I think one thing that makes language learning difficult is that users are almost guaranteed to eventually churn. Either they reach a level where they have no further need for online learning, or they give up/lose interest.
It's a particularly difficult space right now, as VC-backed ventures like Duolingo have set expectations of irrational business models ($0 pricing/advertising) and are taking a lot of the oxygen out.
I think the future looks a bit brighter. Duolingo as it currently exists seems very far from being sustainable. I see 4 ways that the Duolingos' of the world might go (the "translation services" model is a bit unrealistic, in my view):
1. They'll start charging and become the next Rosetta Stone.
2. Rosetta Stone will acquire them. Probably the most likely outcome given the prominence of Duolingo, the extent that it must be impacting on RS, and the upside to RS if they did acquire Duolingo.
3. They'll fizzle out. According to CrunchBase they've raised ~$40MM and have 12 employees. Their marketing budget must be quite massive, and their headcount is likely to grow.
4. They'll become ad-supported, which would probably make them sustainable but not nearly profitable enough that it would make their investors happy.
I heard Louis Von Ahn (Duolingo ) say that they spent $0 on advertising, which sounds great - users love it so much that it spreads completely organically. But in reality they must spend a lot on all the blogging, social networking, and community management - which sounds a lot like marketing to me.
I'm also a bit skeptical about Duolingo's ability to sustain itself selling translations, but I think it's possible, and the product is really great so I'm rooting for them.
Although it's scary to be in the same space as Duolingo, I don't see them as direct competition at the moment, since Duolingo requires users to be much more active in either completing exercises or translating everything, whereas Readlang is centered around the more passive activity of reading. In fact people regularly recommend Readlang on the Duolingo forums as a complementary tool.