The Wall Street Journal
Technology | Artificial Intelligence
Nov. 9, 2024 5:30 am ET

How ChatGPT Brought Down an Online Education Giant

 

Most companies are starting to figure out how artificial intelligence will change the way they do business. Chegg CHGG 0.00%increase; green up pointing triangle is trying to avoid becoming its first major victim.

The online education company was for many years the go-to source for students who wanted help with their homework, or a potential tool for plagiarism. The shift to virtual learning during the pandemic sent subscriptions and its stock price to record highs.

Then came ChatGPT. Suddenly students had a free alternative to the answers Chegg spent years developing with thousands of contractors in India. Instead of “Chegging” the solution, they began canceling their subscriptions and plugging questions into chatbots.

Since ChatGPT’s launch, Chegg has lost more than half a million subscribers who pay up to $19.95 a month for prewritten answers to textbook questions and on-demand help from experts. Its stock is down 99% from early 2021, erasing some $14.5 billion of market value. Bond traders have doubts the company will continue bringing in enough cash to pay its debts.

Though Chegg has built its own AI products, the company is struggling to convince customers and investors it still has value in a market upended by ChatGPT.

“It’s free, it’s instant, and you don’t really have to worry if the problem is there or not,” Jonah Tang, an M.B.A. candidate at Point Loma Nazarene University in San Diego, said of the advantages of using ChatGPT for homework help over Chegg.

A survey of college students by investment bank Needham found 30% intended to use Chegg this semester, down from 38% in the spring, and 62% planned to use ChatGPT, up from 43%.

“My concern is that the headwinds to Chegg’s top-line aren’t temporary—they’re more structural in nature,” said Needham analyst Ryan MacDonald.

Dan Rosensweig, Chegg’s CEO of more than a decade, stepped down in June after the stock cratered under his leadership. Chegg said Rosensweig notified the board of directors he planned to retire a year in advance.

Company veteran Nathan Schultz took over as CEO and laid off 441 employees, almost a quarter of Chegg’s workforce. He has pushed for international expansion and outlined a plan for Chegg to become useful to students for more than just homework answers. 

In an interview, Schultz said Chegg was dealing with a hangover from the growth it experienced during the pandemic and an uncertain outlook for classroom policies around AI. He said Chegg plans to target what he calls the “curious learner” by offering more comprehensive answers and services such as counseling.

“In moments of disruption, you have to focus on what you do best,” he said. 

Researchers at the University of Illinois at Urbana-Champaign conducted a study in the spring last year to see how ChatGPT had influenced cheating in an introductory programming course. They found students had overwhelmingly moved to ChatGPT from what the researchers called “plagiarism hubs” such as Chegg.

“It appeared that they completely shifted over from trying to find online solutions and copying them to just going to ChatGPT and having it generate solutions for them,” said Craig Zilles, professor of computer science at the University of Illinois at Urbana-Champaign.

The Chegg spokeswoman said, “We take any attempt to misuse our platform extremely seriously, cooperate with official university investigations into allegations of cheating  and invest in our technology and solutions to prevent such actions.” OpenAI declined to comment.

Down 48% in a day

Chegg began as a message board for Iowa State University students, with a name that combines “chicken” and “egg.” It evolved into a textbook rental company during the 2000s and began offering human-created online study guides in the 2010s.

Rosensweig, a former Yahoo executive who became CEO in 2010, managed Chegg like a fast-growing technology company. He spent top dollar on employee pay and starred in an Ashton Kutcher-produced reality show called “Going From Broke,” in which he dispensed financial advice to young people trying to repay student loan debt. 

Around 2022, as Chegg was already struggling with late-pandemic turbulence in its business, employees asked for resources to develop AI tools for automating answers. Chegg’s leaders initially denied the request, said a person who worked on the effort.

Immediately after ChatGPT’s release, some Chegg employees thought the company wasn’t at risk because of the chatbot’s propensity to make up incorrect answers.

But within months, Chegg’s internal data showed students were increasingly turning to ChatGPT as a studying aid. Employees found some of the answers provided by GPT-4, the technology behind ChatGPT, scored higher on internal evaluations than answers from Chegg’s human experts.

Around that time, Rosensweig met with Sam Altman, CEO of OpenAI. The pair agreed to develop a service called Cheggmate that would use Chegg’s repository of millions of answers and GPT-4 to instantly answer student questions and generate quizzes.

As testing of Cheggmate began, Rosensweig said on a May earnings call that ChatGPT had begun eating into subscriber growth. Chegg pulled financial forecasts for the rest of the year, and its stock dropped 48% in a day.

By the following earnings call, Rosensweig said the company’s AI features would no longer be called Cheggmate. He announced a second partnership with a startup called Scale AI that would help Chegg create more than two dozen AI systems for different academic disciplines.

More recently, company leaders have distanced themselves from Cheggmate, instead focusing on how the technology behind it is being infused across the company. 

“We’ll take Cheggmate, and we’ll toss it off a building,” Schultz said in the interview. “It was never a thing.”

Aping ChatGPT

The company used AI developed with Scale AI to answer homework and test questions that previously would have been outsourced to experts. It also revamped its website to greet visitors with a textbox that looks similar to ChatGPT. The OpenAI app asks, “What can I help with?” Chegg’s home page now asks, “What would you like help with today?” 

Chegg’s automated answers have allowed it to provide homework answers at about one-quarter the cost of those produced by humans, the company has said. The new tools haven’t reversed subscriber losses, though.

Chegg reported an 11% revenue drop in the second quarter, its biggest annual decline since 2017. Wall Street analysts expect the company to report a 15% decrease in sales when it announces third-quarter earnings Tuesday.

Ahmed Assalmi, a fourth-year student at Taif University in Saudi Arabia, subscribed to Chegg recently for help on a computer engineering problem. He was disappointed with Chegg’s solution, which said at the bottom, “Instant responses come from subject-matter experts, AI models trained on Chegg’s learning content or OpenAI.”

“I felt scammed,” Assalmi said. He preferred the answer from ChatGPT, which he frequently uses for schoolwork. 

Chegg said 91% of its users were satisfied with the product. Schultz said Chegg wanted to target students who need more than freely available answers from chatbots.

“We’ve given the company a road map that integrates AI in the right ways for us,” he said. “Now we’re in execution mode.”

Write to Miles Kruppa at miles.kruppa@wsj.com