Blackboard and MoodleRooms: An insight to private equity

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%.

Blackboard Performance

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.

Figure 1: Blackboard's Performance and Median Rates of Return

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.

Figure 2: Market Share of LMSs in Higher Education

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.

Figure 3: eLearning Guild Reported Market Share

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.

Table 1: Firm Employees and Clients

Based only on these data, Remote-Learner should be profitable at lower prices than MoodleRooms.

Table 2: Historical Pricing Patterns

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.

The Future

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.

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9 Responses to Blackboard and MoodleRooms: An insight to private equity

  1. Allison Wood says:

    Great post, Jim. I have a question about this observation from you:

    “Consulting support, as Blackboard’s experience also shows, it is difficult to market in education…”

    Is it difficult to do, or has Blackboard just not done it well? As the CEO of a new LMS (specialized for healthcare education), I can say that our management team believes that having a strong professional services group will be key to our profitability. There are many large (Blackboard-size) companies who have placed an equally strong emphasis on professional services as on their product with impressive financial results. I’m curious if this simply hasn’t been a priority for Blackboard – they do seem to have always been product-focused from the early days – or why it’s been difficult to market in education?

    Thanks again for always giving us so much to chew on with your posts!

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  3. Appreciate your article. One point I’d like to make: I’ve been a customer of Remote-Learner’s for the past three years. If you note their number of employees per clients, it’s not hard to imagine that they’re not to be taken seriously as a competitor to MoodleRooms (in terms of customer service). Three times in the last three years, I’ve had to email their senior management regarding severe customer service issues. Their ticketing system is completely upside down, and they have to real CRM in place. At the University of Tennessee, Knoxville, this lack of attention from their account reps (we’re now moving on to our third one), has driven me and my management to open a vendor search.

  4. Geoff Handley says:

    Interesting article. Just FYI: the proper spelling and casing is Moodlerooms and NOT MoodleRooms.

    Thanks.

  5. I thought I should note that Blackboard is a member of the SIF Association. Blackboard has also worked extensively with Rustici software, the leading implementers of the SCORM to expand and improve support for this standard within its products. Blackboard has also worked to build bridges between the various standards organizations such as IMS and SIF.

  6. Jim,

    Given your background as a researcher, I continue to be bewildered by the fact that you never call me or anyone else at Blackboard to gain insight into and confirm our financial metrics before you write articles that include glaring inaccuracies. As a matter of course, journalists and bloggers call the people or companies they are writing about to ensure that they understand as much as possible about the topics of their articles and blog posts.

    I want to reiterate the invitation I have extended several times to you, Michael Feldstein and other e-Literate contributors: PLEASE contact us if you would like to develop a better understanding of our strategy, metrics or financials. Of course I wouldn’t expect you to use the Blackboard perspective as your only source of input. However, you should include us in the dialogue, rather than relying on piecemeal quotes and hearsay reporting. By following an explicit strategy of not engaging me or the Blackboard team, you risk undermining your own credibility.

    In addition, I understand that financial metrics are not everyone’s area of expertise. I wanted to identify several mistakes in your blog post so that your readers have a more accurate understanding of these concepts.

    1. Profit margins are NOT Internal Rates of Return

    In your first chart, it appears you are comparing Blackboard PROFITABILITY MARGINS to private equity INTERNAL RATES OF RETURN (IRR). While these are certainly related, they are not the same. Among other comparability issues, annual profitability margins ignore growth, capital structure, cashflow / capital requirements and exit valuation; IRR incorporates all of these. Thus your direct contrast of the two without acknowledging the differences is misleading to our public.

    Some examples to illustrate my point: If you buy a business with a 0% margin for $1 million and then “exit” (sale or IPO) for $2 million after one year, the IRR of this investment is 100%, NOT 0%. Similarly, if you buy a 0% margin business for $1 million with 50% debt financing (equity = $500k), you would only need to exit at $1.5 million in order to achieve a 100% return.

    When used responsibly, leverage (i.e., financing the purchase of a business through a combination of debt and equity) can be an effective tool for private equity investors. The “exit” equity valuation is partially driven by operating margins. However top line growth and debt repayment are also critical components of calculating internal rates of return.

    While Blackboard certainly has better margins than 0%, the examples I used above illustrate the fact that high returns can be achieved even with zero (or even negative) profitability.

    2. GAAP Net Income doesn’t reflect “true” operating performance – It includes non-cash items

    You mentioned that Blackboard has 4% earnings from 2007 to 2011. The source of that statement is not completely clear – but I am assuming you took an average GAAP net income margin over this period. I would direct you and your readers to our publicly-available non-GAAP earnings presentations; here you will find the elimination of non-cash, one-time or extraordinary items from our income statement. These adjustments include significant write-downs related to our acquisitions (strictly accounting adjustments related mostly to deferred revenue and purchased intangibles), as well as other non-cash amortization charges. As an informed investor will tell you, these adjustments are standard add-backs to a GAAP presentation of earnings because they are non-cash and do not reflect the “true” financial performance of a business. If you were to read the Blackboard financials fully you would see that we have a true operating margin of just over 30%.

    3. More clients don’t necessarily mean more revenue, nor suggest anything about profitability

    Your post includes a chart showing that Remote-Learner has more clients and fewer employees than Moodlerooms. From this data, you appeared to draw the conclusion that Remote-Learner is larger and more profitable than Moodlerooms. Clients come in many different sizes and pay different fees. Remote-Learner, of course, has insight into their own metrics. I have a good view into the Moodlerooms business, but unless a person could see the books of both companies at the same time, a valid comparison is not possible.

    Additionally, you assert that Blackboard’s acquisition rationale was to “reduce Moodlerooms marketing and general admission [sic.] costs”. In no way is this acquisition a “cost takeout” story. We are making large investments in the open source offering – investments that Moodlerooms would have had to wait to afford. We made this clear in our announcement when we announced the deal. If there is any piece of information you possess that suggests otherwise, I’d like to review it with you.

    4. The numbers you referenced in your post are incorrect

    For the record, please note that the staffing numbers for Moodlerooms that you cite are incorrect; the pricing schedules are out-dated; and Moodlerooms is spelled without a capital “R”. If you had called and asked us, we could have given you the correct information for your analysis.

    Conclusion

    I appreciate the time you took to comment on our recent move and think it’s a valuable to have committed followers of the market explain complex topics to a general audience—provided the explanations are correct. If it’s not, well, it’s misleading at a minimum and often simply paints an unfair picture which doesn’t serve the market well.

    And as to your speculation about the motives of private equity in general: if you would like to hear from the team at Providence about their rationale in acquiring us, I’m also happy to facilitate that discussion. I’m sure they’d be happy to help you understand a bit more about their investment horizon and perspectives about early vs. late stage equity investing and about education technology. And I am confident you would hear a similar thesis from Providence about how Blackboard is doing well as a portfolio holding.

    Finally, while I have taken the time here to point out the basic financial inaccuracies in your presentation, I also must state that I disagree with your continuing premise that Blackboard is not doing well as a company.

    Blackboard has continued to grow and expand every year both organically and through acquisition. We continue to make very large investments in both product development and support. We are expanding into complementary product lines, expanding our service offerings, and extending our platforms internationally. All of these things have helped Blackboard to grow from what was a company started by two young entrepreneurs to a global organization of almost 3,000 people serving over 20,000 schools and colleges around the world. Blackboard hasn’t just done well because we have “good management”. We have done well because we are made up of a passionate group of individuals that care about education and technology and making a difference. This drives our whole organization and is one of the many special things about our culture that has helped us to continue to succeed. So while over the years you have continued to write about the problems that Blackboard has been facing, we have continued as an organization to grow right through them.

    And I believe we are just at the beginning of our journey.

    As always, I am available to discuss any of these points for further clarification.

    Sincerely,

    Michael L. Chasen
    CEO
    Blackboard Inc.

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  9. Rodger says:

    Remote-Learner will not be around long enough to hold down the cost. It is not a competitor. The company has a great sales force and training force but has negligible and unintelligent people working in support. Their support staff will kill the company because the competition is much better at support. It took 6 weeks for the support staff at Remote-learner to comment out a line in moodle that was crashing our system. WE TOLD THEM WHICH LINE TO COMMENT OUT! 6 WEEKS! That is only one of MANY such issues we had with them.