Blackboard Confronts Erosion of Market Share, Makes a Major Change in Strategy

In a series of announcements that has the educational technology world buzzing, Blackboard reversed their strategy of their core LMS business.

• Blackboard acquired two Moodle hosting and service providers – MoodleRooms in the US and NetSpot in Australia.
• Blackboard created an Open Source Services Group, which includes helping “institutions successfully manage open source learning management systems (LMS) including Moodle and Sakai”.
• Blackboard hired Charles Severance (Dr. Chuck) to lead this new group, and he laid out much of the rationale in his blog (by the way, this was probably the smartest of the four moves).
• Blackboard canceled their end-of-life for the ANGEL LMS product, keeping it available indefinitely.

Most of the discussion in articles and blogs follows the meme of Blackboard entering open source, or even the meme of Blackboard acquiring competitors. I think the news is more significant than either of these two memes.

Blackboard just did a 180-degree turn on their strategy for their core LMS business. They have moved from consolidating all customers into Learn 9.1 to providing products and services that are almost LMS-agnostic. As Dr. Chuck described:

The notion that we will somehow find the “one true LMS” that will solve all problems is simply crazy talk and has been for quite some time.

There is another aspect to this story not described in yesterday’s press releases and the associated articles and blogs. This is the first public strategic decision by Blackboard since they were acquired by Providence Equity Partners. I suspect that if you take all four of Blackboard’s announcements within the context of the private equity ownership, the underlying strategy and rationale make much more sense.

Blackboard Strategy and Market Share

Blackboard’s overall strategy has been to leverage their LMS market position and become a diversified educational solutions provider. Their core business is LMS, but they have been quite active, through corporate acquisition, in the addition of complementary business lines (mobile, analytics, video teleconference, payment services), as well as moving into the K-12 market. In a post from last summer, I quoted from a quarterly earnings call.

When asked on the Q4 2010 earnings call about the Learn business prospects in 3 – 5 years, John Kinzer said that “I’ll look at the whole learn stack, and it’s somewhere around 55% to 60%. Over time, clearly the other products like Mobile and Collaborate and Analytics are growing much faster. So we will, we’d assume over a three year to five year horizon that percentage is going to be much lower than that, probably down into the 20% to 30% range, eventually.” Michael Chasen quickly jumped in to clarify or recast the answer as “while as a percent of our overall revenue, Blackboard Learn may end up decreasing, we actually continue to see it growing nicely over the next couple of years with Blackboard Learn and all of the add-ons to it.”

While the core LMS business should become a smaller percentage of revenue, it does remain the core of their business. If the core erodes too quickly, then the overall corporate strategy is jeopardized. Steve Kolowich summarized the situation in this morning’s Inside Higher Ed article (and it is worth reading the whole article).

This bear hug of the open-source movement marks a dramatic departure in strategy for Blackboard, which previously has brushed off the threat of open-source LMS alternatives, even as they have chipped away at the company’s market share in recent years. While Blackboard has watched its share of campuswide LMS adoptions among U.S. nonprofit colleges fall from 71 percent to 50.6 percent in the last five years, Moodle has seen its own share grow from 4.2 percent to 19.2 percent over the same period, according to the Campus Computing Project.

Factoring in Sakai, which has grown at a slower clip (though its clients tend to be larger), open-source platforms now serve more than a quarter of nonprofit colleges. [snip]

Phil Hill, executive vice president of the Delta Initiative, focused on another Blackboard announcement that was largely dwarfed by the company’s open-source news. Blackboard said it will continue supporting the Angel Learning platform, which it acquired in 2009, indefinitely rather than trying to move its legacy clients on to a newer version of Blackboard Learn in 2014, as previously planned.

I wrote about this market share decrease last summer (you can read the full post here), but the key point is that I believe that Blackboard has been losing at least 150 LMS clients per year, and a high percentage of the losses are driven by the end-of-life for their legacy WebCT and ANGEL customers.

Change in Ownership

The missing piece to this puzzle is the nature of their new ownership. As Steve Denning has described in his classic Forbes post:

In today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called “the dumbest idea in the world”, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

Why is this relevant? Because Blackboard is no longer publicly traded (now owned by private equity), and they no longer need to or should play in the expectations market. Now is the time to focus on the real market, real products and services. They are losing market share in their core LMS business, their strategy of consolidating all customers on Learn 9.1 has not been working, and they need a new approach.

Mistake or Bold Move?

George Siemens wrote an entertaining and informative post yesterday. He summarized:

My final assessment: It’s a mistake. It leaves the impression that Bb doesn’t have the confidence to compete on their own product.

There may be small benefits that Bb can gain from the acquisition, but any benefit will be offset by the message it sends about their main LMS offering. The only way that this acquisition makes sense economically is if Bb is moving OUT of the LMS space…or at least repositioning themselves so that the LMS is no longer their main offering. What we have here is a message that a tired product can be augmented by offering hosting for open source products.

D2L wins. Bb looks unfocused (and a bit scared).

I agree with George’s analysis of the challenges Blackboard faces, particularly with the messaging, but I respectfully disagree that this move was a mistake. Continuing a strategy that was not working would have been a mistake. Blackboard’s move yesterday was probably the best choice they had.

The real question is whether institutions will trust Blackboard and accept this change in strategy. If they do and Blackboard stops its market share losses, this move will work out for them in the long run. If not, then we will see increased market churn for another couple of years.