United States Education & Training Services Knowledge Enterprises 23 May 2000 Michael T. Moe, CFA Director of Global Growth Research The Knowledge Web (1) 415 676-3570 [email protected] Henry Blodget Part 1: People Power – Fuel for the New Economy Senior Internet Analyst, Global Coordinator (1) 212 449-0773 [email protected] Technology is the Driver of the New Highlights: Economy and Human Capital is its Fuel The Internet’s Capability to Deliver a Total Human Capital Solution Creates a Powerful Investment Opportunity Merrill Lynch & Co. Global Securities Research & Economics Group Global Fundamental Equity Research Department RC#60214529 The Knowledge Web – 23 May 2000 Knowledge Enterprises Group Michael T. Moe, CFA Director of Global Growth Research (1) 415 676-3570 [email protected] Education Services Global Internet Research Kathleen Bailey Henry Blodget Vice President Senior Internet Analyst, Global Coordinator (1) 415 676-3572 (1) 212 449-0773 [email protected] [email protected] Neil Godsey Kirsten Campbell Assistant Vice President Assistant Vice President (1) 415 676-3574 (1) 212 449-3113 [email protected] [email protected] Michael B. Armstrong Industry Analyst (1) 415 676-3585 [email protected] Business & Employee Services Thatcher Thompson Director (1) 212 449-8787 [email protected] Chandy Smith Assistant Vice President (1) 212 449-0841 [email protected] "Albert Einstein"™ Licensed by the Hebrew University of Jerusalem, Represented by the Roger Richman Agency, Inc., Beverly Hills, CA 90212 www.albert-einstein.net" 2 The Knowledge Web – 23 May 2000 Introduction to the e-Knowledge Industry The new economy moves at a pace never seen before. The new providing continuing education, employment opportunities economy is a knowledge economy based on brainpower, ideas and relevant information, will be knowledge nerve centers and entrepreneurism. Technology is the driver of the new for vertical knowledge communities. economy, and human capital is its fuel. The knowledge Colleges and universities are the most wired community economy is people-centric. Our economy has evolved from on the Web, with over 90% of college students accessing manufacturing-intensive to labor-extensive. Fundamental to the Internet, 52% of them daily. Students spend nearly 19 success in the new economy is how companies obtain, train and hours per week on the Internet, 84% of the time pursuing retain knowledge workers. The knowledge enterprise industry academic activities. College students currently spend $105 is over $2.2 trillion. We expect the online component to grow billion annually, with $1.5 billion of that online. Higher ed from $9.4 billion to $53.3 billion by 2003, a 54% CAGR. hubs provide educators and e-commerce companies access Ubiquitous PCs and high-speed bandwidth will facilitate access to this very compelling demographic. to knowledge anytime, anywhere. The Internet democratizes The Internet creates one economy and one market. As knowledge, increasing access to it, lowering its cost and large as the online higher education market is in the U.S., ultimately improving its quality. We believe combining the the global opportunity is significantly greater. Unlike the “richness” of an offline experience and the “reach” that only the U.S. where post-secondary education is relatively Internet provides creates a network effect that allows scale available, access to world-class post-secondary institutions knowledge enterprises to be born. Moreover, we see significant in many parts of the world is limited. Currently, there are potential advantages that offline operators can achieve by 84 million students enrolled in higher education leveraging their experience and brand online. worldwide. Global demand for higher education is e-Commerce has forced all traditional businesses to forecasted to reach 160 million by 2025 − if online compete at Internet speed. In a 4% unemployment learning captures even half of this growth, there would be economy with 65% of all the new jobs created requiring 40 million students for online education. We predict that skills, 70% of Fortune 1000 CEOs are saying that finding in the next five years, there will be global virtual qualified workers is a major issue for growth. “Time-to- universities with potentially millions of students enrolled. competency” is a bottleneck or a strategic advantage We project that the online higher education market will depending on how effective an organization is at finding grow to $7 billion by 2003 in the U.S. alone. and training knowledge workers. Domestic online The number of K-12 schools connected to the Internet has corporate learning is expected to grow from $1.1 billion in climbed from 35% in 1994 to 96% today. Today’s kids are 1999 to $11.4 billion in 2003, a 79% CAGR, and online − − staffing and recruiting, critical functions of human capital the Internet Generation Generation i and are as comfortable on a computer as on a bicycle. With 53 million management, is projected to grow from $5.8 billion in schoolchildren, three million teachers and 23 million 1999 to $28 billion in 2003, a 48% CAGR. families, the K-12 marketplace encompasses a huge number The information revolution that began with the birth of the of potential users. The Internet is the world’s greatest PC is really the knowledge revolution. e-Commerce is to library and gives a student in Minot the same access to the knowledge revolution what the railroads were to the knowledge as a student in Manhattan. Key for improvement industrial revolution. We think enterprises building in learner outcome is getting parents involved − the home- “knowledge tracks,” or infrastructure, into the corporate school connection − and email has already proven to be an market, K-12 community, and higher education spaces are effective communication tool between parents and teachers. poised to enjoy explosive growth. The Internet is all about disproportionate gains to the Integrating quality educational content with leaders of a category. The gigantic opportunity has not testing/assessment and certification programs is the new st been lost on investors, with over $3 billion in venture education paradigm for the 21 century. In the knowledge capital funds flowing into knowledge enterprises in the economy, assessment is the currency with which all skills past fifteen months alone. By focusing on knowledge are valued. The four engines of the new economy – enterprises that contain the 4 P’s (People, Product, computers, telecommunications, healthcare and Potential and Predictability) and other key differentiating instrumentation – employ approximately 50 knowledge factors, notably the network effect outlined in this report, workers per 100 employees and are growing. These we hope to identify the Yahoo!s from the yahoos and technology-intensive industries are growing 3-6 times as provide outsized investment returns for what we see as an fast as economy-wide job growth. Career vortals, outsized opportunity. 3 The Knowledge Web – 23 May 2000 Fast Facts: The New Economy • The pay gap separating a high school graduate from a • At the end of 1998 there were approximately 88 college graduate was 50% in 1980. Today, it has Internet stocks. Currently, there are approximately reached 111%. Looked at another way, a 30-year-old 400 with nearly a half trillion dollars of market cap. male with a high school diploma earns just two-thirds • Approximately 50% of the total Internet market cap is of what he earned 25 years ago. Even so, only 21% of accounted for by the five largest Internet companies, American adults over the age of 25 have a bachelor’s providing evidence for the belief that, on the Internet, degree or better. the winners “take all.” • In 1980, the price-to-book ratio of the ten largest • Studies have shown that effective management of publicly traded companies in the U.S. was 1.2x. human capital can improve shareholder value by up to Today, the price-to-book is 12.1x, or ten times greater. 30%. This multiple expansion correlates directly with the increased productivity of a company’s intangible • By our estimates, the e-knowledge market will reach assets – its human capital. $53.3 billion by 2003 from $9.4 billion in 1999, growing at a CAGR of 54%. • On average, each employee at the leading “New Economy” companies is “worth” $38 million based on • Reflecting the transformation of technology in our market cap-per-employee. In contrast, each employee economy, in 2000, skilled jobs will represent 65% of at the leading “Old Economy” companies is worth all jobs. This is expected to expand to 85% by 2005, about $689,000, or less than 2% of employee value at up from just 20% in 1950. the New Economy companies. • Knowledge Services – education and corporate • Venture capital funding in knowledge enterprises learning for the new economy – is a $740 billion amounted to over $3 billion since January 1999, or industry in the U.S. and a $2-trillion industry globally. about triple the total invested in the previous 9 years. • Web-based corporate learning should enjoy explosive • At the end of 1999, more than 196 million people growth, measuring $11.4 billion by 2003, up from were using the Internet worldwide. The number of $550 million in 1998, an 83% CAGR. global Internet users is expected to more than triple to • By 2002, technology-based training will capture the 638 million by 2004, a 27% CAGR. majority of dollars for IT training, at 55% versus the • The “free agent” mindset of today’s knowledge worker 45% share captured by instructor-led methods. is evidenced by the fact that the average person entering • In 1996, 44% of students enrolled in higher education the workforce today will work for between 8 and 10 programs were adults over 24 years of age, up from different employers versus 4 to 6 a decade ago. Only 28% in 1970.