> But there is another buyer that your post leaves out: parents.
I did consider adding a section to my post breaking down all the smaller sub-categories of the main three, of which "Parents" is a significant one.
> Historically, this has been a very challenging market to scale up well
Yes! And for several different reasons. Labor costs, which you mention, can be a major one for products which offer highly individualized interaction. I agree that LLMs should be able to substantially disrupt existing tutoring type businesses. Another major challenge of parent-direct sales is that they aren't a well-aggregated market. Scaling sales there gets costly in average cost of new customer acquisition for new brands. It's basically a direct to consumer business, with all the well-known challenges that presents to fledgling starts. Of course, there are examples of companies that managed to do it, but as you say, it's risky.
I agree with all the shortcomings you mention with existing tutoring and the potential of AI here seems obviously compelling. In fact, both the technologist and the passionate believer in learning inside of me are giddily enthusiastic about the vision you paint. However, as a serial tech startup entrepreneur who recently retired (somewhat) early after a multi-decade, multi-startup career that was (eventually) quite successful... I'm also, sadly, now too jaded and battle-hardened for my edu-idealistic enthusiasm for that vision to survive for long.
Assuming you live in urban or suburban North America, to see what I mean, you need only take a trip to your local "learning center" franchise location between 3p-6p. Park yourself near enough to the entrance to observe the parents dropping off and picking up their middle and high-schoolers in waves at the top and bottom of every hour. You'll probably also find several parents waiting in their cars. Be bold and chat with few. Ask if they've considered or tried computer-based tutoring (either Zoom-style or automated). I think you'll find many have. Now ask what this tutoring center offers that's better enough to be worth the increased cost and hassle. If you're good at customer interviewing (and active listening), you may be surprised at what you learn.
As the parent of a 9th grader who's recently paid for both learning centers and private tutors, I can tell you the thoughtful parents will share that an in-person human tutor offers a few key things an automated (whether AI or not) or even remote video tutor doesn't. For one, a local tutor, whether at a center or private, is probably deeply familiar with what the local school's curriculum is in the relevant subjects. While schools are all required to teach to state and federal guidelines, the texts used and the sequencing of the instruction and granular testing varies from district to district (and even school to school) more than you'd think. The tutors at our local center knew things down to the level of individual teachers at each of the two local high schools and they used this knowledge to customize the objectives week by week.
If you're not the parent of a 9th grader who's falling behind in math, you may just think "The student can tell the AI what their current curriculum module is." If you ARE such a parent, you already know why that is an unreliable solution! For the rest of you, understand that there are two broad types of students getting tutoring. One is a highly-motivated self-learner who gets good grades and whose parents are paying more just to pile even more icing on that already well-iced cake. The other kind is more like my kid who, unfortunately, takes after Dad as far as school goes. A non-motivated, highly-distracted learner who is extremely bright and intellectually capable but simply does the bare minimum in school to get by. For us, the parents of this wonderful kid who shines so bright in every way except academics, the learning center offers something an AI can't, a real person whose presence enforces actual engagement. Another subtle yet even more important benefit is an environment full of peers who are all exhibiting that alien "learning behavior" together. For a teen struggling with even engaging in academics, this peer modeling is invaluable.
So, yes. AI has the potential to be revolutionary for student tutoring - in concept. And it will be revolutionary for some students. Yet somehow, in practice, this amazing solution which should simply replace human tutoring - won't. And the edutech entrepreneurs on the front lines trying to figure out why will discover there lurks a subtly wicked complexity under this apparently highly-tractable problem. And these thorny barriers to adoption are all hidden behind human psychology and teen behavioral dynamics. Thus, my OP was really intended as a cautionary tale and warning to all startup entrepreneurs ready to set sail in uncharted edutech waters that "here be dragons!"