There has been speculation about Blackboard’s acquisition of MoodleRooms and its announcements about support of open-source learning systems. This is also an opportunity to see decision-making by Blackboard owner Providence Equity. The motivation of a private equity firm is rapid increase in the value of its assets. Some of Blackboard initiatives may take several years to take final form; perhaps longer than private equity objectives permit.
Blackboard describes their software business saying: “We typically license our individual software applications either on a stand-alone basis or bundled as part of one of our six product lines: Blackboard Learn Blackboard Transact Blackboard Connect Blackboard Mobile Blackboard Collaborate and Blackboard Analytics.” Professional services account for 8% of revenue; product for 92%.
Earning can come from either a short- or long-term improvement in the management of the company. Blackboard was and is a well-managed company. From an investment perspective is has been a consistent performer. However the performance of Blackboard is not sufficient to meet the expectations of the private equity funds. This comparison is shown in Figure 1.
According to Preqin surveys, private equity firms focusing on buyouts achieved an average annual internal rate of return (IRR) of 17.5% for the 1999 to 2009 period; the average for all private equity is 10.2%. As the return for private equity following the 2008 decrease improves it is now 19,7% for one-year investments. From 2007 through projected 2011(guidance only), Blackboard’s earnings have been 4.6%.
Market share for the Blackboard product appears to be declining. Market share in higher education, based on reports from the Campus Computing Project, is shown in Figure 2.
Blackboard lost 14% and Moodle gained 14%. In 2006 Desire2 Learn had only 2.0% of the higher education market, by 2010 it was 10.1%, a 405% increase. Some smaller firms were losing market share.
There are different trends in the more mature and diverse corporate market. The results of the eLearning Guild survey are shown in Figure 3.
Blackboard gained substantial market share in 2007-2008, but lost most of it in the following year; Moodle did not gain any market share. The replacement of in-house with commercial and open-source learning systems continues.
The data suggest the increasing value of Blackboard is not coming from the Blackboard products, but from Blackboard acquisitions and product lines not included in these statistics.
A Roll-up Strategy
For the past two years, Blackboard has purchased a number of companies from established companies like Angel Learning—a Blackboard Learn competitor—to start-ups such as txttools Limited, “a provider of mass notification solutions in the United Kingdom and Ireland.” Blackboard acquired Edline, a company focused on K-12 in October 2011. This may increase Blackboard’s activities in the highly competitive US K-12 market.
An emerging corporate strategy is to acquire start-ups. Providence Equity acquisitions follow this strategy. Such acquisitions were also Blackboard’s strategy before it was acquired by Providence Equity.
As an example in 2007 Providence Equity bought a 10 percent share in Los Angeles-based Hulu. It sold for about $200 million in April. Bloomberg reported a comment that may be relevant: “The real value of Hulu will be discovered on a longer time frame than what’s likely optimal for Providence.”
MoodleRooms Inc. was a large—likely the second largest—Moodle hosting firm. It could serve as the basis for rapid expansion in K-12 where Blackboard does not have a commanding market share. However MoodleRooms had and will continue to have a very strong competitor—Remote-Learner US Inc. Data provided for the two are shown in Table 1.
Based only on these data, Remote-Learner should be profitable at lower prices than MoodleRooms.
The two pricing models are shown in Table 1. Before 2010 MoodleRooms had a published price per student per year for three levels of service priced as shown in column 1. Remote-Learner’s pricing is by school, college or university. Again pricing was based on the type of services the client purchased. Currently MoodleRooms pricing reflects the services a client needs or wants at a finer level of detail; therefore pricing is not published and done only for a specific case. Note the pricing for Remote-Learner in column 3. The Remote-Learner prices are published and current.
Education Week reported Blackboard priced hosting and training for “annual flat fee starting at $10,000, including online hosting and training of personnel. That rate is substantially lower than what larger institutions pay.”
It is likely Remote-Learner pricing will constrain price increases by MoodleRooms and appears to have a similar impact on pricing of Blackboard hosting itself.
Hosting is going to be very competitive. Though MoodleRooms is the second largest Moodle hosting company, because of size it is not likely to contribute a significant part of Blackboard revenue. The acquisition can reduce MoodleRooms marketing and general admission costs.
Although Moodle hosting by MoodleRooms can be profitable, and more profitable as a division of a firm with established marketing and administrative capabilities, it may not be as profitable as Providence Equity will expect.
Open Source and Consulting
MoodleRooms does have employees who are knowledgeable of information technology and pedagogy. Because Remote-Learner US entered the Moodle market earlier, led development of the Moodle Partners program, and subsequently recruited Jason Cole as CEO, the firm has a reputation of expertise.
As an example, CEO Jason Cole authored Using Moodle: Teaching with the Popular Open Source Course Management System available August 2005. Amazon now lists 99 books in five languages with the word Moodle in the title.Remote-Learner authors have four of the best-selling Moodle books. Though used by many Moodle users, these popular publications have contributed to Remote-Learner’s reputation for leading edge use of the Moodle learning system..
Consulting support, as Blackboard’s experience also shows, it is difficult to market in education, and difficult to achieve profitability at a level a private equity fund may expect.
Financing Moodlerooms and Remote-Learner
Table 3 lists MoodleRooms reports to the Securities and Exchange Commission (SEC Form D) for selling securities, primarily to accredited (knowledgeable) investors. $14.4 million was offered; $11 million was sold before the SEC filing. How much of the remaining amount—labeled available—was later sold cannot be determined from the SEC filings.
MoodleRooms offered equity—shares—and “units” that consisted of unsecured loans that could be converted to stock at a set price. On June 24, 2011, Tech Journal reported “Investors [for the June offering] include Longworth Venture Partners, Kaplan Ventures, Frank A. Bonsal III, and New Markets Growth Fund.”
There are no similar SEC filings for Remote-Learner. Several months ago Remote-Learner Chairman and Founder Bryan Williams confirmed Remote-Learner has been internally financed and paid for the acquisition of the Canadian and UK Moodle partners with cash. In both acquisitions the founders were retained as Chief Executive Officers. Mike Churchward and Seon Keogh were experienced professionals who contributed to the Moodle 1 and subsequently built a business providing Moodle hosting and consulting services.
The blogs have asked whether Martin Dougiamas had a financial interest in MoodleRooms. He was not listed in any of the SEC filings as an investor, director, or officer, but could have been a founder or purchased an equity position after the offering (labeled available). The June 7, 2011 Form D does list Case Western University CIO Lev Gonik as a MoodleRooms director.
NetSpot provides “hosting, support, and consulting services and products to clients using open source systems including the Moodle learning management system (LMS) and the Mahara e-portfolio product. NetSpot is also an authorized reseller and service provider for Blackboard Collaborate™ . MoodleRooms primarily serves clients in North America, while NetSpot serves a client base in Australia, New Zealand and the Asia Pacific region.” The NetSpot website lists 17 clients; 13 are Australian universities.
It does not appear the acquisition of MoodleRooms and NetSpot alone will provide the increase in value that a private equity firm could expect because of established competition.
Adding Open Source: Blackboard Education Open Source Services
On the same day Blackboard announced a new effort to support clients using open-source education technologies.
Companies supporting both proprietary and open source software exist. For example IBM and Oracle offer support for products that include open source. Typically open source is commodity software used by several companies. The proprietary products differentiate their products, not included open-source software. The open source software achieves value because it is standard software used by several contributors and others, often through the Apache Foundation. However Moodle and Blackboard Learn, and MoodleRooms and Remote-Learner US are direct competitors. This becomes a difficult sell since customers are often choosing between the two.
Sakai’s website cites 350 clients. Although it has fewer installations than Blackboard or Moodle, Sakai clients include prestigious research-oriented universities. They have been developing learning technology for decades and are principal sources of authoritative research on how students learn. Sakai commercial affiliates may have been a better acquisition than Moodle Partners since it could be viewed as “leading edge” and different from Blackboard itself. Sakai’s Open Academic Environment may be a better product for graduate teaching and learning than other learning systems.
Instead Blackboard Inc. “announced the appointment of Charles Severance, a longtime leader and one of the founders of the Sakai community, to a senior role to lead the company’s initiative on the Sakai open source learning management system (LMS). Chuck, as he is better known, was chief architect of the beginning development of Sakai and subsequently Executive Director of the Sakai Foundation. Chuck documented his experience in his book “Sakai: Free as in Freedom” (Alpha). Ian Dolphin is the current Executive Director of the Sakai Foundation. He is well known internationally for his work with UK’s Joint Information Systems Committee (JISC) .
Neither of Blackboard’s acquisitions brought expertise in the Sakai Collaborative Learning Environment (CLE) or the Open Academic Environment (OAE). In addition to rSmart, Sakai is supported by Longsight and Unicon Inc. (Unicon also supports Jasig open-source software products).
In an interview of Blackboard's Ray Henderson and Lou Pugliese, THE Journal Reporter Dian Schaffhauser asked: "Could there be another acquisition in the works, such as rSmart?" Henderson responded: "I wouldn't be able to comment about anything like that." This is different than saying no or such an acquisition has not been discussed.
When rSmart CEO Chris Coppola was asked to comment he said:
rSmart is not entertaining an acquisition from Blackboard. We are wholly focused on delivering the products we develop with the Sakai and Kuali communities, and on developing a platform for education that goes well beyond the LMS. The market needs flexible platforms that effectively integrate and deliver capabilities from a host of educational technology providers. To do this, the lines between legacy LMS and ERP silos need to blur for institutions so they can better leverage data and capabilities that span the entire enterprise. The community development model gives us a unique opportunity to deliver just that - a platform that spans the educational enterprise with support for learning and research, financial management, and student services. This is a broader and more effective approach that we believe drives down costs and helps students and educators improve education.
As rSmart is a major contributor to Jasig, Sakai, and Kuali projects, this answer is not surprising. Here he cites an emerging interest in the integration of student information systems and learning management systems that may be important as adaptive learning becomes more frequently supported. rSmart is best positioned to do so for higher education.
Blackboard’s future relationship with Sakai will have to emerge.
Open Source and the Future of the Learning Management System
Blackboard’s press release described the Open Source Group narrowly; “With the announcement, the company will continue to focus on its flagship Blackboard Learn ™ platform [emphasis added] as well as Angel Learning and Edline, while also helping institutions successfully manage open source learning management systems (LMS) including Moodle and Sakai.” During the Schaffhauser interview, Ray Henderson said,
Thinking about the possibility of supporting an open source platform or multiple platforms has actually been something in the strategy context that we've thought about for years. … As we've seen this dramatic growth in open source around the world, we knew that it represented a very significant opportunity for us to introduce our own open source services business. So it's been on the radar for years.
He later comments: “Rather than president of Learn, I'm now president of Academic platforms.”
Henderson sees each of the learning systems as a “platform.” Coppola sees a single integrated platform on which academic and administrative applications are built and operate. This is a significant architectural difference that has different economics. It parallels the finance industry that has, over forty years, adopted a similar information systems architecture.
Blackboard’s focus on IMS standards may limit its market.
Blackboard has not participated in the U.S. Department of Defense’s newest version of SCORM or the US and UK SIF Association (Schools Interoperability Framework Association) technical efforts led by CTO Ron Kleinman. These standards are quite different.
SCORM was a standard developed by the Department of Defense’s Advanced Distributed Learning initiative. There are two parts. The most frequently and historically used was for “packaging learning materials.” That is, the materials for on line courses—text, assessments, audio, video, and navigation—were provided for use on a learning management system. IMS has a later standard—Common Cartridge—that permits a student to also “click through” to a publisher’s learning site with authentication. The second part of SCORM was relatively unknown—a real-time data link so the learning management system would receive a real-time stream of data from the learning presentation system (think of a flight simulator) both to provide a detailed record of the student’s learning activities and to feed back changes in the navigation through the learning materials—now called adaptive learning. ADL and their community—the Aviation Industry CBT Committee and LETSI (the International Federation for Learning, Education, Training Systems Interoperability)—have extended the packaging concept and introduced standard real-time exchange of data that was coordinated with the SIF Association.
This underlying concept has three major components—learning presentation systems which includes those of publishers, training departments of geographical distributed firms, and government department and agencies, learning authoring systems that include sophisticated audio, video, text including mathematic and chemical notations, and sophisticated navigation, and learning management systems that incorporate the remaining elements of current systems and may include learning analytics.
ADL has the authority to proscribe the acquisition regulations for training materials for the Department and, by history, adopted by other U.S. departments and agencies and state governments.
Because of these differences it will be difficult for Blackboard to expand this market without coordinating its “platform” development with ADL/AICC/LETSI/SIF standards-making.
Because the Blackboard product is mature, the increase in Blackboard revenue and earnings has principally come from new products from acquisitions which have the increasing market share of a new product.
The acquisition of MoodleRooms and NetSpot by Blackboard Inc. will not change the dynamics of learning technology in higher education and has limited profitability.
The emerging model for open-source software was established by Jasig and Sakai creating development communities. The Kuali Foundation introduced an open source funding model that, with a single platform and multiple software applications, improves information technology based services while reducing costs and facilitating modular implementations. These two are also options for providing enterprise integration.
The talented management and technology teams of Blackboard can be very successful adapting to the evolving uses of education technology. The question is whether they will be given the time to do so. Also whether they will have to adopt policies and practices focused on short-term profit as contrasted to the long-term interests of it current and future clients.