Blackboard Acts on Patent Award, Angers Customers

| About: Blackboard Inc. (BBBB)

Many companies have to answer the question, "Is it more important to make as much money as possible, or to make our customers happy?" In attempting to answer this question, Blackboard (NASDAQ:BBBB) has taken a small step toward increasing their earnings while alienating some customers.

You may have already heard this news, but to summarize: Blackboard in January was awarded a patent, no. 6,988,138 by the US Patent and Trademark Office. The patent covers essentially the entirety of their course management system and related software and services, and their decision to begin enforcing that patent against some of their competitors has made a lot of academics very angry, and truly shocked the industry. The AP ran a pretty good story explaining the situation yesterday, and the BBC covered the legal issues quite well a couple weeks ago.

Now, the controversy generally wouldn't matter that much -- academics are an easily angered lot (I should know, being among them), and they often take principled stands. That's fine, and often admirable, but it doesn't often have a huge impact on companies or businesses.

But this time it might matter -- because Blackboard's clients are all academics. And if the fight over this becomes more acrimonious and continues to attract attention, the folks who sway University decision making might have a bad taste in their mouth when it comes to Blackboard ... though this may not end up impacting the company all that negatively in the end (just consider Microsoft -- how many of us hate the company, hate the monopoly, and find the products frustrating ... but have to use them just the same?)

I think it made sense to try to patent this work, especially back in 1999 when BBBB and WebCT, which they later acquired, first filed these patents -- the industry was much newer then, and any edge that could be obtained certainly made sense as all the players feared they would be blown out of the water if one of the major software companies moved into this space.

But it may be hard to prove in court that Blackboard really was the first to invent the very basic networked learning support infrastructure that they've received a patent for. Most of the critics of this patent believe it shoudn't have been granted, as one Motley Fool author argues, and it's entirely possible that they'll lose the patent when their first disputes with their "patent-infringing" competitors hit the courts.

Now, I don't think this is going to be that big a deal, and I expect that the firestorm of controversy within the academic community will simmer down in the coming months as long as Blackboard sticks to a narrow use of their patent to extract royalties from for-profit competitors, or, alternatively, loses their patent.

I actually find the arguments of Blackboard's opponents more compelling in this case -- you can read their work at and in the Wikipedia article they have quickly constructed explaining -- in great detail and with a pretty exhaustive historical scope -- the "prior art" in this case (all the developments that led to today's course management systems, and that existed prior to BBBB's invention of their own system).

But I didn't buy shares of Blackboard because I though they had patentable ideas, or because they had been granted this patent (as it was granted before I ever bought shares). It never occurred to me that someone might patent the concept of an online course management system.

No, I bought shares in Blackboard because, although still a small cap company, they have a dominant market position, a very well-integrated product, and a set of competitors that, though myriad, are quite weak in comparison. I see BBBB as having a near monopoly on this market, or at least a monopoly on the segment of the market that will always prefer to have a professional, supported suite of products as opposed to a homegrown or self-supported open source solution.

And my sense is that this will not be a threat to that position, at least not in the long term. Blackboard is arguably creating something of a network effect here, with a sea of faculty and administrators around the country who are trained on this product and accustomed to using it. I think it will take more than some moral outrage to make all of these faculty members, especially, accept the idea that they should have to learn an entirely new system and re-do the work they put into creating their current class environments. As this develops, it's more than possible the new faculty members will demand the Blackboard system they're accustomed to from their prior positions, or that the students who grew up with Blackboard as grad students and teaching assistants will expect to have this software available in their professional positions.

I've written before about Blackboard, as I bought shares at around $24 in June and $28 in April, and I've pretty consistently argued for the opportunity present in these shares as online education grows, faculties age and turn over, and the company takes advantage of their WebCT merger to gain economy of scale and pricing power with their huge market share. Interestingly enough, there was a minor bit of outcry about their merger with WebCT as well, over the past year, as more than one commentator questioned the antitrust issues and many schools feared the impact a monopoly player would have on the market ... but that particular controversy seemed to settle down significantly, as BBBB has continued signing up new clients and building relationships with existing ones.

Universities are extremely reliant on course management software and, increasingly, on online classes ... but that doesn't mean they change fast or happily, as anyone who has worked inside an educational institution can attest. The fact that Blackboard already has the lead position in this market is a huge advantage in itself.

But make no mistake, the controversy is real, and it is certainly possible that some of Blackboard's customers will be angry enough about this move that they could stop buying BBBB's products. There is plenty of talk of a boycott in the academic blogosphere, but as far as I can tell it's just talk so far, and the other options remain riskier, less powerful, or require more of a staff investment... all things that academic administrators generally shy away from.

I'm still holding my shares and I believe the prospects are good several years out, but I also think there's some chance for a significant short term backlash from angry customers, or a stock dip if and when they lose this patent suit... if nothing changes in my big picture assessment, I'll watch out for that as a possible buying opportunity.

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