Chegg vs ChatGPT: How an edtech giant lost its business to AI

With revenue in decline, bond trade analysts are concerned about Chegg’s ability to pay off debts, according to a report by The Wall Street Journal that examines whether the surge in students cancelling their Chegg subscriptions goes hand in hand with the advent of large language models (LLMs) like ChatGPT.

What is Chegg and how has it evolved?

In 2000, a student at the University of Iowa named Josh Carlson started an online messaging forum for his peers. He combined the words ‘chicken’ and ‘egg’ to come up with the name CheggPost. Carlson teamed up with Aayush Phumbhra, an MBA student from India, to work on the project. Phumbhra and a new partner, Osman Rashid, suggested shortening the name of the forum to Chegg and exploring textbook rentals as a strategy, according to Forbes.

By 2005, Phumbra was no longer part of the company which had expanded into online study guides. Five years later, Chegg acquired another edtech startup called Cramster and pivoted to providing pre-written answers to frequently asked homework questions. Dan Rosenweig, a former Yahoo executive, became CEO of the company at around the same time.

Over the next decade, Chegg hired thousands of contractors, most of whom were based in India, to answer questions posted by students across every major subject including advanced maths, science, technology, and engineering.

The on-demand supply of test answers to students was packaged into a subscription-based offering named Chegg Study at $14.95 (Rs 1,200 approx.) every month that became its key revenue driver during the COVID-19 pandemic-driven shift to virtual learning.

Chegg reportedly saw its stock price triple during pandemic lockdowns along with a spike in subscriptions, making it one of the most valuable edtech companies in the US at the time. Students everywhere got into the habit of ‘chegging’ their homework problems or online quizzes as it took them only a few minutes to look up the answers.

How did ChatGPT disrupt Chegg’s business model?

Chegg went from steady growth and minimal competition to witnessing its business model swiftly lose relevance with the 2022 launch of ChatGPT.

The AI chatbot trained on vast amounts of data and information available on the internet could dish out answers in a matter of seconds. The advantages of using ChatGPT over Chegg for homework help became quite obvious to students who did not hesitate to make the switch.

“It’s free, it’s instant, and you don’t really have to worry if the problem is there or not,” Jonah Tang, an MBA student, was quoted as saying by WSJ.

Over 62 per cent of college students plan to use ChatGPT this semester while only 30 per cent said they will be relying on Chegg, according to a recent survey conducted by Needham, an investment bank.

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Another study by researchers at University of Illinois found that students had overwhelmingly switched to ChatGPT from 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,” Craig Zilles, a computer science professor at the university, was quoted as saying.

However, experts have warned that answers generated by ChatGPT may not be correct all the time as LLMs are prone to information hallucination which means that the solutions would have to be double-checked. A few others have also argued that LLMs can never be used for fact-finding tasks as they return answers by guessing at the sequence of words or phrases that should make up a sentence (probabilistic determination).

These purported blindspots in present-day LLMs have not stopped companies from marketing their frontier AI models as personalised tutors or research assistants that can provide solutions to complex problems in science, coding, maths, etc.

Did Chegg’s shift to AI come too late?

Prior to the release of ChatGPT, employees at Chegg wanted to leverage AI to automate answers as a way of addressing the huge influx in demand. However, their requests to build these AI tools were denied by the company’s leadership, according to WSJ.

Even after the launch, Chegg executives reportedly did not see AI chatbots as an immediate threat due to its tendency to generate inaccurate answers. It was soon regarded as a misstep since employees found in their internal evaluations that GPT-4-generated answers scored better than Chegg’s answers supplied from human experts.

Hoping to stave off the existential crisis unleashed by ChatGPT, CEO Rosensweig reportedly met with OpenAI frontman Sam Altman to develop a new product called Cheggmate that would give GPT-4 access to Chegg’s vast repository of solutions in order to generate accurate answers to student questions.

But that did not stop ChatGPT from eating into Chegg’s subscriber growth. Its stock tumbled nearly 50 per cent after Rosensweigh acknowledged in an earnings call that AI was hurting its business. By the next earnings call, Cheggmate was dead in the water.

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The company had struck another deal with Scale AI to help build more than 24 AI systems that can be used by Chegg for various academic disciplines. In June this year, Rosenweig stepped down from his position and Nathan Schultz took over as CEO.

What does the future look like for Chegg?

While Chegg is playing catch-up by building its own AI products, the edtech company may still find it difficult to retain student customers and convince pessimistic investors of its value in a market disrupted by free AI tools.

Under a new CEO, the company has started offering more AI-assisted answers along with live counselling sessions as it now looks to target students that need help beyond freely-available, AI-generated answers.