Chegg Embraced AI. ChatGPT Ate Its Lunch Anyway
[photo1]Paresh DaveInvestors were surprised when the online education company Chegg last month revealed that ChatGPT was hurting subscriber growth--the company lost half of its market value overnight. But long before Chegg became an index case for the disruptive force of ChatGPT, its top brass had heard plenty of warnings about the threat and opportunity of generative AI. For years, on afternoon walks outside Chegg's Silicon Valley headquarters, former executives say they had discussed someday slashing costs by tapping AI programs to replace an army of instructors that answer student questions and draft flashcards. Matthew Ramirez, a product leader who left Chegg two years ago, says he even advised CEO Dan Rosensweig in 2020 that generative AI would be the bus that ran down Chegg if it didn't prepare itself. Outside advisers flagged similar concerns. And just weeks after OpenAI launched ChatGPT last November, a source familiar with the exchange says, one Chegg executive had the bot write an email to Rosensweig urging him to develop a ChatGPT rival.What happened next shows a company that had tried to keep up with advances in AI getting blindsided by the rapid pace at which consumers have embraced experimental but capable tools such as ChatGPT--a position that many companies may find themselves in if the recent torrent of generative AI development continues.Interviews with two current and five former Chegg executives, along with three other former employees, indicate the company had considered the potential for AI to supplant its services but figured it would not manifest soon. The company's chief operating officer, Nathan Schultz, says executives had bet in a recent five-year plan that an experience like ChatGPT wouldn't be possible until at least 2025. And even after the bot's debut, Chegg saw no cause for alarm, because data showed that the chatbot wasn't luring away the 8 million paying subscribers to human-generated study guides and homework help.But the sirens went off in March, when OpenAI unleashed GPT-4, its most powerful model yet. It reignited
the AI excitement just as students in the US and some other countries began taking spring exams. Undergraduates and high schoolers who might have paid Chegg as little as $16 a month for practice exams and term paper feedback quietly opted for ChatGPT instead--the free, fast, and cool new kid on the block."We believe this is an existential change."Chegg CFO Andy Brown would later describe the chatbot as vanishing 100,000 would-be subscribers "right around the fringes" of the subscription services that account for 90 percent of the company's overall sales. Rosensweig says he had met with his friend Sam Altman, OpenAI's CEO, for a couple of hours to discuss the future of education, and months later in mid-April, they announced a partnership to create CheggMate, an AI learning companion powered by GPT-4, Chegg's own algorithms, and its repository of 100 million study questions built over previous years.The deal may have erected a barrier, but the bus came crashing through anyway. Two weeks later, on May 1, Rosensweig revealed the stunted growth to investors and said Chegg would not provide revenue forecasts for the second half of this year because the relationship students would have with ChatGPT when they return to school after the summer break was anyone's guess."It was a little bit bewildering," says Jeff Silber, an analyst who tracks Chegg for investment bank BMO. "It left a lot of people scratching their heads over how quickly ChatGPT took a hold." Chegg shares plummeted 48 percent the day after Rosensweig's bombshell and have not rebounded since.Brenda StolyarWill KnightWIRED StaffMedea GiordanoLast year, Chegg didn't mention "artificial intelligence" a single time in its annual report to investors. This year, it came up nine times, mostly as a threat. "We have absolutely pivoted internally to focus our resources on CheggMate and AI," Brown said at an investor event on May 18. "We believe this is an existential change."Chegg is not the only education company suffering right now. ChatGPT-induced euphoria on Wall Street for shares of Microsoft, Nvidia, and other companies benefiting from relationships with OpenAI has been accompanied by a souring on ed-tech businesses such as Chegg, Duolingo, and Udemy. Some investors consider them to be threatened by ChatGPT's ability to play teacher and tutor. None has taken the hit that Chegg has, or publicly warned that AI chatbots are chewing into its business, but if tech industry expectations for generative AI hold, it will be far from the last company to see its business undermined by text generators and chatbots.Chegg was founded in 2005 by college students to rent textbooks. Its founders quickly moved on to other ventures, but it has survived by repeatedly reshaping its business, riding out a pricing war with Amazon over textbook rentals a decade ago, and then shifting away from that money-losing business. "We made ourselves competitive long enough that we could transition," says Ben Van Roo, a Chegg vice president at the time who now runs generative AI vendor Yurts AI. Chegg went on to make a series of acquisitions that created a highly profitable array of services, including language courses, months-long skills training for corporate workers, and a math problem solver.Students can save time, money, and perhaps their grades by "Chegging it" instead of hiring tutors, going deep into books, or knocking on professors' doors. The idea that AI might change or challenge those services has been on Chegg executives' minds for years. Since late 2018, it has used free, open-sourced models developed by OpenAI to help offer grammar and composition suggestions to students in a writing aid feature and to score the quality of internal documents, according to Ramirez, the former director of Chegg's writing aid."We could see whether a suggestion we gave actually made the writing more fluent, whether the text was better or worse with what we were suggesting," says Ramirez, who now runs AI-based writing helpers Rephrasely and Paraphrase Tool. AI programs also help route subscribers' academic questions to appropriate experts among Chegg's over 150,000 contractors, most of them in India.The prospect of using AI to create the content students and other learners want isn't new to the company either. Since long before ChatGPT came on the scene, Brown has said the holy grail for Chegg has been generating content with algorithms to reduce tens of millions of dollars in labor and licensing costs. But OpenAI's early models were not very fluent at text generation, and some Chegg leaders talked regularly about how difficult it would be to safely operate generative AI, according to three former employees. They feared students could goad a chatbot into silly and problematic responses that could tarnish Chegg's reputation, while any instructional errors held huge academic consequences for users and liability questions for the company. Brenda StolyarWill KnightWIRED StaffMedea GiordanoIn subjects such as engineering, chemistry, and statistics, which drive significant traffic to Chegg but often involve diagrams, there was a sense that relying too heavily on AI to parse visual information was unreasonable, the former employees say. So the ethics of unleashing an imperfect product gave Chegg pause. "We knew generative was coming down the pike," says one former executive. "Text analysis was easy to embrace in the short run."In 2020, OpenAI's GPT-3 model was released and made text generation much better. Some machine-learning leaders at Chegg wanted to get their hands on it, but one source says executives weren't aggressive about securing access to the technology, which OpenAI did not open-source. Early this year, GPT-3's successor was added to ChatGPT, and the centrality of generative AI to Chegg's future became inarguable, carved as it was into the company's dented user growth.Chegg is now focused on proving with its in-house bot CheggMate that it's possible to outcompete ChatGPT when it charges onto your turf. "We happened to be one of the industries that's facing it first, and that gives us a wonderful opportunity to understand it deeper and sooner and come on to the other side of it with unique and value-creating products for our consumers," says Schultz, the COO.The company has marshaled all extra hands onto CheggMate and AI development, including by reassigning teams that worked on collecting more data from users to personalize services through more traditional means. Brown, the CFO, told investors last month that the company's summer interns will be fully focused on CheggMate. But Chegg doesn't have the best record of developing products from scratch and has previously leaned on acquisitions, leaving some former executives closely following CheggMate unsure of its prospects.The new service also doesn't exactly ease ethical implications. Chegg has long faced allegations from colleges and universities that it enables cheating, as students secretly turn to its tools to complete homework and exams. Officially, Chegg bars dishonest use and carries out and supports integrity investigations, says Nina Huntemann, the company's chief academic officer. But former Chegg data scientist Eric Wang worries that CheggMate and similar applications could spread the cheating habit. Students feel overwhelmed and pressed for time, and feel they are competing for scarce opportunities, he says. "All of these forces drive students who know better to make decisions that are in hindsight not great," Wang says, suggesting that there could be better ways to support students and educators.Select users, along with Chegg's subject matter experts and academic advisers, began testing CheggMate over the past couple of weeks, but it isn't expected to publicly launch until next year. That means it won't be ready for the US fall semester, when Chegg typically generates its greatest sales. Schultz says he's proud of the company's response to ChatGPT's arrival. "We weren't going to react overnight and just throw something up on the site," he says. "We have a responsibility to be thoughtful.""We happened to be one of the industries facing ChatGPT first."When a user types a query to CheggMate, it first attempts to categorize whether the request is for help understanding a concept, solving a particular problem, or concerning a particular subject, Schultz says. The system then tries to direct the question to the best resource, with the options including prompting GPT-4, having a human expert answer, or re-airing an old answer from Chegg's database. CheggMate is designed to keep users engaged through positive reinforcement and pushing related content. "We could say, 'Why don't you try this similar problem? Why don't you guess a step?'" says Huntemann, the chief academic officer. "Conversation allows us to extend the experience."Chegg executives hope tuning their chatbot to education that way will make ChatGPT look less attractive as a homework helper. Pricing for CheggMate has not been determined; operating generative models is expensive, and those costs rise with usage. But two former employees say that having a human expert answer a question costs about $2. Generating a comparable response through GPT-4 possibly runs half a US cent, and having an expert edit it might cost $1 overall, they say, suggesting the economics could work out for Chegg.At the same time, competition is likely to intensify from ChatGPT itself, Microsoft, and Google's generative AI-powered search features, or rivals developing their own AI tutors using OpenAI technology such as Quizlet, Brainly, and Khan Academy. That could force Chegg to spend more on marketing to stay relevant. Silber, the stock analyst, expects Chegg's operating profit margins will suffer for some time.The recent ride has made Rosensweig, who has led Chegg since 2010, and his friend of 20 years, OpenAI's Altman, into competitors and perhaps frenemies. They both have a hand now in shaping the next chapter of education.All of the people WIRED spoke to described Rosensweig, whose mom was a public school teacher, as someone who wants to see people have the chance to pull themselves up through educational opportunities. He hosts an online show called Going From Broke, in which he and a financial strategist help people with major money troubles bounce back. If Rosensweig was to rebuild Chegg for the generative AI age, ChatGPT suggests that show could be called Chegg Resurgence: Triumph Over Turbulence.