Blackboard Inc. (“Blackboard”), a Washington-based developer of online learning resources and Web-based academic forums, announced Wednesday, October 12, it would acquire smaller rival WebCT Inc. (‘WebCT”) of Lynnfield, Massachusetts, for $180 million. The deal will bring the top two competitors in the online learning space together under one platform, with a total of 3,700 institutional users. The transaction has been approved by the companies’ boards and the companies expect the deal to close later this year or in early 2006.
On November 23, Blackboard and WebCT each received a request for additional information from the Department of Justice (“DOJ”) in connection with the entry into an Agreement and Plan of Merger by and among Blackboard, WebCT and College Acquisition Sub, Inc. The effect of the second request is to extend the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, until 30 days after the parties have substantially complied with the request, unless that period is terminated sooner by the DOJ.
Blackboard is the world’s largest supplier of course management system (“CMS”) software to educational institutions. Blackboard currently has 2,225 clients in 64 countries. In 2004, Blackboard had $3.7 million in net income on $111 million in revenue. Blackboard’s products are divided into two separate categories: the Blackboard Academic Suite, which consists of software that facilitates long distance learning and the dissemination of classroom information; and, the Blackboard Commerce Suite, which allows universities to set up student debit accounts for use at both the institution and private businesses in the area. WebCT is the world’s second largest supplier of CMS software. WebCT has 1,480 clients in 70 countries. Although WebCT does not offer commerce products for institutions, it does offer software, such as the WebCT Vista, which competes with the Blackboard Academic Suite by providing course preparation, distribution and viewing software.
This deal will need approval by the antitrust agencies in the United States. The DOJ will review this deal because of its past experience with the software industry. The parties will want the reviewing agency to use a broad product market definition, possibly encompassing all software applications made for academic institutions. Blackboard may argue the company competes in a broader software market against larger technology providers that make financial management, human resources and other products used by educators. This definition would allow Blackboard to place Oracle and SAP, two large software providers, in the market as well.
The DOJ could take a narrower view of the product market, defining it by the function of the application and the type of customer, as it has done in prior cases. When challenging Oracle’s acquisition of PeopleSoft, the DOJ limited the product market definition to human resources and financial management software sold to the largest customers. In this case, if the DOJ were to use a similar product market definition, asserting that CMS software is only useful to academic institutions, it would likely define the market as CMS software.
Alternatively, Blackboard could argue that it competes against traditional methods of course management, as only 20% of the institutions of higher learning in the United States currently use Blackboard’s software, while 59% do not use any form of CMS software. Accordingly, Blackboard may seek to define the market to include all software sold to colleges and universities, including student information and financial management products. The DOJ might define the relevant product market as CMS software because the Networks and Technology Enforcement Section has traditionally defined software markets narrowly. This product market definition may explain what caused the DOJ to issue a second request and may lead the DOJ to challenge the merger, arguing that the merger would create a monopoly in the CMS market.
The geographic scope of the relevant market is probably worldwide because technologies encompassed within the relevant product market are used on a worldwide basis. In addition, both Blackboard and WebCT sell substantial numbers of their software packages abroad, with international institutions accounting for 23% and 35% of the companies’ revenues, respectively. Although Blackboard does not sell its commerce suite outside of North America, the product area where the two companies have overlaps, CMS software, is sold in every major region of the world. Furthermore, the market shares of the two companies internationally are approximately the same as they are nationally.
In Oracle/PeopleSoft, the DOJ found that both Oracle and PeopleSoft sold their software throughout the United States and the world. Hence, it found the United States to be a relevant geographic market in Oracle/PeopleSoft. Accordingly, the geographic scope in this case might appropriately be defined as either worldwide or national.
If the DOJ defines the market as CMS software, it could express serious reservations about the merger and try to block it. Blackboard currently has a 54% share of the CMS market, while WebCT has a 27% share. Other market share reports state that Blackboard controls roughly 45% to 50% of the U.S. market for software used to conduct college and other school classes, among other functions, over the Internet, while WebCT holds about 35% to 40%. These figures indicate that the combined company would have at least 80% of the CMS market.
Furthermore, the current competitors in the CMS market do not currently challenge either WebCT or Blackboard. Competitors such as Desire2learn, Jenzabar, Angel Learning, and ConcordUSA tend to focus on smaller educational institutions, and thus may not have resources to devote to research and development that Blackboard does. In addition, none of the companies offer the full array of CMS software offered by Blackboard, but rather only focus upon niches. Thus, colleges and universities may find it cheaper to go with a suite of software if they need more than one product, which may leave the other competitors with a small market for which to compete. Another competitor, eCollege.com, focuses on adult learning and incorporates a “pay-as-you-go” model that avoids direct competition with Blackboard, which sells to the universities directly. Finally, an open source project, known as Sakai and started by a consortium of universities, also competes with Blackboard, but analysts have doubts as to its ability to keep up with Blackboard in terms of product development, support, and quality.
Hence, DOJ may assert that no other current competitors pose a credible threat to Blackboard despite Blackboard’s assertion that this acquisition is needed to help it remain competitive against the new market entrants and open-source initiatives that are out there. WebCT has been the most serious competitive threat to Blackboard. Although Blackboard indicated that it worries about either SAP or Oracle entering the CMS market, the DOJ might contend that the most likely way that either of these companies would enter the market would be through the acquisition of an existing CMS provider, and that Blackboard’s acquisition removes the threat of better-capitalized players entering the market using WebCT as a platform.
There is a possibility, however, that entry by either Oracle or SAP would pose a significant problem for Blackboard, due to the financial resources of these companies and their ability to bundle CMS software with other software that universities must buy anyway, such as human resources and financial services suites. Oracle and SAP’s failure to enter the market may indicate that neither may be interested in it, decreasing the weight of potential entrants as a barrier to market power abuse.