Duolingo: Free Speech - [Business Breakdowns, EP.157]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you. To find more episodes of Breakdowns, check out joincollossus .com. All opinions expressed by hosts and podcast guests are sole their own opinions. Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. This is Matt Russell and today we are breaking down Duolingo. It's hard to find someone who doesn't see the opportunity to build new technology businesses around education, but it's equally hard to find existing success stories in education technology or ed tech. Enter Duolingo. The learning app built on language learning that is increasingly expanding into other territories like math and music. My guest is Tyra Winn from Bailey Gifford. You should assume that most of our guests own the businesses that they are covering on business breakdowns.

1:27But it's important to mention here that Tyra works for Bailey Gifford's positive change strategy. They invest for returns but also for the impact on society. And while I personally try to avoid casting judgment on how businesses earn their profits, we have certainly covered some businesses that are deemed to be world class at raising prices. Dual -lingo seems to stand out in a different way. Founder Luis Benon is constantly looking for ways to make this accessible and free to use for many people around the world while also finding reasonable ways to monetize and make this a profitable longer -term business.

2:07It's always difficult to find that balance between your customers, your employees, and your shareholders. and Duolingo has adjusted its business model over time to ensure that that can happen. Ty and I cover the fascinating founder story behind Duolingo. We cover how Duolingo has succeeded in a largely offline market, how they have approached monetization, and how they plan to expand from here. When we do these breakdowns, we often find some parallels to other businesses we cover, but the themes here are so interesting. You have a tam expansion story that maybe isn't quite the size of Uber, but has some similarities to Uber.

2:43You have an organic growth story that feels like Tinder, where so much of this is happening through word of math, rather than through paid acquisition. And similar to many great startups, you have a founder that built something that was incredibly important to him. So please enjoy this breakdown of Doolingo. I'm excited for Doolingo today, and while I would group it in this new wave of technology companies, there's a lot that stands out from both the financial standpoint, the growth standpoint, it's a fascinating story. So excited to jump right into it. And I thought it's a increasingly well -known name, but I think there's still a percentage of our audience that isn't familiar with Duelingo quite yet.

3:25So maybe we could just start with the one minute short description of Duelingo for those unfamiliar with the business and the product itself. Duelingo is not yet to become a household name, but for people who are learning languages, I'm sure that they all have heard of Dueling Go. The company is most famous for its language learning app that offers over 120 different courses. Since the founding in 2011, there have been over 500 million downloads, and Dueling Go is constantly ranked as the most downloaded app in the education category globally. But Dueling Go was set up with a broader mission than just teaching languages.

4:05they want to develop the best education in the world and make it universally available. That is why today in addition to languages, people can actually learn literacy, maths and music with Duelingar. Yes, you mentioned the mission there and one of the most interesting things about this business is its founder and the founding story. So I want to get into that if we could share that right off the top. I think the history here, it's not a long history, but the founder has quite the interesting path So maybe you could share a bit on that. I always find your Lingos founding story fascinating and it all started with the Fowdo CEO, Luiz Wannan.

4:45He grew up in Guatemala, which is the poorer country in Central America. And he was fortunate to be born in an upper -middle -class family and was given the best education by his parents. And that made him really appreciate the importance of education in improving people's But at the same time, he always felt that education could be among the principal sources of inequality. The most privileged people can get the best education in the world. But the poor may not even get the basic schooling. So he believes that people should have an equal access to education regardless of their wealth. And his profile is nothing shorter than impressive.

5:27of he came to the US for an undergraduate degree in mass at Duke University and later a PhD in computer science at Carnegie Mellon. And before Dueling go, he was actually famous for his genius inventions of capture, which I'm sure the audience here know very well about. She is the annoying task that distinguishes between the humans and both that pop up when you lock in an internet website. And interestingly that although Kapcha was really popular and was really useful, he started thinking that it actually wasted a lot of people's time and his estimation mounted to something like 500 ,000 hours a day that people wasted on typing those letters.

6:11So he reinvented, re -culture with the same goal, but with a twist to turn those hours into something useful. the letters that people have to ties are actually words scanned from books. And so, user would complete the security test why helping digitize the books for the internet archive. And I think there was genius. So later, he saw that recapture a business to Google, along with now the game that he invented for tens of millions of dollars. And I also heard a story that he got a personal phone call from Bill Gates that offered him a job at Microsoft, but he refused. Not that many people returned out and offered from Bill Gates, I suppose, because he just wanted to work in academia and be a professor in computer science and devote his entire life to education.

7:02And that is until he met one of his PhD students named Severin Hecker. They were both passionate about education and had a strong belief in equal access to education. So that's why Duelinggo was founded. And the reason that they started with languages is because Louis wants to deliver the highest possible impact. There are nearly two billion people in the world learning languages. And for lots of people learning a language can unlock tremendous economic opportunity, especially for English. Lots of people in developing countries who know English that can double their potential income. But beyond that, there's also benefits of unlocking new experience or building deeper human connection with family and friends from new languages.

7:51I remember Louie's once say that Dueling Duel can teach geography, but the impact of that will be quite limited and for that reason they wouldn't teach geography. But recently they expanded to things like literacy, music and maths and you can imagine the impact of reducing illiteracy rate in the world even just by a couple of percentage could be quite enormous. Absolutely. I loved the idea of wasting people's time and finding a way to give it back and really taking tasks that would otherwise be viewed as inconsequential and necessary evil and turning them into very productive activities. And I think a lot of what we're doing when we are performing the capture and recapture tests.

8:38actually have a lot of impact that we don't necessarily tie it to, but that has evolved quite interestingly. And that story, I think, is beautiful obviously because it comes again from a personal mission to drive change. So I'd like to transition a bit into the language learning market as I was growing up the infomercials for the Rosetta Stone were widely available. And that was kind of the one vendor that I knew of well besides the private tutoring market, I guess. But maybe you can give an overview of what that market looks like today, some sense of how it's evolved over time, and any players that you think are relevant in that market.

9:19Yeah, sure. Maybe if you start with the size of the market, language learning is a very big market. As I mentioned earlier, there are nearly two billion people in the world learning languages. And a very interesting aspect to me that there could be some degree of dynamism in the market in the sense that because of the ease of access and affordability that Dueling Girl brings about they can actually open up their learning market. And Dueling Girl conducted a survey in 2021 and they found out that almost 80 % of the Dueling Girl users in the US were not learning a language when they began using Dueling Girl.

9:59So it's really talks about that idea of if you make something really easy and fun and accessible then a lot more people would use it. In terms of the structure of the market, the majority of it is still offline. So most people would learn languages by attending classes at schools or at language centers. I guess that the online learning wins over the offline learning from the access perspective because it's cheaper, it's more convenient, it's accessible from almost everywhere. But what is, I think, more interesting is that the Dueling Go also has a potential to win over the offline channel from the content perspective, because in the offline world, learners would receive the same curriculum from textbooks, from the teachers, unless they have a one -to -one human tutor.

10:51But on the other hand, Dueling Go through data and machine learning can truly deliver personalized curriculum, best fits to learners' abilities. And it is something that really interesting that we can talk more later in our conversation. But what I mean is that Dueling Go can really bring that one -to -one human tutor experience to every learner at the fraction of the cost of the offline world. But having said that, there are still aspects that Dueling Go is not yet comparable to the offline world, especially when it comes to the depth of the content. So the app currently only pushes people low to intermediate levels and speaking and writing exercises still quite limited.

11:33There is something that the company is very aware of and they're going to continue to invest very heavily on to improve the teaching effectiveness. Can I ask when you say low to intermediate levels, do you have a way of putting context around that if I were to think of someone on having an intermediate level understanding of the English language, where would you put them into society or in the workforce? How far could that get you? And just any context around what that would mean to have an intermediate level understanding? Jill and Go uses an international skill of language certification. And in that skills, you would have levels from A1A2B1B2C1C2.

12:15A1 is the most basic to like C2 is kind of the advanced level and right now Dueling go tishes up to the level of B2 in some of the language but most of the language courses are still quite basic but the aim is to not to teach people to the advanced level because Lewis thinks that there's gonna be diminishing marginal return. What they want is to be able to teach people to the level that they can get a job with that language skill. They're not going to teach people so that the students become like a poetry or being birds who ride beautifully is not the purpose. And so, yeah, that's why I say that most is basic to intermediate and they are trying, but with English, which is the most learned language in the world and I would say the most important in terms of improving career and potential earnings.

13:07they're trying to put in more advanced content into the courses. That makes a lot of sense. I think you described a bit in terms about the existing market where that offline market is still so large. I think it's very interesting when you have examples of businesses that expand their markets. I think Uber, being one of the best examples, simply looking at the taxi market was not enough because Uber truly did take that market and multiply it. Seems like Duolingo is doing something similar here when you mentioned 80 % of users or not previously learning a language Can you talk about that Growth story because to go from zero and there is an existing playing field in terms of competitors How did they successfully turn on the business and then turn on growth such that they've gotten these users and all that you mentioned in terms of App downloads What was the secret to their success there?

14:04I think maybe to set the scene for that, let's talk about what makes Dueling go different shaded in the first place, what makes it stand out in the very crowded language learning apps out there. So the company always believes that the hardest part of learning a new language is to stay motivated and to keep the study going because learning a new language is hard. Like a lot of time people just want to give up. So, Julingo has a very strong gamification approach to keep people engaged. Action -language course, it decides to be like a mission in which learners would have to unlock lessons in sequence.

14:42So, they must do sufficiently well in one lessons before proceeding to the next. And that helps bring out the natural competitiveness in individuals. There's also a lot of features that are borrowed from the gaming world, such as in -app currency rewards, words, remaining lies or help boost, et cetera. A lot of the apps are more focused on grammatical rules, but Jolingo's simplicity, light lessons, and methods of intuitive learning really make it easy and fun for people to study. So if you use Jolingo, you would know about their distinctive feature called Strik, which is how many consecutive days that people are learning with the Jolingo.

15:22And if you use a MrStrik, then the Strik will be reset. And actually people are obsessed about their strict and many share their strict on social media as a proud achievement and millions of users today have strict longer than a year and the features like that really keep the engagement Going which is something very hard in the education category unlike Netflix or Spotify, which is like entertainment and And besides gamification, another differentiating feature of Duelingo is that it is free to learn. Yes, you can learn entirely with Duelingo without paying for anything. And other competitors allow you to access to their lessons through subscription.

16:06And because of this premium model, Duelingo has been able to grow really fast because when the product is free to use people or more willing to give it a try. And the result is that today, Dueling Go has over 90 % share of the global online language learning monthly active users, which I think is quite impressive. And so that has set context a bit, but I think if you ask about what makes Dueling Go grow really, really fast, then I would attribute it to three factors. So the first thing is the product -led strategy. Louis' views is always that customer will stay with you for your product. So investing in product is really important.

16:51About 70 % of the employees are working in engineering, product development and design and all the product features from the design of the button to when and where they are displayed on the app. A very well thought out and methodologically tested. So, Duelingo is very famous for their AB testing for every product launched. On average, they run about 500 AB tests per quarter and that really shows how the fish is going to affect engagement, teaching efficiency or monetization. And the result of that is the very good products that just attract users. And people may look at Duelingo and think that it is just a little queued up, but actually there's quite a lot of sophistication behind the technology.

17:39Another reason is the freemium model, which I mentioned earlier, if it's three more people are willing to try it. And lastly, I think Duelinggo is very good at social marketing. They don't spend a lot on marketing, but their marketing is super efficient. They really know how to tap into culture and humor to create interests. So everyone using Duelingo would know about their mascot, the aggressive green hour named Duo. Duelingo uses Duo as a protagonist to build content, which can be a bit silly and stupid, but that silliness makes people remember and talk about. So you can find a lot of memes on the internet about Duo based on the messages that Duo send out to people to remind them to take the lessons every day.

18:28So the brand becomes really strong because of that social marketing. And I remember laughing a lot when I saw photos of duo dressing up as a Barbie because Doolingo was referenced in the Barbie movie and the mascot appeared at the Barbie premiere, which is really fun. Or recently they just spend about $700 ,000 on a five -sake and super bow ad, but receive over 600 million impressions on social media, which I think is super efficient. Yeah, it's truly a fascinating example where gamification is used for what I would consider a very good cause here in terms of education and taking something like education, which can be very dry and painful and turning it into something fun, where it sounds great to be idealistic about that stuff.

19:19It's very rare that you see the case that you can realistically do that, but they seem to be achieving that quite well. One of the data points that I read, and I don't know how up to date it is now, is that 90 % of new users were organically acquired, which is a metric that the only other app that I can think of that was anywhere close to that or in the same ballpark was Tinder, which again had this organic natural explosion and growth story. Would you attribute that mostly to the social dynamics of people wanting to post their streaks and wanting to talk about it on social media and other areas where it becomes this social status game?

19:59Is there anything else that you think was playing into that organic growth without having to spend the ton on paid marketing? As I mentioned earlier, I think it firstly owes because of the products. The product is just very good and it's really fun to use because once you have a product that is good, it makes people wanting to keep using it and then recommending it to their friends and family. And couple with that is that very efficient social marketing. So they created a marketing never with the intention to make people subscribe more to Dueling Go, but always with the intentions of making people wanting to talk about it.

20:39And so as you mentioned, people just keep talking about Dueling Go on social media, posting their achievements or just talking about how silly the message the green owl has sent them to remind them to take the lessons. So the combinations of the product and the efficiencies of the social marketing has created that social bust and allowed them to acquire users in such an organic way. Before we transition a bit in terms of the business model, in terms of the market size today, you mentioned in the beginning there's two billion in the world that are interested in learning a new language. In terms of the existing market, do you have any sense of the online versus offline market and just the existing size of those today or just the general share?

21:28It's really hard to get a precise estimate. I have seen loss of number being thrown. So the language market size both offline and online estimated to be over 100 billion US dollars. Online learning is the fattest growing market segment within that. It was projected to grow from about 12 billion in 2019 to about 50 billion dollars in 2025. But I think the main point here is that easy is a very large market, especially when comparing to dueling goes current size of about 600 million dollar annual run rate. Yes, they have a lot of share in the existing market and a lot of share in what could be a growing market to gain in the future that lays it out nicely.

22:13On the business model, you mentioned it is a freemium model, which I think was very invoked at a point in time. And it's become more challenging for people to figure this out with subscription businesses. Not everyone seeing the conversion rates they would like to see when going from freemium to offering a premium tier. Can you talk a little bit about that evolution over time and how they've gone about it? I think maybe it's worth talking about the evolution of Dueling Go itself before touching on the evolution of monetization because it would help you understand and appreciate the monetization evolution of the business.

22:49So the first versions of Dueling Go is nothing like it is today. The experience of recapture instilled the idea of crowdsourcing into Lewis's mind. So, Dueling Go actually started with a web -based product that helped people learn a language by translating the website. So on one side, you have people wanting to learn a new language. On the other side, you have websites, firms, and others who want to translate their content into multiple languages as quickly and cheaply as possible. So a native Spanish speaker who wants to learn English could be given a sentence from an English website to translate it into Spanish.

23:29And Duelingo would help users to practice new words. They stumbled upon through examples and flashcards. And to pay for the bill, Duelingo would sell that user -generated translation to paying clients while keeping it free for the learners. But they didn't get a lot of success with this translation service and they were able to get only two clients, first -feet and CNN. And if you remember back in 2011, when the company was founded, the website remained the dominant platform that tech startups was built on. But the idea of a mobile app has started emerging. So dealing with that time was thinking about building a companion app and they actually hired two interns to start building an app prototype.

24:18And that process really forced them to think much more strategically about what exactly they want to offer their customers. And the interns actually came up with the idea of the skill tree that users would unlock to make progress. And that is why Dueling Go was redesigned and became the Dueling Go that we know today. And for the most part of the company history, they didn't focus on monetization. Most people came to work for a deal and go because of the company mission. So to some extent monetization felt like a scene to them. And it's not until they faced great pressure from investors to make money and Lewis himself realized that for them to achieve the mission that they want to achieve, they would need to build lasting profitable business.

25:08And that's when they started to think about how they can make money from this app. and they came up with the subscription model that we have today that you can use it for free but if you want to remove advertising or you want to get access to some of the fun gaming features to have you learn a bit faster then you pay for the subscription but you can see that from the original model the translation service to the subscription model today they really stay true to their mission of making free education One thing is that they would never charge for education content. It's quite easy for companies to just want bad users with the advertising and make the experience worse so that people subscribe.

25:55But that is not how they're going to do it because Louis thinks that it's going to jeopardize the business in the long term. So I think that given the pressure of being a public company and being able to show profits and growth, the fact that they could resist that temptation to make easy money is really admirable. Yeah, I'm not one to typically judge negatively in terms of how businesses make money, but there's something I will say that's admirable about the original approach even trying to work with businesses that were essentially funding away for people to learn and evolving that over time and seeing the different things that you could try out.

26:33What does that split look like today, in terms of the different revenue buckets. I know there's a third that we haven't gotten to yet in terms of assessments, but between ads, subscriptions, and then to the extent that assessments are a material revenue item, what is the split in those buckets? So, Julingo makes money from three sources. As you mentioned, the first and the biggest part is through subscription, which is about three -quarters of the total revenues. And the rest would be advertising revenue in -app purchase, revenues and English test certification revenues, which are roughly equal to each other, that is how the business is made up.

27:11And do you have some sense in terms of the user base that number is quite large in terms of 75 % of revenue is coming from subscriptions? What percentage of users are converted to subscribed paying users? In the most recent quarters, they disclose that they have nearly 90 million monthly active users and close to 30 millions daily active users. And of those users, nearly 7 millions of them are paying subscribers today. And that is compared to just over 2 millions at the time of the IPO in summer of 2021, about 4 % of the monthly active users are pets. But today it's close to 8 % so that has been increasing.

27:55And I think if you think about the growth rate in the numbers of monthly active users that makes that number even more impressive because your denominator is growing rapidly as well. It's really interesting that people often ask the management team, what do they think going to be the ceiling for the penetration? Because you have businesses like Spotify who get close to or more than a half of the users actually paying for the service and the company would often come back and say that honestly they don't know, they don't really know what the ceiling is. You have business is like Bumble and Tino, the dating apps could have about 10 % of their users paying for the service and they are on the upper hand you would have Spotify.

28:41So they think that they may achieve some way in the middle, but honestly they don't know what it is. As long as they continue to deliver the value to the subscriber than they think that more people would be willing to pay for it. And what is the cost of a subscription for Dalingo? It varies based on different regions and also it depends whether you subscribe monthly or annually or whether you subscribe as a standalone users or as part of the family package. But today, an annual planned in the US, I think costs about $80 to $90 annually, which is really cheap compared to the price that you have to pay to go to language centers.