Rosetta Stone 2012 Annual Report Download - page 14

Table of Contents
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The market for foreign language-learning solutions is rapidly evolving, highly fragmented and intensely competitive, and we expect both product
and pricing competition to persist and intensify. Increased competition could cause reduced revenue, price reductions, reduced gross margins and loss of
market share. Many of our current and potential competitors have longer operating histories and substantially greater financial, technical, sales,
marketing and other resources than we do, as well as greater name recognition worldwide or in select local markets. The resources of these competitors
also may enable them to respond more rapidly to new or emerging technologies and changes in customer requirements, reduce prices to win new
customers and offer free language-learning software or online services. We may not be able to compete successfully against current or future
competitors.
As the market for foreign language solutions continues to develop, a number of other companies with greater resources than ours could attempt to
enter the market or increase their presence by acquiring or forming strategic alliances with our competitors or our distributors or by introducing their
own competing products. These companies and their products may be superior to any of our current competition. We have also seen increased
competition from imitation products which are lower priced, lower quality products that attempt to capitalize on the popularity of our products by
utilizing similar packaging and marketing materials. In addition, we see increased competition from community practice providers which provide low
priced entry points for consumers interested in learning languages. We may not have the financial resources, technical expertise, marketing, distribution
or support capabilities to compete effectively with any of these new entrants to the market.
We have seen an increase of language-learning applications on mobile platforms, such as iPhones and iPads, that are offered at extremely low
prices and, while they are currently limited in scope and ability to teach languages, they may present a threat as they develop.
As we continue to expand into foreign markets, we expect that we will experience competition from local foreign language-learning companies that
have strong brand recognition and more experience in selling to local consumers and a better understanding of local marketing, sales channels and
consumer preferences.
Our success will depend on our ability to adapt to these competitive forces, to adapt to technological advances, to develop more advanced products
more rapidly and less expensively than our competitors, to continue to develop an international sales network, to adapt to changing consumer
preferences and to educate potential customers about the benefits of using our solutions rather than our competitors' products and services. Existing or
new competitors could introduce new products and services with superior features and functionality at lower prices. This could impair our ability to sell
our products and services.
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Presently there are a number of free online language applications and websites offering limited vocabulary lists, grammar explanations and tips,
and crowd sourced text translations. In addition, there are some online services offering limited free lessons and learning tools, including one sponsored
by the U.S. Department of Education to help immigrants learn English. Many of these websites offer free language practice opportunities with other
language learners. If these free products and applications become more sophisticated and competitive or gain widespread acceptance by the public,
demand for our solutions could decline.
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