The US Consumer Market for Technology-based Cognitive Learning Products: Forecast and Analysis

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1 Ambient Insight's The US Consumer Market for Technology-based Cognitive Learning Products: Forecast and Analysis The Early Adoption Phase of the Brain Fitness Industry is Over: It's All about Value and Brand Now We Put Research into Practice Market Analysis by: Sam S. Adkins, Chief Research Officer Published: September 2009 To learn more about our research services, Ambient Insight Copyright Policy: All rights reserved. All media and research data published by Ambient Insight are protected by copyright. Unauthorized use of Ambient Insight research without prior permission is prohibited. Ambient Insight research products provide valuable financial data only to the individual purchaser or the purchasing organization. Purchasers may not modify or repurpose the information and financial data in our research in any manner. Specific distribution rights are provided based on the license model granted at time of purchase. Quoting Ambient Insight Research: Permission is required to use quotes, tables, diagrams, or charts from Ambient Insight research in press releases, promotional material, external presentations, or commercial publications. Permission from Ambient Insight is required to reproduce or distribute in entirety any table, paragraph, section, or report.

2 Table of Contents List of Tables... 3 List of Figures... 3 Executive Overview... 4 Key Findings... 5 Methodology, Scope, and Product Definitions... 8 Scope... 8 Product Definitions... 9 Related Research Forecast by Cognitive Learning Type Cognitive Assessments...13 Children Adults Cognitive and Intelligent Tutors...17 Math Reading General Purpose Cognitive and Intelligent Tutors Cognitive Fitness Games and Applications...20 Mobile Brain Trainers Brain Fitness Games and Applications PC-based Brain Trainer Games Brain Fitness Applications Memory Training Brain Fitness for Children Growing Supply Chain Market Inhibitors Barriers-to-entry...28 Saturation and Maturation...29 Pricing Pressures...30 Brand Awareness...31 Market Catalysts Demand and Demographics...32 Expanding Retail Distribution Channel...33 The Top Four Value Propositions in the Wide Adoption Phase...33 Revenue Opportunities and Recommendations Mobile Brain Trainer Market Share by Operating System Index of Suppliers For more information about this report, sam@ambientinsight.com 2

3 List of Tables Table US Consumer Revenue Forecasts for Cognitive Learning Products by Product Type (in $US Millions)...13 Table US Consumer Revenue Forecasts for Cognitive Fitness Products by Two Sub-Product Types (in $US Millions)...20 List of Figures Figure 1 What are US Consumer Buying? Growth Rates across all Technology-based Learning Product Types... 4 Figure 2 What are US Consumer Buying? Growth Rates for Three Cognitive Learning Product Types... 7 Figure 3 Cognitive Tutors Solve Bloom's 2 Sigma Problem...10 Figure US Consumer Revenue Forecasts for Cognitive Fitness Products by Two Sub-Product Types (in $US Millions)...21 Figure Mobile Brain Trainer Market Share by Game Title...22 Figure Snapshot of the Technology-based Cognitive Learning Product Pipeline in the US Consumer Segment...29 Figure Mobile Brain Trainer Market Share by Operating System...36 Figure Mobile Brain Trainer Market Share by Operating System...37 For more information about this report, sam@ambientinsight.com 3

4 Executive Overview The US consumer demand for technology-based Cognitive Learning products is growing by a five-year compound annual growth rate (CAGR) of 32.4%. Annual consumer expenditures on these products will reach $61.1 million in In the 2009 market, consumers are spending a total of $14.4 billion on training and education. The vast majority (89%) of that is still spent on classroom events and print-based products. Consumers are spending $1.6 billion on technology-based learning products and the demand for these products is growing by 12.9%. In contrast, the demand for Cognitive Learning is growing two and a half times that rate and it is the fastest growing product type in the consumer segment, followed by Collaborative-Social Learning and Mobile Learning. Figure 1 What are US Consumer Buying? Growth Rates across all Technology-based Learning Product Types (Source: The US Consumer Market for Technology-based Learning Products: Forecast and Analysis, Ambient Insight, LLC) This report breaks out revenues for three types of Cognitive Learning products: Cognitive assessments Cognitive and intelligent tutors Cognitive fitness games and applications For more information about this report, sam@ambientinsight.com 4

5 Additionally, revenue for the cognitive fitness product type is further broken out by two sub-product types: Mobile brain trainers and PC-based brain fitness games and applications. The cognitive fitness industry has left the early adoption phase and entered the wide adoption phase. In an early adoption phase, also called the market creation phase, product innovation is the key to attract new customers. In the wide adoption phase, also called the value creation phase, the customer base grows and new suppliers enter the market at a rapid pace. In this phase, new and compelling features are required to keep customers, differentiate products, and compete effectively. The current market favors suppliers that can provide unique value to increasingly well-informed and savvy customers. Key Findings Key findings discussed in this report include: Suppliers have successfully created a new market for new types of products that appeal to a large and diverse demographic on two ends of the age spectrum: early childhood and the elderly The barriers-to-entry are relatively high for advanced products, but a steady stream of new suppliers are entering the market with lowend products The confusion prevalent in the early adoption phase of the market has abated and customers are now relatively well-informed about the value of the products A significant amount of venture capital is being invested in the companies that compete in the consumer segment A vibrant retail reseller channel has emerged in the last year and the distribution channel is in place for wide adoption Suppliers are experimenting with various business models and a "branding frenzy" is underway with a wide range of suppliers rebranding their products as brain training and brain fitness to tap into the demand The competitive landscape is heating up with new and old suppliers competing for brand, revenue, and market share The most significant catalyst in the consumer segment is the interest in the concept of brain fitness coming from the aging population. As of 2009, there are 62 million people over 55 in the US representing 21% of the total population. This demographic is growing by over 2.1 million people a year and will reach almost 73 million by The suppliers are now successfully (and aggressively) marketing to this demographic. An interesting trend is the emergence of new products designed for the 16 million children in the 4-7 years old age. In the last year, several legacy suppliers that previously served the adult population have released products designed for young children. Suppliers of sophisticated clinical learning disabilities and dyslexia solutions designed for children are expanding to wider audiences and marketing their products as generalpurpose brain fitness solutions for children. There are over 45 million For more information about this report, sam@ambientinsight.com 5

6 children between the ages of 4-15 in the US that are given cognitive assessments. Getting new advanced products in the pipeline can be daunting for new suppliers. It takes a great deal of expertise and capital to develop products and time to market can be very long. In a wide adoption phase, this can be a significant inhibitor. Suppliers that can't get to market within the next months will face stiff competition. In the meantime, the market is being flooded with low-end products and suppliers are struggling to differentiate themselves. The current market is saturated with these low-end products that are either free or sold at very low prices. In the current phase of the industry price is important, but not the primary differentiator for consumers. In the forecast period, the market favors suppliers that create value with more advanced feature-driven products. The "hype" surrounding the brain fitness and brain training products still generates significant media attention and potential buyers have access to a great deal of new (and archived) information about the products. The confusion surrounding brain trainers and brain fitness that was prevalent in the early adoption phase of the market has now abated and customers are relatively savvy buyers. Buyers are now more aware of brands and are better informed about the types of products on the market. They know the difference between mass market brain trainer games designed for entertainment and personalized brain fitness applications designed to enhance cognitive skills. Corporations are adding brain fitness to their wellness programs and commercial fitness centers are integrating cognitive fitness products into their fitness programs, increasing the brand awareness for specific products across a younger adult demographic. The hype and the healthy sales of the products have sparked an increase in private investment. Ambient Insight considers private investment to be a leading indicator of future revenue generation. Obviously, investors believe these companies will be successful. Posit Science garnered $24 million in private investment in 2004 and 2005 allowing the company to get to market early. They got $5.6 million in a third round of funding in early There was $53.6 million invested in brain fitness companies in 2007 and 2008 with 53% of the funding going to consumer-facing suppliers. In 2008, Dakim garnered the highest investment receiving $10 million in funding, followed by CogniFit at $5 million, and Lumos Labs at $3 million. (Source: Private Investment Trends in the US Learning Technology Industry: Longitudinal Analysis, Ambient Insight, LLC) A new development is the emergence of a rapidly growing retail reseller channel. This is a fast and low-risk way into the market and represents significant revenue opportunities for new suppliers that lack the expertise or capital to develop their own products. The rapid growth of the retail reseller channel is a primary market catalyst and creates the foundation of the current wide adoption phase. However, a channel model creates a new layer of complexity for those suppliers that, to date, have sold directly to customers or through tightly controlled affiliate programs. Also, volume For more information about this report, sam@ambientinsight.com 6

7 may increase, but margins drop in a channel model which exacerbates pricing pressure. Figure 2 What are US Consumer Buying? Growth Rates for Three Cognitive Learning Product Types The competitive landscape is heating up with new and old suppliers vying for revenue and market share. There are market leaders, but no single supplier has a dominant market share. A variety of business models are evolving. Suppliers are experimenting with reseller, affiliate, direct retail, and subscription-based models. Some suppliers are also building out ad-based community sites. There are also hybrid models that offer tiered pricing with basic products offered for free and more advanced products sold on a fee basis. A range of suppliers that come from outside the industry are now retooling their marketing messages and rebranding their products to tap into the growing customer awareness of the products. For example, publishers of trivia, puzzle, and strategy games are trying to tap into the demand by repackaging products as brain training. As new products come into the pipeline at a steady pace, the demand for older products is maturing. For example, the once-booming demand for mobile brain trainer edugames is slowing. It is likely that during the forecast period a significant "shake-out" will occur in the supply chain. In the meantime, the demand for Cognitive Learning products is very high and there are significant revenue opportunities for suppliers that can compete successfully. The target demographic for these products is relatively large (and growing) and the demand is still largely untapped. For more information about this report, sam@ambientinsight.com 7

8 Methodology, Scope, and Product Definitions Ambient Insight is an integrity-based market research firm that specializes in identifying revenue opportunities for suppliers. Principals at Ambient Insight have been tracking innovation and investment trends in the learning technology industry since the late 1990's. Ambient Insight provides market revenue forecasts based on our proprietary Evidence-based Research Methodology (ERM). The ERM is an iterative process based on predictive analytics. ERM progresses from general patterns (the big picture) to very precise granular patterns. It is used to create a forecast model comprised of relevant predictors. The forecast model is refined as additional data becomes available. Ambient Insight triangulates baseline revenues from three analysis vectors: Supply-side analysis Demand-side analysis Product and service analysis Once the baseline revenues are triangulated, Ambient Insight uses the data to forecast the Total Addressable Market (TAM). Ambient Insight uses the data derived from the ERM process literally as evidence to support our market forecasts. Ambient Insight gathers market and competitive intelligence from a wide spectrum of information broadly classified as leading and lagging indicators. Economic and market conditions are subject to change and the data in this report are current at the time of publication. Leading indicators signal future events and include venture capital investment trends, patent applications, technology-related legislation, technology standards development, product research trends, technology infrastructure trends, labor demand, and outsourcing demand. Lagging indicators, referred to as "rear-view mirror" data, are past events captured in data that include new vendor activity, M&A activity, executive hiring patterns, US Economic Census data, SIC and NAICS data, SEC filings, local and federal government data, Universal Commercial Code banking reports, public-domain business records, court records, press releases, and industry association information. Scope This report only covers revenues derived from US customers. The companies that develop the products discussed in the analysis are either US-based, have established US subsidiaries, or are offshore companies providing products and services to US buyers. The analysis in this report covers the technology-based products that are specifically designed, branded, and marketed as Cognitive Learning For more information about this report, sam@ambientinsight.com 8

9 products. This includes cognitive assessments, cognitive and intelligent tutors, brain training games, brain gyms, brain fitness applications, and cognitive fitness applications. There are rehabilitation and clinical-diagnostic technologies that are often marketed as brain fitness applications. Ambient Insight does not categorize products that are designed for cognitive rehabilitation or for clinical diagnosis as Cognitive Learning products. This analysis does not include forecasts for tangible or print-based content, generic puzzle games, biofeedback products (also known as brain entrainment), or for stand-alone device-embedded products such as Sega Toys' Brain Trainer. Ambient Insight does not categorize clinical diagnostic and clinical intervention (therapy and treatment) tools designed to diagnose and treat cognitive disorders as Cognitive Learning products. Ambient Insight does not categorize inventories primarily used in clinical situations, such as the Minnesota Multiphasic Personality Inventory (MMPI), as Cognitive Learning products. Consequently, those products are excluded from this analysis. Some suppliers have developed products to counteract reading disabilities and are now marketing their products to gifted children and the elderly. Suppliers that are expanding into these demographics are included in this analysis. Disclaimer: Ambient Insight analyzes the competitive landscape and supply chain for Cognitive Learning products and is agnostic about claims or criticisms surrounding the effectiveness of the products. We never endorse specific suppliers or products. We do not evaluate, compare, or rank the effectiveness of Cognitive Learning products. We are interested in the on-going research developments from a product marketing perspective and as potential market catalysts and inhibitors, but our primary focus is to track the buying behavior of customers and identify the revenue opportunities for suppliers. Product Definitions Technology-based Cognitive Learning products are designed to improve or enhance perception, working memory, comprehension, emotional states, decision making, fluid intelligence (general problem solving), and reasoning. They are meta-cognition products that allow users to modify cognitive behavior (learn) by understanding and manipulating the learning process itself. Meta-cognition was defined in 2008 by the educational psychologist John Santrock as the information process that, "includes knowledge about when and where to use particular strategies for learning or for problem solving." There are three primary types of Cognitive Learning products on the market: Cognitive assessments For more information about this report, sam@ambientinsight.com 9

10 Cognitive and intelligent tutors Cognitive fitness games and applications. Cognitive Assessments Cognitive assessments evaluate and measure the spatial perceptions, verbal abilities, memory, problem-solving skills, temperament, and the socalled "intentional" states of users. These products are used in two major areas: in the evaluation of childhood cognitive abilities and in employee personality screening during the hiring process. There are three primary cognitive tests given to 4-15 year-old children in the US: the Cognitive Abilities Test (CogAT), the Otis-Lennon School Ability Test (OLSAT), and the Naglieri Non-Verbal Ability Test (NNAT). The majority of the commercial assessment products on the market are test preparation exercises and practice tests that map to these three tests. The employee personality measurement products range from sophisticated psychometric instruments (such as those based on the so-called five-factor model) to scientifically-unproven instruments such as the Wonderlic Personnel Test (WPT) or the Myers-Briggs Type Indicator (MBTI). One important distinction is that the psychometric instruments are defensible in court, while the scientifically-unproven tests are not. Even though several million people a year take the WPT or MBTI, tests based on the five-factor model are the most widely used for candidate screening. The five-factor model is also known as the OCEAN model and is comprised of five personality dimensions: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism (OCEAN). One of the more common five-factor instruments is the Revised NEO Personality Inventory, or NEO PI-R. The NEO PI-R is copyrighted by Psychological Assessment Resources (PAR), and can only be purchased by professionals. Cognitive and Intelligent Tutors Cognitive and intelligent tutors are meta-cognition technologies that simulate the behavior of a human mentor and provide personalized responses, remediation, and interventions in real time based on the knowledge, behavior, and cognitive abilities of a particular user. The products are based on artificial intelligence and generate a cognitive model of the student based on the interaction with the student. The model is then used to provide individualized instruction to the student. Until recently, empirical studies indicated that one-to-one tutoring was the most effective knowledge transfer method. There are now cognitive and intelligent tutors on the market that can perform better than human tutors. Figure 3 Cognitive Tutors Solve Bloom's 2 Sigma Problem For more information about this report, sam@ambientinsight.com 10

11 In a seminal study known as the Two Sigma Problem, Bloom found that, on average, tutored students scored better than 98% of classroom students. This means that the achievement of individually-tutored students may exceed that of classroom students by as much as two standard deviations (a two sigma shift). This knowledge-transfer improvement is roughly equivalent to raising the performance of 50th percentile students to that of 98th percentile students. New Cognitive Tutor products are capable of exceeding the two-sigma deviation. Cognitive Fitness Games and Applications Cognitive fitness is based on cognitive science, neuropsychology, and brain-based learning theories emerging from educational psychology and educational neuroscience. It is an instructional method that targets the neuro-physiological processes involved in learning and has little in common with traditional instructional design principles. The two most prominent products to emerge from this new science are so-called brain fitness applications and brain trainer games. The "fitness" and "training" metaphors derive from physical exercise concepts. Researchers and suppliers have a growing body of empirical evidence to show that people who use the products can condition and train the brain to improve memory, attention, visual and spatial awareness, auditory processing, linguistic skills, planning skills, and problem solving. The brain fitness industry in the US is in a wide adoption phase as of late early Starting in late 2006, mobile brain trainer games appeared in the US market and are now the top selling mobile edugame For more information about this report, sam@ambientinsight.com 11

12 type in the country. Ambient Insight also categorizes these edugames as a type of Mobile Learning packaged content. Related Research Buyers of this report may also benefit by the following Ambient Insight market research: Private Investment Trends in the US Learning Technology Industry: Longitudinal Analysis The US Market for Mobile Learning Products and Services: Forecast and Analysis Snapshot of the US Market for Mobile Brain Trainer Products: Forecast and Analysis The US Corporate Market for Self-paced elearning Products and Services: Forecast and Analysis The US Corporate Market for Learning Services: Forecast and Analysis The US Market for Handheld and Mobile Game-based Learning Products: Forecast and Analysis Ambient Insight s 2009 Learning and Performance Technology Research Taxonomy For more information about this report, sam@ambientinsight.com 12

13 Index of Suppliers 3SmartCubes.com Accelerated Learning Methods Advanced Brain Technologies Advanced Cognitive Enhancement ALEKS Amazon...14, 19, 27, 28, 33 American Council on Exercise Apangea Learning Apple... 24, 33, 37, 38 Applied Cognitive Engineering Assessment.com AT KidSystems Audiblox Avanquest Software Publishing BOOMj Brain Aerobics Brain Building Fun Brain Center America... 34, 35 Brain-Guide.org Brainmetric Software BrainSavers BrainSkills... 26, 27 BrainTrainAge.com BrainX Brighter Minds Media CareerQuiz Carnegie Learning Central Test Cogmed CogniFit... 24, 25 Cognitive Enhancement Systems Cognitive Labs... 24, 34 Core Learning Dakim... 6, 24, 25 Dana Alliance for Brain Initiatives Digital Dominion DreamBox Learning ExpertRating Gameloft Handango happier.com HAPPYneuron Headsprout Houghton Mifflin Harcourt HumaNext In-Fusio Intelligent Software Learning Enhancement Corporation 26 LearningRX Lexia Learning Systems Lumos Labs... 6, 24, 25, 34 Mastersoft Mobile Solutions Memory Works Mercury Learning Systems Microsoft... 23, 37, 38 Mind Evolve Software...34, 38 Mind Media Mind , 28 Minds Refined MyBraintrainer.com MySkillsProfile Nintendo... 21, 22, 29, 30, 36, 37, 38 Oak Systems Leisure Software Oberon Media Posit Science Practical Memory Institute PsychTests Qualifying.org Quantum Simulations Right Brain Kids RIM... 23, 37, 38 Rocky Mountain Learning Systems.. 33 Scholastic School of Phenomenal Memory Scientific Brain Training Scientific Learning SharperPrograms SmartTutor.com Sony... 23, 29, 36, 37 Sparks of Genius SPB Software TalentSmart TestingRoom.com The Brain Trainers The Conference Board The Critical Thinking Co Think Tonight Thinking Pays Thinking To Learn Thriving Brain TRAQ Tri Synergy uboost UrHead.com VibrantBrains Vigorous Mind Vivity Labs...24, 25 Wonderlic...10, 15 For more information about this report, 39

14 We Put Research into Practice Contact Information: Sam Adkins' Ambient Insight phone: