A Broken Business Model

In the final installment of its three-part series, The Daily Yomiuri touches on something that I commented on last night: that Nova's business model was fatally flawed.

The Daily Yomiuri:

Nova was structured on the faulty premise that there would be an endlessly increasing supply of students. This assumption was based on shakier foundations than the ministry realized.

What the ministry, METI, didn't realize, was that Sahashi was a megalomaniac:

But Nova's then President Nozomu Sahashi, 56, reportedly said at a meeting of a deliberative council of the then International Trade and Industry Ministry that was held before the revision, "Our management is as solid as a rock, no matter how the system changes." The senior executives of other schools looked at each other in complete confusion.

What I wasn't aware of was the fact that refunds for English conversation lessons were not covered under the Specified Commercial Transactions Law until the law was revised in 1999. Before the revision, a student would have been completely out of luck if they decided to cancel their contract and ask for a refund. Even after the law was changed, Sahashi was so full of himself that he never bothered to adapt Nova's business to the new rules.

In not adapting the business to the new law, Nova's refund policy was a factor in Nova's collapse. Under the new law, if a student bought a lesson package at 1,500 yen per lesson, for example, and later wanted a refund, the unused lessons would have to be refunded at the purchase price. Nova, however, calculated the refunds at a price higher than the purchase price, leading to smaller than expected refunds for students.

Right away, having to pay refunds seriously hindered Nova's cash flow since it had not set aside any money for this contingency. Nova did its utmost to contest the refunds until the Supreme Court finally ruled in April that its policy was illegal. The path was clear for students to demand refunds and sue for them if necessary, and as we know now, Nova went into freefall after METI punished it in June.

What will come of the Nova train wreck? I suggest that the gravy train is over for both Nova's business model and teachers. The model of cut-rate lessons in high-rent areas has failed. As the Yomiuri article points out, the Nova model is fundamentally flawed because it depends on a perpetual flow of students purchasing large lesson packages.

The article doesn't touch on the fact that Nova reported losses in 2005 and 2006. Despite the Supreme Court decision and METI punishment, Nova was already failing, albeit slowly. It's not entirely out of the question that the Nova model could be replicated in the future, but everyone involved is now is once bitten twice shy. Consumers are going to be more wary about paying large amounts of cash up front for lessons, and with all of the media coverage on teachers not being paid and in some cases having nothing to eat, it's going to be difficult, in the short run at least, for eikaiwas to recruit new teachers from abroad.

With the weakness of the yen, eikaiwa is also no longer an attractive way to pay off debts and see the world at the same time. Ten years ago, an income of 3 million yen translated into at least $50,000 CDN, now that salary converts to around $25,000 CDN. Wages have been falling in eikaiwa for at least the past 10 years. The heydays of charging $100 an hour are long gone. It's not just eikaiwa--wages are stagnant across the board in Japan. Much of this has to do with the move to part-time work and contract employees. Eikaiwa as a whole has followed this trend with schools providing dispatch ALTs and offering part-time contracts. It used to be that you could do one eikaiwa job and live comfortably off it. Now it seems that you have to hustle and juggle two or even three part time jobs just to make decent money. If the gravy train does manage to get back on track, it will probably be on a much smaller in scale.