Why Your LMS Vendor Gets No Respect

Ever wonder why the major LMS vendors, led by the two public companies Saba and SumTotal Systems, always seem to be struggling? Here we are, a decade after Cisco CEO John Chambers got the early LMS players' hearts fluttering by declaring that eLearning would make email on the web seem like a rounding error. Yet even before the current recession, Saba and SumTotal could not get their growth engines going.

A major reason for this was discussed in my last post. The enterprise LMS market is pretty saturated, and the products are mature, at least from a features-and-functions perspective. So you have limited growth options. You can grow by peer acquisition. But in a saturated market, this is just rearranging the deckchairs. SumTotal and Saba have already consolidated most of the big early players. Those that are left are not especially appealing, and, even if they were, S & S no longer have attractive enough stock to offer, nor can their performance warrant other forms of capital infusion. The current crop of second tier vendors probably believe they are better off sitting tight, or have grown weary of the dance. A number have been dressed up for the dance without suitable suitors for so long that they look and act like old maids.

Another growth strategy is the "adjacent category" play. Add Whatever Management to Learning Management. Whatever needs to be a close enough cousin of Learning to leverage at least some of your sales, marketing and services capability. You get to pick the Whatever of your choice. Human Capital? Content? Performance? The "Pick the Whatever" game has occupied, if not entertained, many LMS vendor staffers for countless hours over the years. Trouble is, the market does not seem to want to grant the LMS vendors the rights to move into any of these catagories in any meaningful way. The market can be stubborn about this: "You want to be my LMS vendor? Then I want you to be focused!"  

So what is left? More mergers? Saba and SumTotal already have hairballs for product lines as a result of their prior acquistions. More would not be merrier. Get acquired by a company in another enterprise space? Even if capital were flowing, where is the value to the acquirer? Saba and SumTotal have spent hundreds of millions forming companies that cannot get to profitability in the LMS market. I know all about the greater fool theory, but really...

So here's an idea. How about becoming a real software company? SumTotal and Saba behave more like they are in the services business than the software business, and their finacial statements and market multiples reflect this. I know, being a software company is a radical idea. Regardless, I'll explore this more soon in another post.

(Full disclosure: I was a founder of Silton-Bookman Systems, whose Registrar product, originally released in 1984, was instrumental in launching the LMS market. Silton-Bookman Systems merged with another LMS company, Pathlore Software, in 1999. I was COO of Pathlore when it was acquired by SumTotal Systems in 2005.)

LMS, A Zero Billion Dollar Market

Led by SumTotal Systems and Saba, the two public companies who consolidated much of the market since the dot-com bust, the learning management systems (LMS) market is a classic zero billion dollar market.

(Full disclosure: I was a founder of Silton-Bookman Systems, whose Registrar product, originally released in 1984, was instrumental in launching the LMS market. Silton-Bookman Systems merged with another LMS company, Pathlore Software, in 1999. I was COO of Pathlore when it was acquired by SumTotal Systems in 2005.)

A zero billion dollar market is a market whose total revenue potential is less than $500 million, so when you round it off to the nearest billion it is zero billion dollars. Without the potential for a billion dollars of revenue, a market is unlikely to support a company with a potential market cap of over $500 million. Thus it is also a zero billion dollar market for market caps.

Many tech start-ups find themselves in zero billion dollar markets, usually with a bunch of peer competitors who got into the market for the same trendy reasons. After a while, some fail, some exit the market, some are acquired by RBCs (really big companies), and some get rolled up in a consolidation wave. When the dust clears, though, the survivors are still stuck in a zero billion dollar market, where even the biggest still have zero billion dollar market caps. Such was the path of the LMS market from the dot-com boom, through the dot-com bust, to the present.

One sure sign of a zero billion dollar market is that the major players, who all sell widgets, claim they are really not in the widget market but that widgets are just their entry point into some other, larger market. Yet years pass and they are still mainly widget companies. LMS market watchers are familiar with this, as the major players tout human capital management, talent management, anything-but-learning-management, as their "real" businesses. Still, customers seem to just want really good learning management, and the other stuff is mainly a distraction. Instead of focusing on running profitable LMS companies, the search for the key to a larger kingdom is a constant distraction.

The stocks of SumTotal and Saba have been beaten down considerably during the current economic meltdown, but even in good times the LMS market was a zero billion dollar market. What is happening now is that investors are getting feed up with the seemingly unending path to profitability (as in, "we are still getting there," even after all these years).

A note to entrepreneurs: A zero billion dollar market can be great if you are a privately and closely held company. Sure, the VCs and investment bankers will sneer at you and call you (shudder) a lifestyle entrepreneur. But you can do quite well for owners, employees and customers in markets under $500 million. You can even get rich. But be sure you have owners, not investors. You can tell the latter, they have billion dollar stars in their eyes.