How AI Is Threatening an Online Education Giant

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[00:00:18] Welcome to Tech News Briefing. It's Monday, November 11th. I'm Cordelia James for The Wall Street Journal.

[00:00:25] Elon Musk could be appointed Secretary of Cost Cutting under Donald Trump's new presidency.

[00:00:31] We'll talk about how Musk's approach to slashing spending has worked for his other businesses and what this means for the federal government.

[00:00:38] And then, for years, online education company Chegg was the go-to source for students who wanted help with homework.

[00:00:45] That is, until ChatGPT came along.

[00:00:49] WSJ's Miles Krupa tells us how artificial intelligence shook up Chegg's business and what moves the company is making now to survive.

[00:01:01] But first, President-elect Donald Trump has proposed appointing Elon Musk to head a new Department of Government Efficiency.

[00:01:09] Little is known about what exactly that role will involve, but our columnist Tim Higgins says that Musk has a long history of taking a shock-and-aw approach to cost-cutting at his businesses in an effort to increase productivity.

[00:01:21] Tim joins us now with more on what that could look like at the federal level.

[00:01:26] So, Tim, I want to get into that shock-and-aw approach as you describe it.

[00:01:31] Can you give us an example of how Musk has done that in the past?

[00:01:34] Well, in late 2022, when he bought Twitter, now known as X, he was very aggressive in cutting the number of employees that worked there, eventually getting down to reducing the headcount by something around 80%.

[00:01:47] Very aggressive.

[00:01:49] And it helped, according to him, stabilize the company.

[00:01:53] You've got to remember that when he took over, it was not necessarily in the best financial shape.

[00:01:58] Some would argue it's still not in the best financial shape.

[00:02:01] It's lost a lot of advertisers because of some of the drama around the company, but it's a company that's still operating.

[00:02:09] And so it's seen as a model for what he might do in the government.

[00:02:13] At least that's according to his fans out there who feel like the federal government is just spending too much money and has gotten too big.

[00:02:20] If you look at his other companies, he tends to slash employees every year or every other year, these sorts of things.

[00:02:29] You could say Tesla and SpaceX are examples of it working.

[00:02:32] Tesla, now the world's most valuable automaker, making profit from its sale of its cars.

[00:02:39] And SpaceX is now an industry leader in what it does.

[00:02:43] Tell me more about how this would play out at the federal level.

[00:02:46] We don't know all the details of what he has in mind or how this might work.

[00:02:49] One of the things that Trump administration is going to have that others have not had, it looks like they're going to keep their majority in the House.

[00:02:57] They have a majority in the Senate.

[00:02:59] So that will give them a lot of power to make changes.

[00:03:02] Elon has also talked about cutting regulations.

[00:03:05] So we'll see if that's possible.

[00:03:07] It's going to be complicated.

[00:03:09] Elon is talking about cutting $2 trillion, which would be about one third of the federal budget from the last fiscal year.

[00:03:17] That's dramatic.

[00:03:19] It's kind of unprecedented.

[00:03:21] And it will be a huge challenge, especially if you look at where most of the money in the government spending goes.

[00:03:28] About half goes to things that are pretty hard to cut.

[00:03:32] Medicare, Social Security, defense.

[00:03:35] Things that maybe would be really hard to cut or that Trump has said he doesn't want to cut.

[00:03:40] So where those savings can be found, that'll be interesting.

[00:03:45] Tim, you wrote that Musk often offers bankruptcy as the alternative to these dramatic changes.

[00:03:51] What does this mean for how these changes might play out as we look ahead?

[00:03:54] A lot of business leaders don't want to mention the B word, bankruptcy.

[00:03:59] This is the last resort.

[00:04:01] This is losing in a lot of ways, right?

[00:04:03] You see with Musk's track record over the years that he's often turning to this kind of language and framing these kind of monumental fights that he faces in these kinds of terms.

[00:04:15] We're going to do this dramatic thing, or if we don't, then it's going to be really bad with bankruptcy.

[00:04:21] So the stakes are created.

[00:04:23] The battle is framed for his employees.

[00:04:25] When he's been on the campaign trail in November and October talking about what is ahead for the government, he keeps cautioning that if the spending cuts are not addressed, the government faces bankruptcy.

[00:04:39] So he's kind of using the same kind of language that he used in business to frame the challenge ahead, which adds some urgency and adds the stakes that he needs.

[00:04:48] Because as he acknowledges, there are going to be lots of people who object to whatever he is proposing to cut.

[00:04:54] But there is a reason why a lot of the spending grows the way it is.

[00:04:58] There are people out there who either depend upon it or is their pet project or it is in their district.

[00:05:03] This could be very difficult politically.

[00:05:06] That was WSJ business columnist Tim Higgins.

[00:05:09] Coming up, how online education company Chegg is trying to avoid becoming the first major casualty of AI.

[00:05:17] That's after the break.

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[00:05:59] For years, students have paid online education company Chegg a monthly subscription fee in exchange for study guides that help with homework.

[00:06:08] But since OpenAI launched ChatGPT in late 2022, Chegg has lost over half a million subscribers as students turn to the AI chatbot to get answers to assignments for free.

[00:06:20] We should note that News Corp, owner of the Wall Street Journal, has a content licensing partnership with OpenAI.

[00:06:27] WSJ tech reporter Miles Krupa joins us now with more.

[00:06:31] Miles, how did student behavior change after ChatGPT launched?

[00:06:36] The first thing is students were curious about how it could help them with their schoolwork and started plugging in questions and getting answers back.

[00:06:45] At first, ChatGPT was pretty error prone, so it wasn't super trustworthy for the hard sciences and maths.

[00:06:53] Students were more using it as sort of like a writing aid.

[00:06:56] Over time, more and more, it's become a sort of replacement for Chegg in a lot of what Chegg does.

[00:07:02] More and more, it seems that students are just uploading questions to ChatGPT in the same way that they would upload questions to Chegg.

[00:07:10] And using the answers that they get back as an input in their schoolwork.

[00:07:17] I spoke to one professor who teaches computer science at University of Illinois, and they did a study going back to 2022 on cheating in an introductory programming course.

[00:07:28] And these researchers basically found that all of the cheating that they witnessed in 2022 was mostly Chegg.

[00:07:37] But then in 2023, it flipped over to ChatGPT.

[00:07:41] We should note that a Chegg spokeswoman said, quote,

[00:07:44] 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.

[00:07:58] OpenAI declined to comment.

[00:08:00] Miles, how has Chegg's business been impacted?

[00:08:03] It's been a really huge hit.

[00:08:04] Chegg was already having a bit of a comedown from the pandemic.

[00:08:08] It appears that subscriber loss they started seeing after the pandemic has only increased since ChatGPT.

[00:08:18] And the problem that they're really dealing with is that ChatGPT, there's a version of it that's free.

[00:08:22] And so, you know, they've been losing subscribers.

[00:08:25] The stock is down 99% from like four years ago, when it had a market cap as high as around $14 billion.

[00:08:32] Based on our own calculations, Chegg has lost over half a million subscribers since the launch of ChatGPT.

[00:08:39] What did the company have to say about this?

[00:08:42] They're in a bit of a transition period right now.

[00:08:44] They just brought on a new CEO, actually a longtime company executive, Nathan Schultz.

[00:08:50] He took over in June, laid off almost a quarter of the employees.

[00:08:54] And at the same time that he did that, he sort of laid out a vision for where he wants to take Chegg.

[00:09:01] And the common thread seems to be that they want to do things that free general AI services can't do.

[00:09:11] So they want to go deeper on counseling.

[00:09:14] You know, they want to go deeper on localizing for different languages and different academic environments in other countries like India.

[00:09:23] They want to try to be as accurate and domain-specific as possible in some of these more tricky areas like math and science.

[00:09:34] Generally, they're trying to lean into things that ChatGPT can't do while also using AI themselves.

[00:09:40] Speaking of using AI themselves, what happened when Chegg partnered with OpenAI?

[00:09:45] The former CEO, Dan Rosenzweig, had this pre-existing relationship with Sam Altman, the CEO of OpenAI.

[00:09:52] So a few months after ChatGPT came out, they sat down and they ultimately signed this partnership to build something called CheggMate.

[00:10:02] And they sort of promoted it as this new tool, this new service that would be built on top of OpenAI's GPT-4 technology,

[00:10:11] which was then the most advanced at the time.

[00:10:13] And would be able to do things like automatically create quizzes and go above and beyond what the existing Chegg service was able to offer.

[00:10:24] So that was sort of the first wave of response.

[00:10:28] What happened right after that is the former CEO, Rosenzweig, he announced on an earnings call that ChatGPT was starting to eat into subscriber growth.

[00:10:37] They pulled all of their financial forecasts for the rest of the year.

[00:10:41] And the stock fell 48% the following day.

[00:10:44] So after that point, they stopped talking about CheggMate.

[00:10:48] And on the next earnings call, they basically pivoted to saying, it's no longer going to be CheggMate.

[00:10:53] This is just going to be Chegg.

[00:10:55] We're just going to infuse AI throughout Chegg.

[00:10:58] And so they started working with this other AI company called Scale to build basically customized AI technology for all these different subject matter areas using their own data.

[00:11:11] That being said, they're still also using OpenAI technology to answer some questions for students.

[00:11:17] What has OpenAI said about that partnership with Chegg?

[00:11:21] OpenAI has said that they're still a customer.

[00:11:24] They haven't really engaged that much on that, frankly.

[00:11:28] Miles, tying this all together, what does Chegg's situation tell us or teach us about the future of similar businesses in this era of AI?

[00:11:37] Chegg is kind of a really interesting first business case of like, what does a company do in the face of a disruptive new technology that is being offered for free?

[00:11:49] What we've seen from Chegg is that there aren't any really easy answers when something like ChatGPT is going directly at your value proposition.

[00:11:59] You know, there's been sort of debate inside the company about the direction of the product.

[00:12:05] Clearly, they shelved the Cheggmate brand, but they've decided in the end to try to lean into what they do best, which is really being specialized in these different academic subject areas, marrying human insight with the AI.

[00:12:24] The story isn't quite fully over.

[00:12:26] However, they're at least optimistic that on the cost side, they can use AI to improve quite a bit and that once they get the experience right, they'll be able to grow subscribers again.

[00:12:38] That was our reporter, Miles Krupa.

[00:12:40] And that's it for Tech News Briefing.

[00:12:43] Today's show was produced by Julie Chang with supervising producer Catherine Millsop.

[00:12:48] I'm Cornelia James for The Wall Street Journal.

[00:12:50] We'll be back this afternoon with TNB Tech Minute.

[00:12:53] Thanks for listening.