Dan Rosensweig has been around the tech industry long enough to recognize an important platform shift when he sees one. As chief operating officer of Yahoo, he held one of the top posts in the consumer internet when the iPhone launched the mobile computing revolution.
This week, Rosensweig found himself in the middle of another tech upheaval. Online education company Chegg, where he is the chief executive, had the distinction of becoming the first company to report a hit to its business from generative artificial intelligence, as some students turned to smart chatbots for answers rather than subscribe to its own services.
Pointing to experience from previous big tech shifts, the former Yahoo boss was quick to claim that incumbents such as Chegg stand to be big winners from transformative new technologies like this — provided they act quickly enough to co-opt them for their own use.
Wall Street decided that this sounded like wishful thinking and wiped nearly 50 per cent from Chegg’s stock price in a day.
The answer will be of great interest to executives in many other industries. The online education market looks like being the first to be disrupted by generative AI.
Incumbents like Rosensweig like to point to their customers and brands as assets that can help them withstand disruptive newcomers, which often use a new technology to launch free but undifferentiated services. The cash flow from existing businesses can also put them in a stronger financial position than disrupters, at least when the venture capital pouring into new fads such as generative AI dries up.
This is often presented as a straight investment choice between backing the old guard or the disrupters, but the outcome is rarely that binary. The arrival of free services powered by a new technology often kills off companies without a strong value proposition, and many others won ‘t develop the new skills and processes that are needed. But many disrupters, which often use free services as a lure, won’t alight on a sustainable business model before running out of cash.
The news business is a case in point. The latest wave of upstarts has hit the rocks, with BuzzFeed closing its prizewinning news division and Vice Media’s owners struggling to find a buyer for the company for more than a year.
Whoever the long-term winners from generative AI turn out to be, companies thought to be in the crosshairs will face immediate consequences. Despite saying this week that AI had only had an impact on its business “at the margin”, Chegg is deemed by Wall Street to be worth just a third of what it was when ChatGPT was launched late last year.
Even companies that react quickly to the threat are unlikely to get credit until the competitive dynamics of the new market are better known. Rosensweig has not been asleep at the wheel. Taking a course that many other companies are likely to follow, Chegg has forged its own partnership with OpenAI and is preparing to integrate AI into its own services.
Companies with customer data and industry expertise should be in a position to add a level of context to their AI-powered services that generalized chatbots lack. In Chegg’s case, that includes knowing students’ histories and levels of attainment, making it possible to feed them prompts that home in on gaps in their knowledge. It also has years of experience from teaching the same courses and learning from the questions other students ask.
Will this kind of data and domain knowledge be enough for incumbents to prevent customers peeling off for less effective, but free, chatbots? There’s simply no way to tell. But after seeing the impact that the free internet services had on a swath of industries, Many investors are likely to vote with their feet.
Ultimately, as Rosensweig said this week, the hope from a platform shift of this significance is that it will greatly expand the size of digital markets — though the path will be “very bumpy and very lumpy and very uncertain”. Executives in many other industries will soon find themselves explaining to their own investors how they deserve a big slice of this new AI-powered future.
Drawing on years of experience, the Chegg CEO tried to counter the knee-jerk stock market reaction: “This is not a sky-is-falling thing, it’s a technological shift.” But when there is so much at stake, Wall Street finds it hard to see the difference.