Chalk Up More Promises from Blackboard

| About: Blackboard Inc. (BBBB)

I wrote a while back about Blackboard's patent argument with its customer base, and there has been some interesting recent news on that front.

As a little background, Blackboard (NASDAQ:BBBB) is the leading provider of course management software for higher education - the software that runs online classes, and provides essentially an electronic syllabus and virtual classroom to support traditional classes as well.

With an estimated 60-75% market share (depending on who you ask) following their takeover of WebCT, they are in the drivers seat... and, as near-monopoly operators, they get some of the same kind of negative attention as Microsoft (NASDAQ:MSFT) used to get (though from a much smaller group of critics, given their smaller market).
Blackboard faces open source competition just like Microsoft does, as well as other software companies that produce competing products. In the face of that competition, they filed a patent claim a while back for many of the core capabilities of their suite of academic software, and, in a surprise to many folks, they were granted a very broad patent about a year ago.

The patent flew under the radar for a while, but about six months later they announced they would enforce the patent by suing a small competitor called Desire2Learn, and all hell broke loose.

Immediately, the academic IT community panicked and, in a fit of righteous outrage, collaborated to condemn the patent, and the company for enforcing it.

A Questionable Patent, but a Patent Nonetheless

Now, I certainly agree (and I'm far from being a patent lawyer) that there's something a little silly about some parts of the patent that Blackboard was granted. Rrom reading the patent and the various blogs and articles about the controversy, there's definitely an argument to be made that Blackboard could certainly prevent a lot of course management systems from propagating if they provide too many services that are similar to the patented offerings of their software. After all, the basics of delivering course content over the internet are (arguably) not all that different in concept from one software version to another, and the current systems from Blackboard and others seem to me to have all evolved along similar tracks.

But that being said, I would argue that it made sense for Blackboard to try to patent the things that they do uniquely well in order to fend off the competition - that's just good business. If there was an error there, it was in the patent examiner's office.

And to their credit, Blackboard consistently claimed that they had no intention of doing what was most feared by the academic community: shutting down homegrown and open source course management systems that have similar capabilities to Blackboard's software. But the anger was fierce enough among their customers and potential customers over this, that no one believed them. There's a fair summary of the story as it occurred here.

A Comforting Pledge?

But now, they've promised.. really promised, in what they say are legally binding documents, that they will not go after open source software producers or users, or those who combine open source and homegrown software to cobble together a system for their students and teachers.

So, will that quell the concerns of the higher education community? Well, as a pledge that got at least some input from Sakai, the leading open source group in this space, and Educause, a group of higher education IT leaders, it will carry at least a little street credibility; but even those groups remain quite concerned that the agreement doesn't go nearly as far as they would like.

A good article from Inside Higher Ed on the pledge and the remaining concerns summarizes the whole thing nicely, and I think there are three important points to take from this whole fight:

  • One, it's quite possible that the patent will be thrown out upon reexamination (the patent office has agreed, under pressure, to take another look at it - and if they agree with the contentions of many that this is the equivalent of patenting a chalkboard or whiteboard, it could be significantly redacted or thrown out). If that happens, I expect this to all blow over in fairly short order, and the future will depend on how much better Blackboard's products and salespeople are than their competitors. The bad taste in people's mouths will probably not linger, or will not be strong enough to force decisions that they otherwise wouldn't make (at least in most cases, I expect).
  • Two, although there has been a backlash among IT professionals in higher education, it's very hard to quantify what that backlash means. Certainly, they're angry about the possibility that collaboration with open source solutions will be squelched, but they're also worried about the possibility that Blackboard will get royalties on any of its patents, thereby increasing costs for those who use competing commercial products. I've been unable to find any published examples of colleges or universities that have specifically dropped Blackboard or decided not to contract with Blackboard because of the patent dispute, though claims that "we'll definitely take a close look when it comes time to renew" are all over the blogosphere.

    In essence Blackboard, at least among members of this somewhat idealistic community, is politically incorrect - but using them is also arguably the safest route to take while the patent is in litigation. At least, that's my assessment, based on the fact that Blackboard is the only software provider out there that we know will emerge unscathed from the patent fight. (And some more cautious universities might fear being tarred with the liability brush if Blackboard were to renege on the spirit of its pledge and go after users who combine open source and commercial software from Blackboard's competitors.) So it's possible that this will lead to some showdowns between University Counsel and the heads of IT Departments - and I don't like to bet against the lawyers.

  • And third, and perhaps most important, Blackboard did not become the leading provider in this space because of their patent. The patent award came long after they took the lead, and they got to this point because they produced and sold an innovative product that their customers wanted (and bought out some of their smaller competitors). There's an excellent quote in the article from the Case Western VP for IT Services' blog: "Blackboard should take one more look in the mirror and realize that it is not its patents that will protect its near monopoly share of commercial course management software (full disclosure Case Western Reserve University is an enterprise customer of Blackboard) but rather its ability to demonstrate a true commitment to innovation and responsiveness to the higher education marketplace."

    I think that's a great point, and that's what will eventually make the difference for Blackboard. While the patent is litigated, and reviewed by examiners over the next couple years, will they continue to innovate and create products that schools want and need?

    If so, things look good for them and they should be able to leverage their huge customer list by upselling many more of their offerings ... to say nothing of the fact that there is a bias for a high renewal rate because the switching costs are very significant in this business. Even beyond the actual cost of moving all your data from one system to another, the training costs can be quite significant, and measured in more than just dollars. Blackboard is becoming the industry standard as more and more faculty members learn the software and will resist being forced to learn something different in the future, and as more and more students go through Blackboard-equipped high schools and expect a familiar software package in college (and if you've never tried to teach a bunch of baby boomer professors something they don't think they should have to learn, I envy you).

  • So there are a lot of nice things going for Blackboard. Not only do they have a near monopoly position in a very fast growing market (not only higher education, but K-12 as well, and worldwide), but they are continuing to innovate and use the huge market share of their "academic suite" and course management software to win business in the back end of college and university management - including financial and registration systems, ID card and meal plan and account system management, and the like.

    They also recently released their "outcomes system," and while it's too early to tell if it's any good or will be adopted widely, it's certainly on target: outcomes based learning is absolutely the hottest thing in higher education right now, and assessment and accountability are growing in importance, which means any software that can help colleges move forward with improving assessment of student learning outcomes has at least a wide market to address.

    The Investment Viewpoint
    In the end, my investment thesis hasn't really changed. I wrote about six months ago that I wanted to see how the patent dispute settled down before I bought any more shares, and I've still not decided to pull the trigger and fill out my position, but I'm closer to that point.

    I keep coming back to Microsoft; even when your customers don't like you and smaller competitors have more innovative offerings, sometimes that doesn't matter if the product you offer is the industry standard and you manage to outsell, outbully or outlawyer the competition to keep your market share at stratospheric levels. It's a hard world, and while I think Blackboard has made some mistakes in its interactions with opinion leaders among its customers, the fact remains that they have more customers than anyone else, and it's hard for those customers to switch, even if they're mad for the moment.

    Of course, this is far from a fait accompli - in the age of Linux and Mozilla, and with fast-changing technology, it may be that the leverage offered by seemingly impenetrable market share is a thing of the past. Just ask Microsoft about Internet Explorer. We'll see.

    Disclosure: I do own shares in Blackboard. I do not own shares of any other company mentioned, though I do teach an online class for a graduate school using a non-Blackboard homegrown course management system.

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