The Changing Dynamics of the Educational Technology Markets

Phil Hill has two good blog posts up in response to Blackboard’s announcement that it has received at least two “unsolicited non-binding proposals” for the company to be acquired. In his first post, Phil argues that, whatever the outcome of the bidding, Blackboard’s brand value will be hurt:

In one dramatic shift, Blackboard has gone from the known to the unknown.  For years, one of Blackboard’s greatest sales strength was the message that it was here to stay.  Unlike that pesky Desire2Learn, who might succumb to lawyer’s bills and the patent fight, Blackboard was a solid investment with the corporate muscle to be here for the long haul.  Unlike those pesky open source providers, who might disappear or stop developing, Blackboard presented “one throat to choke” and was reliable.  Now, can anyone reliably guess what’s going to happen to Blackboard, who will provide services, whether the roadmap will completely change?

This sales advantage is now gone.

I’m somewhat agonistic on this point. I see Phil’s argument, but the size of the impact may be significantly different depending on whether the acquirer somebody like McGraw Hill, somebody like News Corp., or if no acquisition comes through (which I think is the most likely scenario). I don’t have a strong gut feeling about how much this changes the sales conversation.

In his second post, Phil takes issue with one of my previous posts:

Michael is right and you should read the whole post and its second part, but I have a different opinion on the conclusions.  I agree with the conclusions that…

by 2014 we may see it beginning to change the whole picture for educational technology infrastructure in some fundamental ways. Buckle up, folks. It’s going to be an interesting ride.,

but I am less inclined to rely on straight-line projections of market data to look ahead, and am more inclined to think the market changes we are seeing are driven by outside forces with potentially nonlinear effects.  Rome may have been weakened from within, but when real change happened, the Visigoths made it happen….

Today, there is a flood of new money into the educational technology market.  In addition to the potential acquisition of Blackboard, Instructure just raised $8M in venture funding and vying for the role of Alaric in their marketing position, Pearson has been heavily investing in Learning Studio (eCollege for you old-timers), and Moodlerooms raised $7+M in venture funding.  Publishing companies, ERP vendors, private equity, venture funding – these are major disruptive forces.  And there is still significant moves being made by technology companies such as Google.

Whatever happens with the potential acquisition of Blackboard, expect to see a different market emerge, with new dynamics.  For higher education institutions – is your academic technology strategy ready to handle the changes in the market?

I’m not sure that we actually disagree. I also believe that there are some pretty massive changes taking place in the educational technology markets. The only question I would raise is whether those changes will hit quickly enough to substantially change the likely outcome of the evaluations that WebCT and ANGEL customers are going to have to complete in the next 24 months.

Let’s dig into the details a little and see what we can figure out.

First of all, Phil is right to point to the funding that Moodlerooms and Instructure got as indicators that change is afoot. Money matters. If you’re an LMS company and you’re trying to take advantage of a wave of platform migrations, you need to bulk up your sales and marketing teams so that you’ll be able to compete on every RFP. You need to bulk up your customer service, too, so that prospective customers will hear from their peers that you’ve been delivering a top-notch experience. Moodlerooms, Blackboard, and Desire2Learn have all expanded their office space recently, indicating an intention to hire aggressively. (So has Cengage, by the way.) These companies also need to beef up their product suites, either through organic growth or through acquisition. Note, for example, Desire2Learn’s announced acquisition of a lecture capture company. D2L hasn’t said anything about getting new funding, but given the acquisition announcement and some of the aggressive moves that they are making to expand their product line, I would not be surprised if they have received venture or angel funding.

Is this growth new? Yes. It is new. I had an opportunity to speak with Nick Hammerschlag, a venture capitalist at OpenView Venture Partners, about why they chose to invest in Instructure, and why now. On the one hand, OpenView has been looking at the LMS space for a while. It’s relatively large, there are only four major players and, in their view, it is ripe for disruption. But on the other hand, the conditions weren’t right for them before now. For starters, Hammerschlag said point blank that the patent suit was a disincentive. Beyond that, they were having trouble finding a company with the right characteristics. OpenView typically looks to invest in companies that are in an early stage, are doing about a million dollars quarterly in revenue, and are experiencing explosive growth. From their perspective, Instructure’s early growth has been remarkable. “They went from zero to sixty in nothing flat,” said Hammerschlag. Instructure CEO Josh Coates confirms that they have been experiencing very strong demand. He said they are getting about 150 new contacts a week, are currently responding to several dozen RFPs, and could respond to more if they had the bandwidth. Some of that demand is due to work that the company has done, but some of it has to do with market conditions. I don’t think they would have seen anything close to that level of demand two years ago.

So yes, there is clearly market opportunity that is attracting investment dollars. Companies are hiring and acquiring. Blackboard and Pearson, the two most acquisitive players in educational technology, have now been joined by Desire2Learn (as well as the mystery bidders for Blackboard), and I expect others to follow. This will drive up the prices of the companies being acquired which will, in turn, attract new investors. All of this means that new companies and new products will be coming to market faster and more frequently. Big changes are coming.

But how much will those changes affect LMS market share between now and 2014? We know that the main shifts in the LMS market are WebCT and ANGEL customers who are being forced to move as Blackboard retires those platforms. It typically takes a year for a school to select a new platform and another year to migrate. It can be done faster, but it usually isn’t. WebCT is being retired in January 2013. That means schools looking to make a decision (i.e., they are not just going to migrate to Blackboard by default) typically have already started their evaluation process. ANGEL is being retired in the summer of 2014, so those customers have about 12-15 months before they typically have to start their evaluation.

So what changes in the market could move the needle on these evaluations? If Blackboard were acquired, that might have an impact. I agree with Phil that the impact is not likely to be good for Blackboard’s business, but I’m somewhat less certain than he is that it will be bad. Acquisitions of other players could have an impact that might be either good or bad for them, depending on who did the acquiring. (Unlike Blackboard, the other competitors have less of a reputation for being indestructible and therefore may actually benefit from an acquisition by a player that is perceived to have deep pockets and an interest in investing in education.) But the acquisition would have to happen pretty quickly to make a difference. Instructure, which has come along with maximum buzz and strong execution at just the right moment, could eat a few more market share points than I had accounted for in my posts. I’m not convinced that other new entrants or that increased funding of existing players could have an impact beyond the plus-or-minus four percent that I guessed was the margin of error for my projections within the 2014 time frame. At the end of the day, I still think the non-Blackboard LMS market share growth from now until 2014 probably looks something like this:

Keep in mind that my projections are narrowly focused on the traditional LMS market over the next three years. I expect a lot more unpredictable change in the digital textbook market and quite possibly in other educational technology areas as well (e.g., academic analytics). The train is leaving the station for the current round of LMS migrations. But it’s a big station, and there are other trains.