China’s NetDragon to Acquire Edmodo for $137.5 Million

column | Mergers and Acquisitions

China’s NetDragon to Acquire Edmodo for $137.5 Million

By Betsy Corcoran (Columnist) and Tony Wan     Apr 9, 2018

China’s NetDragon to Acquire Edmodo for $137.5 Million

China’s NetDragon has gobbled up another education technology company. This time, it’s Edmodo, one the largest online social communities of teachers and students in the world.

NetDragon Websoft, a publicly-traded company based in Fuzhou, China, has agreed to pay $137.5 million for Edmodo. That deal includes a modest cash outlay of approximately $15 million and a significant chunk of equity (about $122 million worth of shares in NetDragon's education subsidiary.)

The deal could mark the beginning of the end for the “free” model of education technology, at least for standalone education companies without other strong revenue streams to support them.

Edmodo was started in 2008 by a teacher and IT support person as a “Facebook-like” community aimed at connecting educators with students and with one another. Also like Facebook, Edmodo grew rapidly. Currently, the company, now based in San Mateo, Calif., claims more than 90 million registered users (both teachers and students) in 400,000 schools across 192 countries.

Edmodo struggled, however, to find a business model that would support its burgeoning community. It raised close to $100 million in funding, and began seeking another round in early 2017. The company had shifted to an advertising-based model—although one in which the company was trying to move carefully and respect its audience of teachers and students.

That nascent effort hasn’t proved too fruitful. According to a financial statement published by NetDragon, Edmodo lost $19.5 million in 2017, based on revenue of approximately $1 million. The company currently has 85 full-time employees and contractors.

“We were never particularly revenue-centric,” says Manish Kothari, Edmodo’s general manager of platform, “and we will always put the learning experience ahead of the monetization process.”

While altruistic, such intentions were not entertained by companies that wanted to buy the company. As Edmodo fielded offers, buyers wanted it to cut costs and be leaner. Many of them “wanted to drive users to their own service and product” rather than maintain and support the Edmodo product and community, says Vibhu Mittal, the company’s CEO, in an interview with EdSurge.

What made NetDragon’s offer different, he adds, was a commitment to invest more resources into the Edmodo product, including areas where the parent experience could be improved. Mittal says the new owner will try to “optimize” the company’s operations but does not expect to see immediate major changes to its staff.

Kothari described the new owner and Edmodo as “well aligned.” Edmodo brings a vibrant social community to the company, which is amassing education assets that already include both hardware and software.

That seems to be an increasingly popular path. A decade ago, the big education companies were traditional textbook providers such as Pearson. Now the most powerful players are technology companies that offer devices and software. At the top of the list: Google, which supports Chromebooks as well as Google Classroom, and Apple, which sells iPads, Macs and now the Schoolwork app.

By contrast, NetDragon began in 1999 and built its initial financial muscle with games. It has, however, long identified education as one of its top areas of interest. Recently the company has begun purchasing education technology assets at a rapid clip. In 2015, NetDragon paid approximately $130 million to acquire U.K.-based interactive whiteboard maker, Promethean, which gave it a hardware-based entry into classrooms. The company, which refers to the hardware as “interactive panels,” is equipping 13,000 classrooms in Moscow with digital whiteboards. Sales in China are growing, too: “We aim to make 101 Education PPT [NetDragon’s K-12 teaching and learning solutions] the platform of choice for delivery of digital classroom and content distribution in China,” the company noted in its annual report.

Last year, NetDragon also acquired JumpStart, an educational game company behind iconic titles including Math Blaster. And earlier this year, it bought Sokikom, an online game-based math program.

In a press release, NetDragon said that its acquisition of Edmodo underscored how it is working toward its goal of “becoming the world’s largest learning community.”

According to its most recent financial report, education now makes up more than half of NetDragon’s revenue. In 2017, NetDragon reported that education delivered 54 percent (or ¥2.1 billion—approximately US $333 million) of its overall revenues. That said, games are far more profitable: Last year, NetDragon’s games racked up a 94 percent gross margin. By contrast, its education division had a 28 percent gross margin. And while games contributed a profit of ¥675 million, the organization reported a ¥423 million loss from its education division.

The acquisition has raised questions about how Edmodo’s data for its millions of users will be handled, particularly as reports surface over the extent to which Chinese authorities can access data on private individuals from technology companies.

“Even though NetDragon is a Chinese company, it has an international presence” with customers from its Promethean and Jumpstart products, says Mittal, who has “great confidence that [NetDragon] will proceed with sensitivity to users’ wishes and follow the laws of the country where they live. We are committed to our users first.”

He points to the General Data Protection Regulation, a series of data privacy regulations that will be enforced this May for online services used by European Union citizens, as a positive step that “force everyone to think carefully about how to handle sensitive data.”

What will remain the same for Edmodo, says Ketan Kothari, the company’s general manager of the consumer division (and Manish’s brother), is the focus on mission. “We’re very mission-driven,” he states. “When we talked to NetDragon’s founder and senior team, they believe the reason why they’ve been so strong in China is the community—what we would call social networks.” This new owner, he believes, will give Edmodo the financial resources to build out its community of students and teachers using NetDragon’s array of education offerings around the world.

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