By Steven Pearlstein
Wednesday, May 31, 2006
Remember the economic theory behind the dot-com mania?
The notion was that, unlike the market for widgets, the Internet economy was prone to winner-take-all competition, in which the first company to gain a significant lead would wind up with a near monopoly, at least till the next breakthrough technology came along.
Big economies of scale were a part of it, allowing the market leader to wage a debilitating price war against smaller competitors. There was also something called "network effect," which had to do with the natural preference of customers to use compatible software.
As it turned out, most of the companies bankrolled on the basis of this theory never made it. But for the few that survived, the theory may actually be panning out. There are eBay and Google, of course. And here in Washington, there's Blackboard Inc.
Blackboard has quietly become the world's leader in the software used to connect students to their teachers, their textbooks, their course materials and one another. By some estimates, Blackboard now has as much as 80 percent of the U.S. market, with sales growing at 20 percent annually, 20 percent operating margins and a stock price that has doubled since its first stock offering two years ago.
Blackboard's beginnings are little different than those of thousands of other Internet start-ups. The founders were a couple of former American University frat brothers, Matthew Pittinsky and Michael Chasen, who decided to start a company in 1997 at the ages of 24 and 25, when they were junior consultants at KPMG. Their basic idea was to allow teachers to make course materials available to students on the Web. They got seed money from a local high-tech entrepreneur, Ching-Ho Fung, whom they had met at one of Mario Marino's famous networking events. Over the next two years, they managed to raise more than $100 million in four rounds of venture funding.
When the dot-com bubble burst, Blackboard had enough of a client base, and enough money in the bank, to ride out the financial storm. Because it was still a private company, it was spared the harsh and fickle discipline of Wall Street investors. And it didn't hurt that its venture backers included the likes of Novak Biddle; the Carlyle Group; the Bass brothers; Microsoft; Dell; AOL; and Kaplan, the education arm of The Washington Post Co. -- respected and patient investors with deep pockets.
But, according to Pittinsky, the company's chairman and education guru, what may have saved Blackboard from the fate of other start-ups was the Internet itself. Notwithstanding its elaborate plans to market directly to tech administrators at universities and school districts, what really worked best was simply making its basic course-management software available for free to any teacher willing to download it from the Web. Many of the teachers who tried Blackboard began talking it up with colleagues, and before long, it was the somewhat perturbed tech administrators who began calling to inquire about the "unauthorized" software their teachers and students were using.
By the time the window for initial stock offerings was open again in 2004, Blackboard had reached $100 million in sales and turned its first profit. Several generations of enhancements had been added to the original bare-bones software. Blackboard became the portal through which classroom notes were made available, tests and quizzes were taken, and homework handed in. Students working on collaborative projects could use it to share information or pass around drafts for editing and revision. In K-12, parents were able to use Blackboard to find out what the homework assignments really were. And administrators began to use Blackboard to integrate course work with school records, organize extracurricular activity, and even record financial transactions at university bookstores and cafeterias.
Perhaps the biggest breakthrough came when Pearson, the world's largest textbook publisher, adopted Blackboard protocols and standards for its interactive course Web sites. Not only did other publishers follow suit, but it gave schools looking to consolidate their various software applications another reason to choose the industry leader.
All of which makes it particularly curious that the Justice Department earlier this year allowed Blackboard, with 45 to 50 percent of the market, to buy its main rival, WebCT, which had 35 to 40 percent. To be sure, there are still thousands of universities and school systems that have no e-learning software, and those that do can switch vendors when contracts come up for renewal. But the quiet approval of the merger of the top two companies in a market with strong winner-take-all characteristics is the best evidence yet that the Bush administration has abandoned antitrust enforcement.
None of that, however, is meant to take away from the accomplishments of two young men who have managed to avoid most of the pitfalls of Internet start-ups and build an enduring and profitable company.
Chasen, the chief executive, says the key was their decision to stick with a traditional software business model of charging annual license fees, rather than hoping for an eventual windfall of advertising revenue.
Venture capitalist and board member Roger Novak gives Chasen himself much of the credit: "What's noteworthy about Michael is that he never makes the same mistake twice."
I wonder if Blackboard's success may have something to do with its downtown District location. There, it has been able to avoid some of the hype and haste of Silicon Valley or Northern Virginia and offer an alternative to high-tech workers looking for an urban work experience in a corporate culture focused as much on improving education as on improving the company's stock price.
Whatever the reason, Washington now has a high-tech star in its midst that is doing more to change the way teaching and learning is done in America than any policies of the federal government.
Steven Pearlstein can be reached at email@example.com.