Once the go-to platform for students who wanted help with their homework, Chegg now seems on the verge of a downfall that may have a lot to do with the rise of OpenAI’s ChatGPT.
An estimated $14.5 billion worth was wiped out as shares of the US education technology company fell 99% from their 2021 highs. It has lost more than half a year so far. million paying subscribers and a quarter of Chegg’s workforce (441 employees) were laid off a few months ago.
With revenue falling, bond trading analysts are concerned about Chegg’s ability to repay its debts, according to a report from The Wall Street Journal which examines whether the increase in students canceling their Chegg subscriptions goes hand in hand with the advent of large language models (LLMs) like ChatGPT.
What is Chegg and how did it evolve?
In 2000, a University of Iowa student, Josh Carlson, started a online message board for his peers. He combined the words “chicken” and “egg” to give the name CheggPost. Carlson teamed up with Aayush Phumbhra, an Indian MBA student, to work on the project. Phumbhra and a new partner, Osman Rashid, suggested shortening the forum’s name to Chegg and exploring textbook rental as a strategy, according to Forbes.
By 2005, Phumbra was no longer part of the company that had expanded into the online study guide business. Five years later, Chegg acquired another edtech startup called Cramster and pivoted to providing pre-written answers to frequently asked homework questions. Dan Rosenweig, a former Yahoo executive, became CEO of the company around the same time.
Over the next decade, Chegg hired thousands of contractors, most of whom were based in India, to answer questions posed by students in all majors, including advanced mathematics, science, technology and engineering.
The on-demand delivery of test answers to students was bundled into a subscription offering named Chegg Study at $14.95 (Rs 1,200 approx) each month, which became its main revenue driver during the period. COVID-19 pandemic-induced transition to virtual learning.
Chegg would have seen its tripling of share price during pandemic lockdowns as well as a surge in subscriptions, making it one of the most valuable edtech companies in the United States at the time. Students everywhere have become accustomed to “checking” their homework problems or quizzes online because it only takes them a few minutes to look up the answers.
How did ChatGPT disrupt Chegg’s business model?
Chegg went from steady growth and minimal competition to rapidly losing relevance with the launch of ChatGPT in 2022.
The AI chatbot trained on large amounts of data and information available on the Internet could provide answers within seconds. The benefits of using ChatGPT over Chegg for homework help became clear to students who didn’t hesitate to make the switch.
“It’s free, it’s instant, and you don’t really have to worry if the problem is there or not,” MBA student Jonah Tang was quoted as saying by WSJ.
More than 62% of students plan to use ChatGPT this semester, while only 30% say they will rely on Chegg, according to a recent survey conducted by Needham, an investment bank.
Another study by researchers at the University of Illinois found that students overwhelmingly switched from Chegg to ChatGPT. “It appeared that they completely moved from finding solutions online and copying them to just using ChatGPT to generate solutions for them,” said Craig Zilles, a professor of computer science at the university.
However, experts have warned that answers generated by ChatGPT may not be correct at all times, as LLMs are prone to information hallucinations, meaning solutions would need to be double-checked. A few others have also argued that LLMs can never be used for survey tasks because they return answers by guessing the sequence of words or phrases that should make up a sentence (probabilistic determination).
These so-called blind spots in today’s LLMs have not stopped companies from marketing their pioneering AI models as personalized tutors or research assistants capable of providing solutions to complex problems in science, coding, mathematics, etc.
Did Chegg’s move to AI come too late?
Before ChatGPT was released, Chegg employees wanted to leverage AI to automate responses to meet the huge influx of demand. However, their requests to create these AI tools were refused by the company’s management, according to WSJ.
Even after launch, Chegg executives reportedly did not view AI chatbots as an immediate threat due to their tendency to generate inaccurate responses. This was quickly seen as a misstep as employees discovered in their internal reviews that answers generated by GPT-4 performed better than Chegg answers provided by human experts.
Hoping to avert the existential crisis triggered by ChatGPT, CEO Rosensweig reportedly met with OpenAI leader Sam Altman to develop a new product called Cheggmate that would give GPT-4 access to ChatGPT’s vast repository of solutions. Chegg to generate accurate answers to student questions.
But that hasn’t stopped ChatGPT from stunting Chegg’s subscriber growth. Its stock fell nearly 50 percent after Rosensweigh admitted during an earnings conference call that AI was hurting its business. By the next results announcement, Cheggmate was dead in the water.
The company has entered into another agreement with Scale AI to help build more than 24 AI systems that can be used by Chegg for various academic disciplines. In June of this year, Rosenweig resigned from his position and Nathan Schultz took over as CEO.
What does the future look like for Chegg?
As Chegg catches up by creating its own AI products, the education technology company may still struggle to retain its student customers and convince pessimistic investors of its value in a market disrupted by AI tools free.
Under a new CEO, the company has started offering more AI-assisted responses as well as live counseling sessions as it now looks to target students who need help beyond answers available for free and generated by AI.