This is part 3 of a series of posts documenting a vist to Apple headquarters in February, 2005. For the full series, see part 1, part 2, part 3, part 4, part 5. and part 6.
If you want to understand how a company is going to treat you as a customer, you have to understand what’s in it for them. In the case of Apple and higher education, the answer is simple but not obvious.
Mark Carden makes an interesting observation that supports Jim Farmer’s calculations regarding Blackboard’s cost of sales:
I know something about the cost of sales issue, having sold library automation software for most of the past ten years (at Innovative and Dynix). I have long said that it costs the major ILS/LMS vendors an average of about US$50,000 per bid, which means that for a typical mid-sized university deal, five competing bidders will spend US$250,000 between them: and only one will win, so again that is US$250,000 per deal.
Of course an individual vendor’s costs per deal are very dependent on the win-rate, something Jim has not really looked into.
As a deal like this might only have revenues of US$250,000 anyway, it means the library community has paid US$250,000 to the library software vendors and none of this has gone into development � it was all spent on sales and marketing.
It is in everyone’s interest to lower that $50K per-bid cost of entry. Following up on my earlier post, Ken Udas and I have been participating on a thread on the OpenBRR forum. If you have an interest in the topic, please feel free to join in.
Jim Farmer’s financial analysis of Blackboard certainly has gotten a lot of attention–and for good reason. To start with, that ~$250K cost per sale is a truly eye-popping number. But upon further reflection, I’ve come to the conclusion that it’s not the most important part of the story that Jim tells. Here is the most important part:
Software suppliers do not spend on sales and marketing not considered ?necessary.? The costs are driven by customer demands and customer expectations. Enterprise procurements can be very expensive for software suppliers. Requiring extensive proposal responses, large-scale demonstrations using extensive prescribed scripts, and presentations with experts drawn throughout the company are required by customers as a condition of doing business; this is costly.
Blackboard spends a ton of money to acquire each new customer because they have to. It’s the only way they can successfully run the gauntlet of the higher education sales process often enough to make money. The procurement process itself is broken. It requires proprietary vendors to spend between a quarter and a third of their revenue on sales–money that could be better spent on product development or discounts to customers. It blocks Open Source support vendors that don’t have armies of salespeople from participating in many RFP’s. And, according to Jim’s analysis, it results in a net price increase of as much as 26% for the customers. Everybody loses.
The good news is that this problem is fixable.
Update: Welcome, Chronicle readers. Since it wasn’t made clear in the Chronicle’s reference, I’d like to point out that the paper I’m quoting was written by Jim Farmer, who is the Coordinator of Georgetown University’s new Interoperability Center, formerly the Sakai SEPP Community Liaison and project administrator for the uPortal project. Jim has pretty impressive credentials across the board, including having served as the CIO for the Cal State University system. You can find his full bio here.
Sorry I’ve been incommunicado for a while. There’s been lots of stuff going on, both professionally and personally (including a new grandbaby).
Anyway, I’m going to make it up to you with a special treat. Jim Farmer has a fantastic analysis of how much it costs Blackboard to make a sale, what that means to their overall business model, and how that compares to the cost-per-sale of a commercially marketed open source software product and the cost for community-building the Open Source uPortal project. Some of it may be slow going if you’re not familiar with financial analysis, so I’m going to unpack a few of the good parts and speculate a bit on the implications.
According to this article in the Chronicle, it looks like an increasing number of institutions are putting the screws to their faculty to do more online learning work for less money. The story starts with an anecdote about a county college in California pressuring faculty to use sabbatical time for online course development. It continues with the following:
In the 1999 survey, the average minimum overload pay was $1,885. In 2002 it was $1,620, a decrease of 14 percent. The average maximum overload pay also dropped, from $4,097 in 1999 to $2,740 in 2002, a 33-percent decline.
While differences in salary and hours spent working may be partly responsible for the decrease in overload pay, the amount of the drop-off is significant, Ms. Schifter says. “I’m not sure that it paints a rosy picture.”
The proportion of faculty members surveyed who “often” received time off to develop online courses also dropped, from 13 percent in 1999 to 10 percent in 2002. However, the percentage of those who often received extra compensation for online teaching increased from 26 percent in 1999 to 28 percent in 2002.
In order to know what’s “fair” you really have to know how much each institution is netting on these courses. Typically, online learning programs lose money in the first year or two and then become money makers in the out years. In an earlier post I noted that UMass appears to be making a 90% profit margin on their courses, (though the description is vague, and we don’t know if this is gross, net, or even really profit). If you use Marshall University’s online calculator, the profits look more realistic (and more fair). Plugging in the example numbers that Marshall helpfully supplies from their own experience, they lose money in the first two years, have a 10% net margin in year 3, and a 40% net margin by year 7. That strikes me as roughly fair for all parties. Of course, Marshall pays faculty extra for both online course development and online delivery.
Via eCornell, here’s a story in TMCnet about massive growth in UMass’ online learning program. What I’m interested in, though, is whether this growth leads to profit. It’s great to bring money into the institution, but it would be even better if some of that money stayed in the institution after paying for the program’s costs. While the article isn’t clear, it seems to say that profitability is even more impressive in these programs than revenues. Here’s what they say:
More than 90 percent of the revenues are retained by the UMass campuses to support education and research programs.
If I read this correctly, then UMass is seeing a 90% profit margin on $14 million in revenues. That’s pretty outrageous.
If anybody has any info on e-learning profitability for higher ed programs, please share it in the comments section for this post.
This article [PDF], though two years old now, has some still eye-opening figures on distance learning adoption in higher ed.
Among the more interesting findings:
Impressive.
