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Tuesday March 3, 1998

- An Education Today Feature -

Information highway toll-road
to knowledge based economy

Nation's public schools & colleges side-lined

Howard Hobbs, Daily Republican Contributing Editor

PALO ALTO DESK - The most challenging problem facing the American economy today is the shortage of technically skilled information workers.

Public schools have not been able to provide trained information knowkedge workers. So, private Computwr Based Training (CBT)entrepreneuers have entered the field.

CBT Group PLC, ia the software company that emigrated from its Irish birthplace to Silicon Valley and built a market capitalization of nearly $2 billion - close to Apple Computer Inc.'s current value -- in the three years since its initial public stock offering. Demand for instruction in the use of personal-computer technology made this transition possible.

Also, there is the CBT firm, Learning Tree International. Dow Jones reports this week revealed that it has suddenly jumped-up in valued at nearly $600 million, while rival Computer Learning Centers Inc. has a market cap of $544 million.

Private investors include former junk-bond king Michael Milken and Oracle Corp. Chairman Larry Ellison, whose Knowledge Universe start-up has been buying up training companies everywhere it can find them.

The information highway and the knowkedge based economy boom is a silver lining to the skilled-labor shortage afflicting American companies. Corporations spend billions on computer technology but are often frozedn-out of the market place when employees have been unable to capitalize on the use of new software advances or write their way around program glitches.

In 1998, it is estimated that corporations will waste $21.5 billion on technical training just to get new information workers, up 38% in two years, estimates market researcher International Data Corp.

It is well established that the new CBT instructional software can significantly improve productivity. Schools and colleges have experimented with CBT over past decades. Results in the public education sector have not been promising.

Now, private sector initiatives are gaining ground rapidly. Training companies have moved into multimedia graphics, exploiting the Internet and linking training to increased revenues.

Thre CBT Group's curriculum materials utilizes a graphic metaphor of a software product or programming language to be given detailed attention in the lesson. For example, there is an opening screen shot in a Lotus Notes course which presents topic as a metaphor of a three-dimensional image that is a representation of a file cabinet. It has multicolored notebooks in drawers. Following this reasoning, a cartoon-like assistant then pops up to explain key concepts in the software and to introduce tidbits of pertinent information. In a third level, specific functions and features are demonstrated in application to slove an information storage and retrieval task. At a fourth leevel of abstraction, the student metaphorically uses the software in simulated real-world tasks. Once those levels are mastered, a digital teacher grades the result in terms of mastery.

Then, there is another CBT entry. It is Computer Literacy, an on-line bookstore based in Sunnyvale, CA. It use this type of software to train employees in Microsoft's Access database. Where a classroom course for one employee in using the software would have cost $1,100, the company was able to buy training software for use in teaching the program to its 150 employees for under $100.

General Motors Corp. recently reinvented its computer infrastructure so that every GM dealer was networked to handle tasks like locating cars, showing comparisons to customers and swapping electronic mail with GM's home offices.

However, GM over-estimated its training capability when it tried to roll out the new technology on its own. It started with computerized courses. Then dealers demanded classroom instruction. So it hird the CBT firm Learning Tree to train 35,000 employees. Finally, a comprehensive curriculum was initiated in June 1997 and lasted thru November.

American Express Co. uses CBT as a technical support approach. First workers fcomplete a series of CBT subjects on their own, These cover subjects like, programming languages, that are followed by classroom instruction.

As this is being written there are more than 10% of the nation's technical positions are going unfilled for lack of qualified applicants. Most sought-after are programmers, systems analysts and computer engineers according to the Information Technology Association of America. Their study revealed that medium-sized and large American computer companies have 346,000 unfilled technical jobs.

In Silicon Valley, help-wanted ads are everywhere. Web sites run by technology companies list job openings by the hundreds.

New graduates aren't likely to fill the void, either. Between 1986 and 1994, the annual number of computer-science graduates dropped 43%, to 24,200 from 42,195.

In the past year, private companies spent about $18 billion worldwide training their workers in various information technologies, according to market-research firm International Data Corp. By 2001 that annual bill should hit $27.9 billion. Especially promising is employee training via the Internet and corporate intranets. Companies in this part of the training business could grow at annual rates of better than 100% for the next few years, and that suggests enormous possibilities for investors.

In recent months, Wall Street financiers have begun scrambling to gain a foothold in the training business, in part by encouraging consolidation among the industry's smaller players. T

he field also has attracted Microsoft's co-founder Paul Allen, Oracle chieftain Larry Ellison and even Michael Milken.

It is surprising to most people to learn that the best curriculum is dished-out in the good old-fashioned teachers in classrooms metaphor.

Some of the new information and knowledge economy companies produce self-instructional courseware. Among the top contenders, there is CBT Group, and a contingent of firms that write software to help monitor and administer training programs, through proprietary computer networks. Others operate virtual classrooms which combine elements of computerized training and instructor moderated lessons.

LKnowledge Universe, created by Michael Milken, is another player in the private sector knowledge based services market.

The traditional paradigm of teachers and classrooms-based learning is still growing.

Last year, for example, instructor-led classroms in the U.S. was nearly three-fourths of the $8.1 billion U.S. market for knowledke based information training.

With such a stron demand, there are eagre invrstors for private sector educatioan and training in the new knowledge based economy. Investors have a number of publicly traded companies to watch. Best known to investors is probably Learning Tree International, which in the fiscal year ended last September 30 produced revenues of $164.5 million, up a heady 59%. Learning Tree, a 24-year-old Los Angeles company which came public in December 1995, has taken investors on a wild ride. Barron's re[ported that, on a split-adjusted basis, the Learning Tree stock soared from $8 at its initial offering to about $48 last summer before it nose-dived.

Investors in classroom training firms are having to pay attention to many variables involved in such programs. First, teaching highly technical material to information-technology workers is something most educators know little or nothing about. Then, the technique of instructing office workers on computer applications is a daunting undertaking.

Learning Tree is one firm that avoids using software like Microsoft Office or Windows because competition in desktop applications training is fierce. Learning Tree typically provides four- or five-day courses, priced at about $1,500, to government and corporate computer workers.

Most of Learning Tree's instructors are part-time, spending most of their careers working in their fields of expertise. Most Learning Tree rivals, by contrast, employ a full-time instructional staff. [Media]

Learning Tree has been taking steps to move away from instructor-led classes preferring a computer-based training model, where they think future growth will come from.

New Horizons Worldwide, a Morganville, New Jersey, is a CBT firm with more than 200 franchise training centers. About 70% of New Horizons' revenues come from providing training for personal-computer use.

Robert McMillan, New Horizons' CFO, released information that the company had system-wide revenues last year of more than $270 million. Only a fraction of that actually reached the company, though -- revenues for the first three quarters of 1997 totaled $38.9 million. Like Learning Tree, New Horizons has been looking to add a computer-based training arm. And like Learning Tree, it has not yet made computer-based training a material part of the business.

There are even a few very small publicly traded training companies, including Mastering Inc., which focuses on single-day seminars, and Wave Technologies. Three of the largest players in classroom training remain in private hands; they are Global Knowledge Network, ExecuTrain and Productivity Point.

Global Knowledge Network, is owned by Welsh Carson Anderson & Stowe, a $3.5 billion investment firm. Carson created the company in late 1995, after acquiring Digital Equipment Corp.'s training business. According to Global's Web site, its 1997 revenues were about $200 million - similar in size to both Learning Tree and New Horizons. The company boasts that it's the largest authorized Microsoft training center, and ranks among the biggest Cisco training companies.

Executrain, a division of the privately held trade magazine publisher International Data Group, provides similar services. Operating more than 200 sites worldwide, most of them franchised, Executrain has taken a similar approach to that of New Horizons, focusing on pc applications. Despite a fledgling effort in technology-based courses, 98% of Executrain's more than $200 million in system-wide revenues is from classroom training, according to Bob Buhay, the firm's chief financial officer. [Media]

Productivity Point International, a Weston, Florida, company owned by Knowledge Universe, has about $200 million in annual sales. According to public record reports Knowledge Universe acquired Productivity Point in 1996, and has since been steadily buying out its franchisees. Lane Bess, the marketing guru at Productivity Point, reports that the company has acquired 80% of its training sites, usually by offering the franchisees a combination of cash, equity and performance-based incentives.

In the meantime, the company is considering ways to capitalize on its ties to Knowledge Universe. The company hasn't developed any of its own computer-based training programs.

However, CBT style programs are producing less revenues than traditional classroom training. Yet, most of the CBT industry consists of companies producing software to teach people to do technical tasks, like using Microsoft Excel or designing a World Wide Web site. The clear leader is CBT Group, an Irish company run from California by former Apple Computer executive James Buckley.

The CBT Group has a library of 558 training titles, covering a wide range of computer-related topics, including instructions on how to use software from Microsoft, Oracle, Informix and Lotus. Each title includes about four hours of instruction. Some employees view the titles by dropping them into their desktop CD-ROM drives, but 65% of users access them via corporate computer networks, and an increasingly large group gets at them via the Internet. Though CBT originates its titles in English, the company has been steadily translating its library to other languages -German, French, Spanish, Japanese, Portuguese.

CBT Group's rent its software. It contracts for from one to three years. Buckley notes that more than 80% of the company's contracts renew, at 140% of the original contract value, on average. The company also takes a conservative approach to booking its long-term contracts, which provides a healthy backlog. For a three-year, $300,000 contract, CBT would book a third of the contract value in each year. The company finished last year with a backlog of $110 million, just a tad short of 1997 revenues of $119 million.

The company has experienced high gross profit margins around 84% last year. Operating profitability is rising, too, hitting 21% last year. The company is also spending heavily on research and development, which accounted for about 16% of revenues in each of the last two years.

CBT Group has the reputation for trades with a huge price-to-earnings multiple of nearly 57 times estimated 1998 projections. The company's market value stands at nearly $2 billion, about the same as Netscape, or, for that matter, Buckley's former employer, Apple.

Gradually, the CBT industry has begun making the move to learning via the Web. The transition hasn't been an easy one. Some of the features typical of CD-ROM training software -- rich audio, video and simulations -- don't work well when downloaded over the Internet via a dial-up line. The industry has been frantically working on the problem. For its part, CBT offers something called CBT Web, a software package that allows people to download courses over a 28.8 kilobit-per-second line in eight to 15 minutes. An alternative version of the software, CBT Web Live Player, requires a two-minute software download and allows students to take courses over the Web with less disruption. More recently, the company launched CBT Web-Plus, a system for administering learning systems on behalf of corporate customers. [Media]

Buckley sees his chief competition as the traditional classroom-training companies. He is quick to note that on a per-student basis the classroom method costs more than computer-based training. Classroom training also has some serious restrictions. "Classroom training is almost always for five days -- never seven days, or eight days," he says. "Everyone is at a different level of understanding, so with a standard approach you effectively slow down the fast people and push the slower people. In technology training, that's a real disadvantage."

At the moment, industry analysts see two chief rivals for CBT Group. The one that might sound familiar is Gartner Learning, a division of Gartner Group, the consulting firm. While much smaller than CBT, Gartner Learning is growing faster.

Gartner, which concentrates mostly on fairly technical computer training, got into the business in 1996, via the acquisition of three smaller firms: J3 Learning, Relational Courseware and Mindware Technologies. The unit is still a tiny part of the Gartner empire, contributing less than 10% of revenues, but it is growing fast. Gartner Learning expects revenues in the year ending September 1998 to hit $42 million, twice the year-earlier level.

The other firm worth watching is NETg, a division of Harcourt General. Harcourt acquired NETg last year as part of its purchase of National Education Corp. NETg has a library of more than 400 computer-based training titles.

Of course, employees need to learn a lot of things that can't be found in an off-the-shelf software package. For many companies, that means creating custom instructional software, and there are plenty of software tools available to help companies do just that. Such tools probably bring in less than $100 million in revenues today, but they play a pivotal role in employee training. This segment of the training industry is dominated by two companies, Asymetrix Learning Systems and Macromedia.

Asymetrix, a private company based in Bellevue, Washington, was formed in 1984 by the billionaire investor Paul Allen, who generated most of his fortune as the co-founder of Microsoft. To outsiders, the company for some of its life seemed slightly adrift, and by its own admission it was acting mostly as a research organization. But in recent years, Asymetrix has focused firmly on the market for software tools used in "distributed learning." Lately, Asymetrix has been reshaping the business slightly, acquiring AimTech, a rival maker of software tools. Asymetrix also has sold off some products and strengthened its custom software development group via acquisition. In short, it seems clear that Asymetrix is readying itself for an initial public offering, probably this year, and possibly in the next few months. Or maybe sooner, given the fact that the company has suddenly turned press-shy. "Our lips are sealed at this point in time," said spokesman Frank Coyle in response to a request for an interview.

Asymetrix's most important products are its ToolBook II line of courseware development software, which includes a professional version and a simpler model for nonprogrammers. Asymetrix also sells a product called Librarian, which helps companies centralize their delivery and tracking of training efforts. This part of the business will be crucial as corporate America adopts online learning in a broader way, and for that reason Asymetrix faces a plethora of competitors. They include Macromedia, which sells a piece of software similar to Librarian, called Pathware. Macromedia also competes directly against the Asymetrix ToolBook products with a line called Authorware.

Jim Funk, vice president for marketing at Macromedia's interactive learnings division, points out that the current generation of software for what he calls "computer-managed instruction," such as Pathware and Librarian, faces the challenge of getting training titles and other materials from varying producers to work seamlessly.

At the moment, there are no accepted standards for computer-based training software -- but the industry is working on it through the Aviation Industry CBT Committee, which originally aimed to produce computerized training standards for the aviation industry but has gradually taken on a broader role.

The holy grail in learning software, the ability to use a tiny slice of training any time you want it, "chunking it up," as Oracle's Klaus Anderson puts it, is a little farther off. But that capability is coming. Oracle champions a concept called "learning objects," which would break courses into small pieces, store them in a database, and allow people to mix-and-match the training they need, requesting just the information they require. It's similar to a concept that has been kicking around for years called EPSS, or electronic performance support systems, which provides workers with expert information on demand.

All of that will take time. Meanwhile, as noted, there's a real battle going on in the emerging market for the software to control corporate learning systems. Products from Asymetrix, Macromedia and CBT Group face competition from NETg's Skillvantage Manager and Lotus LearningSpace. Then there are LOIS and KoTrain, two offerings from Oracle Learning Architecture and KnowledgeSoft, a private company in which Gartner Group holds a 19.9% stake.

"Training is the killer app for the Web," contends Oracle's Anderson. "Three years ago, you could download the beta version of Netscape's browser. We expect the same rapid rate of adoption for Web-based training. The snowball is just getting started. Three years from now, 90% of the Fortune 500 will have their own learning sites."

Elliott Masie, a training industry guru who runs the Masie Center, a Saratoga Springs, New York, research firm, says Oracle has an early edge in this particular battle, with closer ties than rival systems to human-resource information systems like those provided by PeopleSoft.

Another group of companies, mostly start-ups, is trying to create "virtual classrooms" to allow people to gain the benefits of online training but also have the interaction aspect of traditional classroom learning. For the moment, this is a tiny business, with many new entrants, including Centra Software, Databeam, Eloquent, Docent, ILINC and better known as a video-conferencing company.

Maybe one or two of these new companies will get bought out. An obvious acquirer would be Knowledge Universe, which certainly has been spending a lot of time looking for companies to buy. Knowledge Universe has been moving swiftly, but quietly. Started two years ago with a $500 million grubstake from Oracle Corp. Chairman Larry Ellison, former Drexel Burnham Lambert junk-bond king Michael Milken and his brother Lowell, Knowledge Universe thus far has gone to great lengths to stay out of the limelight. The company has no Web site and has never bothered to announce some of its acquisitions. It doesn't even have a real headquarters -- some operations are located in Los Angeles, Milken country, others in Burlingame, California, not all that far from the Redwood Shores offices of Oracle. Various other parts of the company are scattered around the country.

Thomas Kalinske, a former Mattel and Sega executive who serves as CEO, says Knowledge Universe has been trying not to tip its hand about corporate strategy. No doubt the low-profile approach also reflects the influence of Milken, who's still battling with regulators over what roles he can and cannot play as a financier.

The $47 million settlement that Milken agreed to pay last week stemmed from SEC civil charges that Milken's consulting on a deal concerning News Corp. MCI violated his lifetime ban from the securities industry. Milken's Los Angeles attorney, Richard V. Sandler, says that the government has never expressed concerns over Knowledge Universe. "That's his own personal business and investment," Sandler adds.

Knowledge Universe already has annualized revenues of $1 billion, making it one of the largest educational-products companies in the world. The company sees education as a $600 billion market, which breaks down into nearly two dozen different categories and excludes public schools and institutions of higher education.

Knowledge Universe acquired Productivity Point for "less than $100 million," according to Kalinske. More recently, Knowledge Universe has signed a letter of intent to acquire Executive Council, a small firm that provides education and training for chief executives. And, as noted above, Knowledge Universe recently acquired MindQ, provider of software to train people in the Java computer language.

Knowledge Universe is in the process of buying Bookman Consulting, which provides standardized testing for computer programmers. And it owns Leap Frog, a maker of educational toys, and Nextera, an information-technology consulting business.

Knowledge Universe has recently acquired a 21% stake in Nobel Education, a public company that operates private pre-schools and elementary schools. Knowledge University has announced plans to start offering certificate and degree programs over the Internet this fall.

Knowledge Publishing, which will include academic journals, educational materials and other products, in only in the early stages of development.

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