In an unprecedented move, Chegg, a prominent online education platform, has initiated a lawsuit against tech giant Google, asserting that the company’s artificial intelligence (AI) summaries of search results have significantly undermined Chegg’s web traffic and, consequently, its revenue. This legal action arises amidst ongoing concerns about the competitive landscape of the education technology sector, particularly in light of AI advancements that have shifted user engagement from traditional platforms to new AI-driven solutions.
Former CEO Dan Rosensweig’s observations regarding the impact of AI tools like OpenAI’s ChatGPT on Chegg’s customer acquisition process have proven prescient. Nearly two years ago, Rosensweig warned of a decline in new student engagement as users increasingly turned to AI solutions for academic assistance. Chegg’s ensuing struggles reflect a broader trend witnessed across various industries in the wake of AI innovations, where traditional business models face significant disruption. With Chegg’s valuation dipping below $200 million and its stock trading at a mere $1 per share during after-hours trading, the company finds itself in a precarious situation, grappling with a net loss of $6.1 million during its last fiscal quarter.
Chegg’s recent financial report speaks volumes about the company’s current trajectory. While it generated $143.5 million in revenue for the fourth quarter, this figure represents a concerning 24% decline compared to the prior year. Analysts had anticipated slightly higher numbers, predicting $142.1 million in revenue, but the actual results fell short of expectations significantly. Management’s forecast for the first quarter appeared bleak as well, with projected revenue between $114 million and $116 million, which also lagged behind analyst projections of $138.1 million. Consequently, Chegg’s stock plummeted by 18% in after-hours trading, raising red flags regarding its sustainability and efficiency in the increasingly competitive educational landscape.
In the legal filing, Chegg’s President and CEO Nathan Schultz pointed to what he describes as Google’s monopolistic practices, claiming that the search engine giant leverages its vast market dominance to require companies like Chegg to provide proprietary content for inclusion in search results. The lawsuit highlights the paradox of Google’s profit model, which capitalizes on the very educational resources Chegg compiles, without compensating the company for its contributions. This ongoing battle cries out for regulatory scrutiny, particularly in light of a recent ruling that recognized Google’s monopolistic standing in the search industry.
Despite its grievances, Chegg is not standing idly by. The company has devised its own AI strategy, drawing on technologies from alternative sources such as Meta’s open-source Llama and models provided by other private entities like Anthropic and Mistral. In a particularly interesting move, Schultz revealed that Chegg has partnered with OpenAI, an entity the company simultaneously views as both a competitor and a collaborator. This dual relationship reflects the complexities that dominate the online education sector as firms grapple with the incoming wave of AI innovation.
Chegg’s subscription model, which once thrived on providing educational resources to approximately 3.6 million students, is now under siege, as illustrated by a 21% decrease in subscriptions. The decreasing numbers are indicative of a broader shift in educational practices. The growing prominence of Google’s AI Overviews, a feature boasting over 1 billion users in more than 100 countries, has redefined how students access educational materials—often sidelining platforms like Chegg that have historically relied on search engines for visibility and customer reach.
The implications of this lawsuit stretch beyond Chegg itself; they encapsulate a moment of reckoning for the online education industry as it faces co-evolving challenges of technological advancement, market competition, and regulatory oversight. As the educational landscape continues to unfold, the outcome of this legal dispute could set a precedent affecting myriad stakeholders in the digital learning space.