The entirety of Rosetta Stone's (NYSE: RST) conference call felt like a huge therapy session. CEO Tom Adams finally admitted that free or low-priced competitors were cutting into profits. Fellow education stocks face similar pressures, including Blackboard's (Nasdaq: BBBB) competition from open-source option Moodle. Worse yet, Rosetta Stone must also contend with other for-profit options such as CBS's (NYSE: CBS) Pimsleur.

Adams also shouldered responsibility for the awful advertising campaign that's gotten the company caught between a rock and a hard place. The only question that remained: Can any real strategy help this company fulfill its potential?

Why the dive?
I've written about Rosetta Stone several times before; the company is a compelling investment that aims to profit from the worldwide need to learn languages, namely English. In addition, as a former teacher, I see vast potential for the product in the institutional/educational sector.

All of that is fine and dandy, but right now, the U.S. consumer market makes up the great bulk of Rosetta's revenue -- 64%, to be exact. It seems that spot TV ads were driving consumers to give the product a try during the Great Recession. The company notched as much as a 22% increase in consumer revenue until the second quarter of 2010.

Then Rosetta Stone announced Q2 earnings, and revenue fell off a cliff. The rising cost of U.S. advertising seems to be the culprit, as the TV ad market recovers from its post-recession lows. Rosetta Stone now spends more money on advertising than it did a year ago, while getting just 40% as many TV impressions.

Enormous potential
The negativity that the U.S. consumer market brings is tempered -- though lately, not much -- by the international and institutional potential the company has. Adams mentioned during the conference call that Rosetta is a product for serious language learners, not dabblers. U.S. consumers don't have nearly the same motivation to learn a language as someone does abroad. As Adams put it, to them, learning English means bread, not cake.

The results from the fourth quarter were extremely positive for both sectors. Institutional revenue not only continues to grow, but has also accelerated, up 37% year over year. International revenue rose 92%.

Can they make it?
Although it'd be nice to see the U.S. consumer market make a full-fledged comeback, I'm not betting on it. But I'm not selling my shares, either. In my view, the company needs to figure out a way to squeeze as much out of the consumer market as they can before International and institutional buyers take over and carry the company into the future.

What kind of things does RST aim to do to beef up U.S. consumer spending?

  • Spending their advertising money at a more directed audience
  • Changing product offerings and, as a result, prices
  • Making content downloadable

Certainly, if things pan out for this company, it could be a huge success. But investing in RST is risky too, so if you buy in, be sure it's within a well-diversified portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.