MasterClass: High-Priced Edutainment with Celebrity Sparkle, but is it Truly Scalable?

Earlier this week, The Information had a fascinating article on MasterClass. For those who don’t know, MasterClass is a firm that offers well-produced classes from celebrities such as Film-making by Martin Scorsese, Acting by Natalie Portman, or Writing by Margaret Atwood, on a subscription basis, granting customers access to the platform’s library, rather than a single course. 

The article focuses on the firm’s effort to cut costs. 

My question is whether firms like MasterClass are scalable and whether the (sometimes careless) spending, followed by drastic cost-cutting, is inevitable. 

Below I’m presenting a summary of my S.C.A.L.E framework (you can find a more detailed version here), which I developed while working with various firms, and which helps managers evaluate their company’s scalability readiness. The acronym stands for:

• Scalable: Does the company possess an environment conducive to growth and a pressing urgency to expand?

• Constraints: What are the primary growth limiters, such as cash, resources, processes, or technology?

• Aligned: Does the company have a product-market fit, a defensible competitive edge, and the required operational capabilities?

• Leadership: Is there an effective leadership structure with the right individuals in key roles and a culture ready for growth?

• Efficient: Is there a consistent, profitable path to earning more from customers than the cost of acquisition?

Three of the five components (Scalable, Efficient, and Aligned) gauge the company’s growth tailwinds, assessing its economic status, urgency, and timing. The other two (Constraints and Leadership), identify potential growth obstacles. 

For the purposes of today’s discussion, I will focus on Alignment, Constraints, Efficiency, and Scalability (but less on the human limitation for growth). 

But first, what does MasterClass actually sell? 

Because it’s not Education. 

Edutainment or Just Plain Entertainment? 

If you’re reading these lines, you know me (either personally or through this newsletter). If you’ve read this far but don’t anticipate a rant (or “Hot Take,” as the youngsters like to say, or UO, as in “Unpopular Opinion”), then you don’t know me. 

Let me start by saying that I’m never happy to see a startup fail. 

But … Edutainment is something I can’t tolerate. 

There’s nothing I hate more (and I possess the capacity to hate) than giving people the impression they can just passively learn something without much effort just by paying someone to casually pass on their wisdom. And not just someone, but an individual who is so accomplished at what they do that they are, most likely, completely detached from the reality of us mere mortals. 

MasterClass is not about education at all. It’s pure edutainment, and I can explain.

The debate whether MasterClass (and similar platforms) leans more toward education or entertainment is important, and it’s emblematic of broader trends in online learning.

Several points to think about:

1. The Appeal of Celebrity Instructors: MasterClass’s unique selling proposition is its lineup of celebrity instructors. While these figures are undoubtedly experts in their fields, the question arises: Are students primarily attracted because they genuinely want to learn a new skill or because they want to get a closer look at how their favorite celebrities operate? If it’s the latter, the platform’s primary value is entertainment.

2. High Production Value: The slick, high-quality production of MasterClass videos makes them feel more like documentaries or feature presentations than traditional educational content. This cinematic approach is undoubtedly engaging, but it may also detract from the learning experience if viewers are more captivated by the aesthetics than the content.

3. Depth vs. Breadth: Traditional educational content tends to dive deep into subjects, often requiring prolonged engagement and study from the learner. In contrast, a MasterClass, while insightful, provides a more surface-level overview or introduction to topics. This isn’t necessarily a bad thing – not everyone wants or needs an exhaustive education on every topic – but it does shift the balance more toward casual engagement (entertainment) than intensive learning (education).

4. Passive vs. Active Learning: One criticism often leveled against video-based platforms like MasterClass is that they promote passive learning. In traditional educational settings, students engage in discussions, complete assignments, and receive feedback. In contrast, platforms that lean toward entertainment overlook these active learning components, which are crucial for skill acquisition and mastery. 

To delve deeper, I will, once again, mention Ludwig Wittgenstein, the Austrian-British philosopher who made significant contributions to the philosophy of language and the mind. One of his central themes (particularly in Philosophical Investigations) is challenging certain traditional views about understanding, meaning, and thought.

One of his book’s main points, which I repeat to my students, is that understanding is not a mental state. 

Wittgenstein challenges the idea that understanding is like a picture or representation in the mind corresponding to an external state of affairs. He claims that to understand something is more about being able to use a word or phrase the correct way, to follow a rule, or to engage in a practice. Understanding is exhibited in our behavior and ability to participate in linguistic and non-linguistic practices rather than being something “inside” our heads.

Furthermore, Wittgenstein questioned the notion that understanding is a kind of inner experience or feeling. For example, when we say we understand a mathematical operation, it’s not that we have a special “feeling” of understanding; rather, it’s that we can correctly perform that operation and use it in various contexts.

This perspective departs from many traditional views, which often conceptualized understanding as having a certain internal representation or “grasping” an abstract entity. Wittgenstein’s view is more pragmatic, emphasizing the importance of how language and practices are embedded in our way of life.

Needless to say, this is my view of the role of homework, exams, assignments, and quizzes. All these are necessary evils to move most of us from the “feeling” of understanding toward true understanding. Some MasterClasses include a project or instructions on further assignments, but since they are optional, I assume only a few people bother with them. 

5. Inspirational Value: One counterpoint to the education vs. entertainment debate is the value of inspiration. Even if MasterClass leans toward “edutainment,” the chance to see renowned figures discuss their craft can be deeply inspiring for many. This inspiration can be the spark that drives someone to pursue further education or practice in a particular field.

6. Market Demand and Evolution: It’s also essential to consider that platforms like MasterClass evolve in response to market demand. If the audience is more interested in easily digestible, entertaining content, platforms might shift in that direction. On the other hand, if there’s a clear demand for deeper, more structured learning experiences, we might see platforms adapt accordingly.

In conclusion, while MasterClass undoubtedly offers educational content, the balance between education and entertainment is a point of contention. Like many things in this day and age, platforms blur traditional lines, leading to a fusion of genres and purposes. The “education vs. entertainment” debate reflects broader discussions about the nature of online learning, the role of celebrities in education, and the evolving demands of digital audiences.

Just to be clear, this is not a crusade against MasterClass. I view TED talks as an edutainment as well. If you want to see the experts there give real talks, take their classes, or attend “real” conferences. 

The Value Proposition (Aligned) 

Customers: Most people look for aspirational and inspirational content —quick, digestible learning. Things they can talk about in their next social outing with friends. Like, “Did you know that, according to Gordon Ramsay’s MasterClass, the key to a perfectly cooked steak is to ensure it’s at room temperature before searing and to always let it rest after cooking to keep the juices locked in?” or “Did you know that, according to Bob Iger’s MasterClass, one of the foundational principles of leadership is anticipating what the future holds, allowing you to make bold, informed decisions even in the face of uncertainty and risk?” or “Did you know that according to Professor Allon, the sky is blue?” 

Competition: I’d say that Wharton, Penn, or any other university are not MasterClass competitors, but rather a Netflix documentary or the entire self-help library, like Tonny Robbins or Jocko Willink. Personally, I’d watch Paint Dry before I listen to Tony Robbins or Simon Sinek. If you enjoy them, I promise not to judge (well, maybe a little), but if this is the competition, production value matters, and image is more important than actual learning.

Revenue Model: MasterClass operates on a subscription-based revenue model, so users buy an annual membership that gives them access to every course on the platform for the duration of that membership. This all-access pass allows subscribers to watch anything and everything, and also offers the option of gifting —users can purchase annual memberships as gifts for others. Finally, like any internet firm, MasterClass has an affiliate program where partners can earn commissions for referring new members.

It’s worth noting that MasterClass has raised significant investment capital over multiple funding rounds, which supports its high production values, marketing, and talent acquisition, among other things.

The resources and processes in place are in line with their value proposition. The article details some of these practices:

“...MasterClass created a replica of Iger’s office in a conference room on Disney’s campus, spending around $100,000 on the set alone for his course, one of the people said (Disney didn’t charge MasterClass for renting the space). Between the crew, cameras and other equipment necessary for the production, the entire Iger shoot cost MasterClass around $850,000, that person said. That didn’t include the cost of hiring Iger to teach the class.”

Intuitively, selling self-help means being aspirational. But competing with Netflix on production value raises the question of whether this investment is aligned with the value proposition from a consumer point of view. 

Well, it depends. Research by Marketa Rickley from the University of North Carolina (UNC) at Greensboro and Pavlina Kemp from the University of Iowa shows:

“Our findings indicate that designing and producing video lectures following principles of multimedia learning has a meaningful causal effect on students’ perceived learning and a marginal effect on student satisfaction.”

So, it’s not about the production quality but about properly designing the class, although if there’s a 30-crew member shooting the video, the budget can probably cover an instructional designer. Interestingly though, production quality is correlated more with learning (or perceived learning) and less with satisfaction. 

 The Cash Burn (Constraint) 

Maintaining high production quality is expensive, and in the current funding climate, it may impact a startup’s ability to survive. The article details the story of the studio built for Bob Iger, which cost $100k for the office replica and then $850K to film. That’s ridiculous.

This frivolous behavior is driven by the fact that when valuation is high, and cash is ample, firms tend to forget that tough times are around the corner. A startup (which is what MasterCalss still is), should spend money to de-risk the main risks: market (a customer’s willingness to pay and the ability to acquire and retain customers) and technical (the ability to deliver value). For a firm that’s still struggling with negative cash flows, it makes no sense to be spending so much. But when interest rates are zero and valuations are high, “Why not?”

So what’s considered reasonable spending? What’s the golden rule? For this, I want to invoke my colleague Ron Berman and his research paper on start-up survival, which, in a nutshell, concludes that when a start-up spends significantly more than the competition, its likelihood of failing increases. While there’s nothing wrong with failing, it’s good to be prepared.

Among the paper’s several interesting results, the first that stands out is the “spending per employee” as an important metric:

“We study the association of startup firm spending with firm survival. We propose that spending per employee (the “normalized burn rate”) captures entrepreneur’s ability to avoid failure better than total spending (the popular “burn rate”). We derive an analytical model to describe how spending per employee reflects entrepreneur’s knowledge about the contribution of human and non-human input flows to firm value. The model prescribes a U-shape relationship between the level of spending per employee and firm failure, and that most firms spend below the optimum.”

The second significant result is best summarized by the following graph:

The graph’s message is clear: being on the right-hand side means increased chances of failing. I don’t think MasterClass overpays its employees, but the overinvestment in production surely puts it on the extreme end of the spectrum. 

Is There a Chance? (Efficient)

So is there a path to profitability given the limited and poor use of cash?

Since MasterClass is a private company, it’s hard to know.

However, high production costs, given the caliber of instructors and the premium quality of content, coupled with potential overheads in other areas of the business, will strain profitability. And while some users are willing to pay for the unique content, the recurring costs of maintaining this level of quality, along with other operational expenses, may challenge the company's path to sustain profitability. 

Moreover, we’ve seen users slowly ditching streaming services such as Netflix (who are considered MasterClass competitors), so I’m not sure how long consumers will have the same willingness to pay or if at all. On the other hand, we can’t dismiss it completely. People enjoy investing in themselves. They like purchasing gym memberships even if they don’t attend the gym, and they like buying new running shoes even if they don’t like to run. So maybe this will be similar. But no matter what, MasterClass will need a significant improvement in cash flow.

The most difficult aspect is determining a good level of cash burn to both maintain a competitive advantage and bring the firm to profitability:

“Those free-spending days reflect a growing problem faced by creator and entertainment startups: Business models developed when it was easy to raise venture capital now look unsustainable as investor appetite withers and consumer attention fades. At MasterClass, subscriber growth has stalled, prompting it to slash its headcount by half over the past 18 months. And its courses are now shorter, with simpler sets and fewer A-list celebrity instructors. One recent lesson was led by a 16-year-old pickleball champion.”

MasterClass needs to consider strategies that optimize its cost structure while ensuring its quality remains uncompromised. Additionally, the company’s leadership needs to balance growth and profitability, ensuring that expansion efforts won’t outstrip the firm’s ability to manage costs effectively.

“That’s a big change from a few years ago, when the average MasterClass shoot took between three and five days and cost around $1 million to film and edit, according to a former employee with first hand knowledge of the company’s production expenses. Its shoots often had crews of between 50 and 70 people on location at times, not including the instructor, according to that person and a second one who was involved in MasterClass productions, along with documents viewed by The Information. In contrast, a 2022 analysis of some of the films shown at Sundance Film Festival found that the average crew size was 43 people.”

But growth will be challenging as well. According to the news story, in late 2021, as MasterClass saw a leveling off in subscriber numbers, the company leaders attributed the slowdown to Apple’s privacy updates from earlier that year, which affected app operations. Historically, MasterClass used targeted ads as a key customer acquisition strategy. By the beginning of 2022, high-ranking officials believed these Apple updates — which led many iPhone users to decline cross-app online activity tracking — to have significantly reduced the effectiveness of their ad campaigns on platforms like Facebook and Instagram.

The firm is now trying to diversify its revenue and growth sources. Throughout 2021, it began investing more resources in MasterClass at Work, a corporate subscription product pitched to Deloitte, Microsoft, and other companies as a benefit for employees. The firm started tailoring its lessons to attract a professional demographic, and between 2022 and 2023, the focus shifted toward courses centered on personal and professional growth. This pivot aimed to cater to regular MasterClass users while becoming suitable for corporate subscription packages.

So, while there’s no clear path to profitability, the firm may need to alter both its cost structure and revenue model to create one. While not impossible, when the value proposition is tied to high investment in production, it’s not all that trivial to cut costs without affecting satisfaction. Expectations are already set. 

Is it Scalable?

The firm was obviously eager to acquire customers: 

“The company also used expensive promotions during that era to bolster its subscriber growth, including one that allowed people to get a full year of MasterClass—which normally costs $120 for an annual subscription—for as little as $1, according to two former employees familiar with the figures. That offer resulted in hundreds of thousands of new subscribers in late 2020 but provided little revenue, the people said.” 

But is this urgency merited? 

The firm probably has low customer streakiness:

“In early 2022—with fewer people cooped up at home—the company’s sales growth slowed and user engagement began to decline, according to two former employees familiar with the figures. Monthly active users of its app shrank quarter over quarter for the first time since the pandemic boom in the first quarter of 2022, according to data from web analytics firm Similarweb. At times, the company’s annual churn rate has been as high as 52%, according to two people familiar with the figure. That’s slightly higher than the 47% average annualized churn rate for major streaming services, according to estimates by Parks Associates.”

MasterClass has limited supply or demand side economies of scale, factors that usually compel firms to accelerate the rate at which they acquire customers. 

But this isn’t a winner-takes-all market, especially when competitors are spending to retain and steal customers from other services. 

So, I’d say the main reason for the firm’s urgency to grow is to create a unique brand that would be directly associated with Edutainment. Admittedly, there is no such brand. The question, however, is whether MasterClass is strong enough to sustain itself and survive. 

You’re probably curious what my final verdict is. I will say this: 

In 2020, MasterClass faced a challenge with one of its anticipated courses on bread baking, helmed by Apollonia Poilâne, the third-generation CEO of the esteemed Poilâne bakery in Paris and London. As disclosed by a source from production, during the summer shoot in France, certain recipes, notably her rye dough, didn’t quite pan out and several other goods were overbaked. In response, MasterClass brought on a Los Angeles freelance baker to fine-tune Poilâne’s recipes and invested an extra 100 hours and approximately $10,000 to edit the course material meticulously. Poilâne’s team gave the green light to the revised recipes before the course’s launch. 

This incident underscores MasterClass’s commitment to delivering quality content to its subscribers. The company’s willingness to invest time, resources, and collaborate closely with experts suggests a future focus on maintaining high standards and credibility, positioning them well in the online edutainment market. 

So in the world of online learning, where the line between entertainment and education is blurred, the real masterclass will be in balancing the books without compromising the brand.