Between the creation of a social rating system and street cameras with facial recognition capabilities, technology reports coming out of China have raised serious concerns for privacy advocates. These concerns are only heightened as Chinese investors turn their attention to the United States education technology space acquiring companies with millions of public school users.
A particularly notable deal this year centers on Edmodo, a cross between a social networking platform and a learning management system for schools that boasts having upwards of 90 million users. NetDragon, a Chinese gaming company that is building a significant education division, bought Edmodo for a combination of cash and equity valued at $137.5 million earlier this month.
Edmodo began shifting to an advertising model last year, after years of struggling to generate revenue. This has left critics wondering why the Chinese firm chose to acquire Edmodo at such a price, some have gone as far as to call the move a data grab.
Regulating Chinese Tech Acquisitions
William Carter, the deputy director and fellow of the Technology Policy Program at Center for Strategic and International Studies (CSIS), says US government officials are taking note of these Chinese acquisitions in the tech startup space.
“There is a concern that data is now a strategic resource, and that acquiring companies for their large data sets could be a means by which China could undermine the strategic influence of the United States,” says Carter.
He notes that, historically, United States officials have been hesitant to regulate the tech startup space for fear that innovation could be stifled. The Senate Committee on Foreign Investments in the United States (CFIUS) generally focuses on foreign investments in U.S. companies that could pose a risk to national security—meaning companies that do business with the Department of Defense, the intelligence community, or large firms with strategically important technologies.
But as data becomes a tool that governments such as Russia and China could use to influence voting systems or induce citizens into espionage, more legislators are turning their attention to the acquisitions of early-stage technology startups.
“There have been a number of initiatives to reform the CFIUS process. One that is being led by Sen. John Cornyn (R-Texas), would expand the scope of CFIUS and give it oversight over more types of transactions, including smaller transactions and broaden the way ‘strategically important acquisitions’ would be defined,” explains Carter.
Carter notes that the real threat with foreign governments gaining access to student data does not lie in the possibility of them inducing a 12-year-old to commit espionage against the United States. Instead, security officials are concerned about how governments like Russia have tried to influence the U.S. political debate by manipulating how citizens talk about political issues.
The ability of foreign governments to inject political content that can influence the ways young children discuss sensitive topics is a strategic move Carter warns can have lasting effects.
“If you can try to drive wedges between different demographic groups within schools to create more general social tension, then that is something that can last over time as children grow up,” he continues. “It can be really hard to change those opinions and viewpoints. That is something we see Russia doing a lot of."
Response From Chinese Firms
NetDragon officials, however, say they have no interest in these types of activities. Their main goal in acquiring United States edtech companies lies in building profitability, says Pep So, NetDragon’s Director of Corporate Development.
In 2015, the firm acquired the education technology platform, Promethean, a company that creates interactive displays for schools. NetDragon executives say that the Edmodo acquisition rounds out their education product portfolio—meaning the company will have tools for supporting multiple aspects of learning including; preparation, instructional delivery, homework, assignment grading, communication with parents students and teachers and a content marketplace.
“Promethean was really strong in the front part which is lesson delivery, and Edmodo is more of a content and communication platform,” explains So. “Now putting these two pieces together gives us full coverage of the education exchange which we think will be the future of education.”
Though NetDragon has built market share in other countries like Turkey and Malaysia, So notes that the United States education technology market is more mature than others. He sees buying behavior in United States public schools that doesn’t happen in other countries, pointing to teachers who are willing to shell out significant amounts of their personal funds in order to improve schooling.
“In the U.S. we have seen patterns like teachers willingly paying annually $500 from their pockets to buy content on their own. Whereas in China we don’t see that,” explains So. Although Chinese parents spend heavily for out-of-school tutoring services for children, educators in public classrooms generally will not access education technology tools unless they are free.
NetDragon’s monetization plan for Edmodo focuses on building out content that gets sold via its platform. Similar to tools like TeachersPayTeachers, So hopes to see users putting up content on the platform’s marketplace, some free and others for a fee (including some virtual reality content), so that the community can buy, sell and review available educational tools. They also plan to continue working with advertisers who want to market to teachers and students.
As far as data privacy is concerned, So notes that NetDragon is still learning what it can and cannot do. He noted that the company will comply with Children's Online Privacy Protection Act (COPPA), a federal regulation created in order to protect the privacy of children online, but says that the rules and regulations surrounding the law are confusing for all actors involved.
“Of course we want to protect our users’ data, and we also want to be targeting our users [with products], so that’s always a difficult balance to strike. We don’t have a straight answer about what we can and cannot do and to be honest I don’t think Facebook has one as well,” says So, noting that this is an issue several US technology firms are also struggling with.
Benefits of Chinese Investment
CSIS’ Carter notes that in spite of rising concerns surrounding data privacy, the benefits of United States-based education technology firms being acquired by Chinese companies such as NetDragon might outweigh the risks.
Historically, Chinese companies have faced trust and branding issues when moving into the United States market, and the reverse is also true for U.S. companies seeking to expand overseas. Companies have also struggled to learn the rules, regulations and operational procedures in place in other countries. Carter sees acquisitions as a way firms can begin expanding their offerings and learn from other markets.
“In the edtech space, in particular, I am actually kind of excited that Chinese money is coming into the U.S. edtech startups,” Carter explains. “I see this as an opportunity to give a capital infusion into these companies that could develop really interesting products and services that they could then offer to kids in the United States.”
Regarding compliance with COPPA laws, Carter notes that any company that operates in the United States is subject to compliance with the rules and regulations in the country. However, he does acknowledge that enforcing privacy regulations domestically has been a struggle, and might even be more difficult with companies that don’t have a physical U.S. presence.
“It is a really tough problem in general,” says Carter, speaking about the enforcement of COPPA laws. “It is not just an edtech, U.S. or China question, but the lack of transparency into the data that is being gathered by online platforms and the way that is used, makes it really hard to bring an enforcement action for privacy violations.”
