Three numbers are all it's going to take to tell you why Tuesday's "Livemocha" purchase is great news for Rosetta Stone (NYSE:RST). Are you ready? Here they are:



And zero.

In a world where the cost of "customer acquisition" is often priced in the tens of dollars -- if not the hundreds -- Rosetta Stone has just acquired an online language learning community for the grand total price of just $0.53 -- a mere 53 cents -- per customer. Considering that Rosetta's own computer-aided language courses can cost $350 and up, if Rosetta can convert just one Livemocha member out of 700 to its paid course offerings, this deal will pay off in spades.

And with 16 million Livemocha members to toss ads at, chances are good the company can manage that 0.15% success rate. At least.

That's the grand total that Rosetta Stone pays for Livemocha and its 16 million customers, a mere $8.5 million. It's the number that works out to the $0.53-per-subscriber cost. It's also an amazingly cheap price to pay for taking out -- or to be polite, bringing in-house -- a rival that if left out in the wild, could have disrupted Rosetta's pay-for-service business model by offering Livemocha language training online for free.

$8.5 million is also a small price to pay to arm Rosetta Stone with a "freemium" online service of its own, with which to check online rivals such as Google's (NASDAQ:GOOGL) YouTube, where more and more free educational videos seem to be appearing with each passing day. (The paid language education world shudders at the thought of a free "Khan Language Academy.") Incidentally, it's a weapon Rosetta can employ on offense to challenge and undercut for-pay language offerings from McGraw-Hill (NYSE:SPGI) and Walt Disney (NYSE:DIS) -- very popular in China.

Admittedly, not all investors will like the idea of Rosetta Stone anteing up $8.5 million for a language company that gives away its services for free -- charging zero dollars up-front. But if you ask me, Rosetta's making a smart move. On one hand, the company now has 16 million potential for-pay customers to market its products to. On the other hand, there's a wealth of options available to Rosetta to turn Livemocha into a real, profitable business.

Just off the top of my head, Rosetta could pick the best online tutors on Livemocha today, and encourage them to charge a small fee for their services -- then offer this service as an add-on, and simply skim a small percentage of the fees off the top for itself.

Foolish takeaway
In short, this is a deal that's great news for Rosetta Stone. It's neutral to Google. As for McGraw-Hill and Disney -- they just got a march stolen on 'em.


Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Google, Rosetta Stone, and Walt Disney. The Motley Fool owns shares of Google, Rosetta Stone, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.