The Paper Chase - Company Business and Marketing

Industry Standard, The, Oct 2, 2000 by Peter S. Cohan

How much will college kids pay for a better way to do research? Questia is betting that the answer is billions.

How could a company raise over $100 million to build something so prosaic as an online database? If its managers made the case that millions of college kids would pay $25 a month to access it, that might be a useful start. And if such a database also would provide an entirely new model of publishing and generate income for reusing intellectual property, that would help even more.

Questia is building a cross-referenced database that will feature the full text of 50,000 liberal-arts references, textbooks, journals and classic works of literature. It will let students access the works online and incorporate passages into their term papers, saving precious hours of research and typing as deadlines approach. Its proprietary software system will also help them generate footnotes and bibliographies on the fly.

Will Questia's ambitious plan earn an A from America's undergrads? To break down its business model, we must first define it, then apply the four tests from my previous article ["Valuing the Net," Feb. 7]:

1 Does its industry have economic bargaining power?

2 Does its strategy offer customers a closed-loop solution?

3 Does its management have integrity and adaptability?

4 Does it have a compelling brand family?

THE INDUSTRY

Questia is attempting to create a new industry. According to founder and CEO Troy Williams, the company is targeting, for starters, every undergraduate student at every college and university in America -- some 12.3 million potential customers. Williams says he plans to charge students a monthly fee at about the rate they would pay for Internet or cable TV access.

Assuming then a fee of $25 per month for nine months per student, Questia is looking at a market of $2.7 billion. Williams' ambitious belief is that Questia can capture 100 percent of the student market within five to 10 years of its January 2001 launch.

THE STRATEGY

Questia's competitive advantage is twofold. The first advantage resides in an XML-based cross-referencing scheme that lets students pinpoint searches and customize footnote formats. Questia spent more than two years and over $100 million building an infrastructure and digitizing books.

The second advantage is in the large series of licensing deals the company has cut. Questia already has agreements with 95 publishers, including major college textbook publishers like Harcourt.

The only way other companies can replicate Questia's business is to license, program and digitize in a process similar to what Questia has already done -- a significant barrier to entry.

THE MANAGEMENT

Williams, a graduate of Harvard Law School, where he was a Law Review editor, passed up a career as an M&A lawyer with Cravath, Swain & Moore in New York to start Questia. He spent 10 months living in Houston on credit card advances while he conducted focus groups with students and analyzed how Questia's business would aid potential partners.

The rest of the team is equally impressive. Randy Dragon, Questia's CTO, moved from Los Angeles to Houston to apply the skills he used to build Disney's Web sites. Board members include Compaq founder Rod Canion and Enron CEO Ken Lay. In total, the company has a team of 250 full-time employees and 4,000 part-time staff.

THE BRAND

Questia's investors and partners are strong. Bulldog Capital Management, OppenheimerFunds, Palmetto Partners and TA Associates are among those that have invested $130 million in the company through two rounds of financing.

Partners include Pearson Publishing, which is licensing Questia the electronic rights to at least 100 of its titles, and WebCT, which is offering its 6.8 million student customers access to Questia's research service.

If Questia's team can persuade tightfisted college students to pay a monthly fee to save time and improve the quality of their term papers-a big if-the fledgling company will take a big step toward a proof of concept that could revolutionize the publishing and reuse of intellectual property.

Peter S. Cohan is a management consultant, an angel investor and the author of e-Profit, published by Amacam. He is not invested in the companies mentioned.