Blackboard's Wimba and Elluminate Acquisitions

I have often said that, if you want to understand the likely future behavior of a publicly traded company, the best way to approach it is to think of it as a complex money-making machine. If you can understand how the machine works, then you can make reasonable guesses as to how it will behave under different circumstances and the degree to which that behavior is likely to help or hurt your interests.

There has been a lot of hand-wringing about Blackboard’s announced acquisitions of Wimba and Elluminate. Let’s look at the facts.

The value proposition of Blackboard as a stock is that it has produced reliable revenue growth. It is not now, nor will it ever be, the most profitable company on the stock market. But there are several reasons why Blackboard has historically been viewed by the stock market as a safe bet:

• Blackboard’s products are all sold on a subscription-based model. In contrast to a more traditional license-plus-maintenance software model, where companies get a large lump of cash up front and then smaller amounts in the following years, Blackboard gets an annual subscription fee. It may go up from year to year, but it doesn’t go down. This gives them a lot of predictability in year-to-year revenues.
• Historically, customers have been reluctant to move off of Blackboard to competing products. Part of this has been due to the fact that migration is hard and painful, and part of it was due to a perception in the market that there were no viable (and safe) alternatives.
• Blackboard has been very successful in getting more money out of existing customers from year to year. Some of this comes from customers growing their distance learning programs and therefore needing to license more seats of the product, some of it comes from Blackboard building or buying more add-ons that existing customers license, and part of it comes from Blackboard’s ability to raise prices on its core product year after year.

As long as the majority of their growth prospects were dependent upon sales of their LMS product, the dominant strategy for Blackboard (and I’m using “dominant” in the game theoretical sense of the term) was to protect their LMS revenues. But there are strong indicators that this situation is changing. For one thing, we are seeing larger numbers of defections from Blackboard to other LMS platforms than we had previously. Here are a few recent examples:

• PASSHE, a 14-university system with about 117,000 students, has announced that they are moving to Desire2Learn this year. Other recent Blackboard-to-D2L defections include DePaul University, Portland State, and the Virtual High School Global Consortium.
• University of California San Francisco just completed their move to Moodle. Marylhurst University (an ANGEL customer), the South Carolina Department of Education, San Jose City College, and Wheaton College are other recent Moodle wins.
• Miami University of Ohio has announced that they will be moving to Sakai over the next year. Other recent or pending Bb-to-Sakai converts include Virginia Tech and Wake Forest.

These defections are in line with survey data from the Campus Computing Project indicating that roughly a quarter of schools plan to change their LMS and roughly half are re-evaluating they LMS choices over the next couple of years. In contrast, I’m only aware of one migration to Blackboard from another commercial or open source LMS in the last several years (University of the Free State in South Africa). It looks like the vast majority of the churn in the LMS market is at Blackboard’s expense. At the same time, Blackboard has been moving aggressively to diversify its revenue stream by acquiring non-LMS product lines like emergency notification systems, a campus mobile portal, and now webconferencing software.

Under these circumstances, it is mostly in Blackboard’s financial interest to maintain good partnerships with LMS rivals that integrate with Elluminate and/or Wimba. I say “mostly” because Blackboard is still in a transition period where a lot of its revenue rides on their LMS platform, and they need to do what they can to slow erosion there if they are going to pull off their metamorphosis into a diversified company without having their revenue growth slow enough to scare investors. But the long-term financial interest for Blackboard is tipping away from protecting their core LMS product as their overarching imperative and toward having some sort of relationship with as many schools as possible. To make that work, they will have to build products that play well with whatever other stuff customers happen to have. I do not expect Wimba and Elluminate to be the last products Blackboard buys or builds that will integrate with rival LMS products. Blackboard’s long-term interest dictates cultivating partnerships with their rivals in the LMS space.

Now, interest and ability are not always the same thing. Partnering requires a rather particular set of business skills as well as a corporate culture that tilts in the direction of prioritizing the long-term value of alliances over short-term gains from competition. Time will tell regarding how well Blackboard can execute. But I don’t see strong financial motivation for the company to sabotage the existing partnerships or integrations that Wimba and Elluminate have.

As for what will happen to the acquired products themselves, both Blackboard’s past behaviors and management’s recent statements are pretty clear. It’s in the company’s interest to merge Wimba and Elluminate so that they are not paying the expense of supporting overlapping functionality. This is why WebCT is being ended in 2013 and ANGEL is being ended after 2014. Just this morning on an analyst call, Michael Chasen made it clear that both companies had been planning to come out with next-generation products within 12 months and that he saw no reason why they couldn’t be one and the same. Expect to see just one Blackboard-supported webconferencing platform two years from now.