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The Massive Decline In Larger Education Company Market Caps

Thu, 2016-01-14 16:36

By Phil HillMore Posts (384)

After our coverage of Blackboard’s CEO change last week, we were both interviewed by the Washington Business Journal, with the following lede:

Analysts and sources I spoke with Monday, both on and off the record, said the decision to bring on Bill Ballhaus as CEO was a combination of Bhatt failing to make progress building the company’s business and lacking the experience needed to successfully run a company of that scale. And that means at least several years before Providence Equity Partners, which owns a majority of the company after paying $1.64 billion for it in July 2011, begins actively marketing the company for sale, according to industry experts.

Earlier this week I wrote about Apollo Education Group, parent of the University of Phoenix, putting itself up for sale due to its weakening financial position. I also noted that I doubt that McGraw-Hill Education is going to be able to go public in the near-term. Part of the reason for this latter observation is the dramatic fall of Pearson in the stock market, triggered by its warnings that it would miss earnings estimates. In Audrey’s excellent year-end post on the business of ed tech, she noted:

Private equity firms sure love buying ed-tech companies. Perhaps because the stock market’s sorta “meh” about them.

Despite the talk of record investments in ed tech and digital content, the reality of the business of big education companies is not so robust. In fact, there is a massive decline in market caps for many of these large companies, as investors are seeing real weakness. The weakness can be felt in private equity acquisitions as well as public market valuations. To get a sense of the latter on how dramatic the decline has been in just the past year, I combined the market capitalization of four publicly-traded companies – Pearson, Wiley, Apollo Group, and BridgePoint (Ashford University) – over the past two years.

Composite Market Value

Admittedly, this is a somewhat arbitrary combination of companies based on public markets, but I wanted to get a broader sense of market valuation than just one company at a time. Just between these four companies, they have lost $13.5 billion in market value in the past 10 months, more than half of that drop from Pearson alone. To put this in perspective, the record private investment in learning technology, as described by Ambient this month, was less than half this amount for 2015.

Ambient 2015 Summary Table

At e-Literate we seldom talk about stock prices, as we are not focused on investments. But this aggregate view is worth considering to understand that all is not rosy for technology-based companies serving the education sector.

The post The Massive Decline In Larger Education Company Market Caps appeared first on e-Literate.

Solving the Ed Tech Patent Problem

Thu, 2016-01-14 13:04

By Michael FeldsteinMore Posts (1052)

You may have heard that Khan Academy has filed for several patents. Audrey Watters has written a really strong piece providing the details of the filings in the context of the history of ed tech patents and showing why some academics feel that the patent system clashes with the values upon which academia was built. In the process, she excavates some of my personal history in the Blackboard patent war. While I am sympathetic to arguments against ed tech or software patents on principle, my own personal reasons for getting involved with that fight were more utilitarian. I believed then, as I do now, that patents threaten to kill innovation in educational technology due to the specific characteristics of the market. The outcome of Blackboard v. Desire2Learn did not end that threat, although it did temporarily reduce it. The conversation being provoked by Khan Academy’s filings offers a new opportunity to come up with a more permanent solution.

Understanding the Threat

The Blackboard patent fight provides us with a good case study to understand the nature of the problem. Blackboard was granted a patent related to roles and permissions in an LMS. Specifically, they patented the ability of a system to have a single user set up simultaneously as a teacher in one course and a student in another. When academics hear the patent boiled down this simply, several objections usually come up. The first is obviousness. It doesn’t seem like such a simple function should be patentable. The second is prior art. It seems like other, earlier systems probably went down this path. This latter argument took on particular resonance, since many of these systems were developed by and for academics. There was a sense at the time that Blackboard effectively stole a basic concept behind the LMS from its customers and was using it to limit their alternatives. But neither of these problems were at the heart of what made the Blackboard patent so dangerous. Rather, it was the patent’s breadth of applicability. If it stood, there probably wasn’t a mainstream LMS in existence at the time that wouldn’t infringe. When Blackboard sued Desire2Learn for infringement (or “asserted” their patent, in legal parlance), they were attempting to affirm the validity of the patent. Had they won in court, or had Desire2Learn settled out of court, then Blackboard could have sued any LMS developer and, in principle, any LMS adopter.

But it was worse than that. Blackboard had other patent filings, some of which were also quite broad. It was reasonable to worry that the company was preparing to pursue a strategy known as “royalty stacking,” in which they could charge competitors multiple royalties for multiple patents. What would this do to the LMS market? In a big enough industry like, say, mobile phones, companies like Apple and Samsung can sue the pants off each other for patent infringement and still stay happily in business. The LMS business is nothing like that. Instructure, the only new entrant that has gained substantial traction in North American higher ed in the last decade, did so by spending twice as much money as they made, with most of that going to sales and marketing. If Instructure had to pay multiple royalties to Blackboard, there probably would be no Instructure today, and there almost certainly would be no publicly traded company. A successful royalty stacking strategy would have killed the possibility of new competition and given Blackboard a permanent choke hold on the market. I didn’t care to fight about which LMS company should gain or lose market share or whether software patents are good or bad in principle, but I sure did care about whether there would be long-term competition and innovation in educational technology.

Fighting Back

Once the danger became apparent, different parties took different strategies to fight the threat, depending on their resources and legal standing. Desire2Learn fought back both in court and by challenging the validity of the patent through US Patent and Trademark Office (USPTO). The Sakai, Moodle, and ATutor open source communities enlisted the help of the Software Freedom Law Center (SFLC) to file separate patent challenges on their behalf. Having no lawyers and no legal standing myself, I took a different tack. I sought to make the patent strategy a loser economically. I believed that Blackboard’s customers and prospects would reject the company if only they fully understood the patent, the strategy, and the broader implications. So I did my best to provide the necessary education. I wrote a plain English translation of the patent claim. I started a Wikipedia page to document the history of LMS development, to identify potential prior art for the legal case but also, and perhaps more importantly, to place Blackboard’s assertions of innovation in an historic context. I interviewed legal experts and explained court proceedings. Ultimately, it was up to the university decision-makers, and not me, to decide how Blackboard’s actions should affect their purchasing decisions. But I did everything I could to make sure that they had the knowledge that they needed to make informed decisions. As did other bloggers at the time.

In one important way, the strategy was far more effective than I ever imagined it could be (or than I frankly intended it to be). Blackboard’s reputation was already shaky, for a variety of reasons ranging from product bugs to poor customer service to high-pressure sales tactics to a proclivity for buying up popular alternatives and then killing them off. The patent issue crystalized their brand image, in much the same way that we sometimes see a single gaffe or incident crystalize nascent opinions of a politician—like John Kerry’s “for it before I was against it” or George Bush’s “Heckuva job, Brownie.” There is no doubt in my mind—none—that Blackboard would have substantially better share today had they done nothing different other than refraining from filing that law suit. I always argued that the goal should be to incentivize better market behaviors, and that treatment of companies should change when their behaviors change. And yet to this day, there are institutions that will not even consider evaluating Blackboard because the stakeholders think it’s a bad company, even when they can’t fully articulate why they think that. Even a decade after the patent fight started, and five years and two CEOs after it ended.

And that’s the problem. Yes, we established the principle that a company that asserts an ed tech patent would be punished in the marketplace. Some ed tech leaders learned that lesson and will remember it. Others will not. Even inside Blackboard, even among employees who were there at the time, the institutional memory is fading. Meanwhile, none of the entrepreneurs who entered the space since 2010 have any reason to have even heard of the dispute. And customers don’t remember the details either. The deterrent lesson of Blackboard v. Desire2Learn is time-limited, it is poorly targeted, and it is fading.

We need a better, more permanent solution.

A Complex Problem

So that was Blackboard, circa 2006. What about Khan Academy now? What does it mean that they are filing for patents? What does it mean that they have signed a pledge not to assert their patents except against other parties that have asserted patents? What is the motivation here? What is the effect?

I believe that Khan Academy has good reason to file for patents even if their intentions are entirely noble. Perhaps especially then. Online learning in general and code academies in particular are large and growing markets. Typically, corporate entities only get targeted by patent suits when they are rich enough to produce a big payout. But Khan Academy is a potential target for the opposite reason; they have the ability to reduce the total size of the market by satisfying demand with free offerings. Why pay for a course at Acme Code Academy when you can get it for free from Khan Academy?

Are there actors out there who are morally bankrupt enough to sue a non-profit foundation for giving away free education? If there aren’t now, there will be. Sooner or later, ed tech will get its Martin Shkreli. As long as software patents are legal, Khan Academy is vulnerable to infringement suits. And while owning patents offers far from perfect protection against this danger, it is still better than no protection at all.

I don’t worry about what Khan Academy is likely to do with its software patents. But I do worry about whoever the next owner of the patents might be. I have heard Sal Khan muse that his tutorial videos might still be around and useful to somebody 100 years from now. Unfortunately, that same possibility exists for his software patents. Patent pledges are nice, but they only survive as long as the good will of the current patent owner lasts. Sal Khan may keep his guns locked up safely in a cabinet, but the fact remains that there are now a few more guns in the world that could get out onto the streets and in the wrong hands.

We need a better solution.

A Better Solution?

Needless to say, I have thought about this problem for a long time. There may be a way for good actors in educational technology to get the defensive protection that they need from patent ownership while still reducing the long-term risk to the people that they serve, but they will have to go further than a patent pledge. What I have in mind is a legal structure that combines characteristics of a patent pool and a land conservation easement.

It would work something like this:

  • A legal trust would be formed by a third party with moral credibility, such as the Electronic Frontier Foundation or the Berkman Center.
  • Patent holders would cede their right to assert their patents to the trust, except under specific conditions of self-defense, in perpetuity.
  • In return, they would gain the right to assert other patents in the pool in specified self-defense circumstances, as overseen by the trust.
  • The trust would also be empowered to assert the patents in the pool against third parties that are asserting educational technology patents, as a general deterrent against ed tech patent assertion.

I am not a lawyer and am not sure that this would work. But it seems plausible.

If there are any patent holders out there who are potentially interested in this approach, please know that I want to do anything I can to help. I may be able to help coax other patent holders to the table, and I certainly would be happy to promote the good efforts of any company willing to make such a commitment.


The post Solving the Ed Tech Patent Problem appeared first on e-Literate.

Parent Company of University of Phoenix Could Be Sold to Owner of McGraw-Hill Education

Mon, 2016-01-11 16:45

By Phil HillMore Posts (383)

Apollo Education Group, parent company of the University of Phoenix as well as Apollo Global, is in “advanced talks” to be purchased by Apollo Global Management, owner of McGraw-Hill Education and of Cengage debt. Got that?

To clarify, the Apollo Education Group is the parent company of the University of Phoenix, and they have a subsidiary called Apollo Global, which is a joint venture with the Carlyle Group, another private equity firm. While the confusion is understandable, Apollo Global Management previously shared nothing in common with the Apollo Education Group other than their admiration for the choir-directing sun-god.

With that in mind, here is the news from the Wall Street Journal today:

A deal between Phoenix-based Apollo Education and Apollo Global Management, a New York private-equity firm, could be worth about $1 billion, some of the people said, with one of them adding an agreement could be reached in the next few weeks. Apollo Education had been in discussions with a number of private-equity firms since late last year, but Apollo Global Management is the only one still in the running now, this person said.

It is possible, as always, in such situations that there will be no deal, and another buyout firm could re-emerge.

This news coincided with Apollo Education Group’s announcement of its Q1 2016 earnings. To get a sense of just how far the company has declined, consider that in the earnings they stated their “cash and marketable securities were approximately $756 million and our outstanding debt was $43 million”. AGM is talking about paying $1 billion to get just over $700 million in cash and marketable securities and less than $300 million for the actual assets. The following chart shows the historical Apollo Education Group combined enrollment.

Update: The markets are taking this news well, as shares of Apollo Education Group are up 23% in after-hours trading. At the close today, the publicly-traded market cap of Apollo was just $692 million.

Later in the WSJ article:

Apollo Global Management, founded by veterans of junk-bond pioneer Drexel Burnham Lambert, is known for a willingness to invest in struggling industries and companies. For example, last year it pursued—though never closed—a deal for property mogul Nicholas Schorsch’s troubled real-estate empire.

Connections In Higher Ed

Unstated in the article, but quite important to understand, is that AGM purchased McGraw-Hill Education for $2.5 billion in late 2012 and is trying to take that company public (which I personally doubt will happen in the near term). According to the NY Post, AGM also owns debt from Cengage Learning.

There is one other aspect to consider: the University of Phoenix is in the middle of migrating from their homegrown learning platform that cost several hundreds of millions of dollars to develop to Blackboard’s Learn Ultra. While no one has said that this agreement will change, if AGM does buy the Apollo Education Group, then there would be additional risk on this Learn Ultra migration. University of Phoenix instructors have been told about the changes, but the actual implementation with students and classes is scheduled for Summer 2016. It is quite common for acquisitions of distressed companies to lead to major strategic initiatives being put on hold until the new owners figure out what they plan to do with the company.

There is a lot of moves happening in education this year, and this potential sale will likely have bigger ramifications than just for the for-profit sector.

Update: Sorry for multiple updates, but this observation by Audrey is too good to not include.

Future of edu irony: news that U of Phoenix may be for sale, same day college football championship to be played in U of Phoenix stadium

— Audrey Watters (@audreywatters) January 11, 2016

Future of edu irony: news that U of Phoenix may be for sale, same day college football championship to be played in U of Phoenix stadium

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