Blackboard Scribblings

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Running a school these days requires software to keep things going, especially if the school is planning to offer any online courses. Hidden Gems recommendation Blackboard (Nasdaq: BBBB  ) is the education-software leader, a tenacious little company with an appetite for acquisitions.

Good morning, class
Blackboard was founded in 1997, and founding CEO Michael Chasen is still running the show. He's taken a single online learning application and developed it into a comprehensive suite of offerings, including e-learning software, document-management solutions, campus commerce administration tools, and community portals. Some of that happened through internal development efforts, some by acquiring other companies with great products, and a lot of work has gone into packaging the resulting range of applications into manageable solutions that work well together.

With more and more institutions of higher learning rolling out course materials for Internet delivery, the course-management and online collaboration tools have provided plenty of fuel for Blackboard's growth. But the company is hungry for more than just the learning part of campus life, and has expanded aggressively into student cards, transaction processing, and e-commerce for campus environments. Altogether, the business has grown from $46.7 million of revenues and $41.8 million of net losses in 2001 to gross sales of $153 million and a net profit of $24.2 million over the past 12 months.

This is a growing company with a healthy grasp of the young market, and it serves more than 2,200 educational institutions in 60 countries. But despite acquiring its largest competitor, WebCT, earlier this year, it's far from the only game in town. It's much larger than its only publicly traded direct competition, eCollege (Nasdaq: ECLG  ) , but if you look beyond the stock market and Blackboard's head-to-head market rivals, the picture looks a bit different.

Plenty of competition
The Moodle project, for instance, boasts nearly 14,000 registered deployments in 158 countries. It's not an entirely apples-to-apples comparison, though, because Moodle tends to attract smaller institutions without the budget for a Blackboard implementation. You see, Moodle is free and open source, much like the fabled Linux operating system. It's growing much faster than Blackboard if you count the number of installations, but not if you count revenue (zero) or number of students served.

There are other free alternatives, such as the Sakai Project or WebTycho; smaller and still-private companies like ANGEL Learning and Desire2Learn; and even international competition from HarvestRoad, which trades on the Australian stock market. There's a lot of competition out there, in other words, and Blackboard's respectable stature in the North American higher-education market isn't always applicable to other parts of the globe. Many schools prefer to develop their own solutions, and those projects sometimes grow to provide other institutions with free or cheap e-learning software. ANGEL, Sakai, and WebTycho all started from internal university projects, for example. And these are all just education platforms.

If you look at the wider scope of Blackboard's ambitions, you have content management, personnel management, and transaction processing to contend with, among other things. That puts Blackboard in competition with outsize companies such as Microsoft (Nasdaq: MSFT  ) , Oracle's (Nasdaq: ORCL  ) PeopleSoft division, content-organizing experts Thomson (NYSE: TOC  ) and Electronic Data Systems (NYSE: EDS  ) , and many others.

The trick is to make the whole package greater than the sum of its parts. Blackboard seems to be doing a good job on that measure, as evidenced by its impressive growth and respectable market share, even in the face of larger competitors and cheaper competing products (free).

I've got a patent, and I'm not afraid to use it
There's a lot to like about Blackboard, and it's one of the best performers on the Hidden Gems scorecard. But I do have one major beef with this company, one that just recently reared its ugly head. Last month, Blackboard sued the much smaller Desire2Learn for patent infringement, based on what looks like a very broadly defined patent on using online tools for educational purposes. Not only does this practice rub me personally the wrong way, but there's a definite risk that the move could counter its own original intent and end up scaring potential customers away.

Blackboard filed the lawsuit to effectively shut down Desire2Learn and remove some of its competition. If successful, it could do likewise against eCollege or ANGEL Learning. Some fear that community projects like WebTycho and Moodle could also be affected, or even the use of blogs or discussion boards in the classroom.

I don't object to the patenting of business models, or to lawsuits filed to protect those patents. If I did, I would have sold my Netflix (Nasdaq: NFLX  ) stock the moment that company suedBlockbuster on similar grounds. My problem is that the patent in question is so broad that it even scares operators of bulletin boards and chat rooms that have little to do with educational markets. There have been calls to boycott Blackboard, and e-learning online communities are abuzz with indignation over the temerity of this lawsuit and the underlying patent. That's not a good way to build a fan base.

The fault doesn't lie with Blackboard, really. Management is simply using the processes of the patent and legal systems to its advantage, the best way it knows how. But there were online learning systems in place before Blackboard was even founded, and certainly before the patent application was filed. The patent should have been denied on the grounds of prior art, but it wasn't, and I blame sloppy fact-checking and badly managed documentation at the patent office -- a known problem that some very respectable companies are trying to help the government fix as we speak.

The patent could still be overturned if Desire2Learn is able to collect enough evidence of systems predating that application and matching the description. This puts the onus of doing the patent office's work on a third-party company, which must devote time and money to fighting for its corporate life -- resources that would no doubt be better spent on developing the business and products instead.

Class dismissed
Who said that learning was boring? We have a young, bright-eyed protagonist, armed with some fatally flawed weapons, in combat with a sea of competitors. And the real antagonist, lurking in the shadows, appears to be the government.

Blackboard is an exciting company with a lot going for it, but until we see how its customers respond to the lawsuit situation, I wouldn't dare touch the stock with a 10-foot laser pointer. The fears might be overblown, but you just never know. Check back after the next earnings report for details on that, and in the meantime, read up on patent law. And thanks for the virtual apple.

Further Foolishness:

Blackboard is a Motley Fool Hidden Gems recommendation, Microsoft is an Inside Value pick, and Netflix is a Stock Advisor selection. Your homework assignment today is to try a 30-day free trial to one of our services and find out what the commotion is all about.

Fool contributorAnders Bylundis a Netflix shareholder but holds no other position in any of the companies discussed here. He took his first online class in 1999, at Florida State's School of Library and Information Sciences. Good times. You can check outAnders' holdingsif you like. Foolishdisclosurewould never file for overreaching patents.


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