interactivity.  The disc series also has an old fashioned feel to it in terms of using multimedia, the web developers may be well aware of this and more willing to take advantage of the tools available to them.  Finally, there's a touch and feel of a foreign land that permeates a language. Because Rosetta Stone stretches across its range of languages, it has found economy in recycling it's images from language to language. This results in making the experience seem like learning in a laboratory rather than the street.

Rosetta Stone's IPO is based on the no doubt correct assumption that there is a vast and growing demand for foreign language speakers in business, military, tourism, academia and every day life.  Rosetta Stone has a headstart and years of experience tucked under its belt.  This could make investors comfortable with the IPO.  After all, pricey software that can be sold in volume promises very high margins. And Rosetta Stone has also recognized that it can sell courses across the Internet on a subscription basis, which may well be it's future.

But there should be a large caveat for anybody considering going long on Rosetta Stone and it strikes at the method's heart. Rosetta Stone feels like 1990's technology not merely from a cosmetic perspective but from an almost dimensional sense. In the Iphone world, Rosetta Stone has a Windows 2000 feel. 

Bottom line:  Rosetta Stone may be lucky or smart and agile enough to own this niche for a long time but they are also a lot more vulnerable than may first meet the eye.

With it's rather steep --at least for the consumer market-- price structure, Rosetta Stone has to worry about pirate versions which is probably another reason why they are moving to the web and a subscription model. Many interested investors will be watching what they do as well as their numbers. There are no doubt ambitious competitors who've seen the IPO go out and may be getting ready to bring a newer look that counters the weaknesses.

Posted by dymaxion at 06:13 PM


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