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Innovation economy

Dueling data backup firms are rare bright spot

By Scott Kirsner
January 25, 2009
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Can comedy sell data protection?

A new crop of TV commercials from Mozy, a division of Hopkinton-based EMC Corp., features absent-minded people sliding their laptops into the microwave or leaving them on the lawn to be shredded by a lawnmower - all in hopes of persuading consumers of the need to back up their computers over the Internet.

But Carbonite Inc., Mozy's Boston-based rival, says it has found that fear is more powerful than laughter when selling online backup services. A flight of slapstick-style endorsements last fall on ABC's "Jimmy Kimmel Live," where the host's laptop was swiped by an overweight thief, didn't perform as well as the company had hoped.

"We found that the only thing that sells our product is fear," says Carbonite chief executive David Friend. "The fact that you might wake up tomorrow and your hard drive is dead and all your photos are gone."

Mozy and Carbonite are two of the leaders of the online backup business, a rare bright spot in a gloomy tech economy. Rather than buying their own hard drives to save a copy of their data, consumers and small businesses pay a fee (Mozy's is $59 a year, Carbonite's is $50) to send their information securely over the Net, and have Mozy or Carbonite keep a copy that can be retrieved any time. IDC, a Framingham research firm, predicts that online backup services will generate about $715 million in annual revenue by 2011.

The big question is whether a start-up like Carbonite, with 125 employees and $47 million in venture capital, can capture a bigger piece of that market, or whether a division of a big company like EMC will have the edge.

Friend and Jeff Flowers started Carbonite in 2005 (the same year Mozy got its start). A first infusion of funding, $2.5 million, came the following year, led by Lexington's CommonAngels.

"We found that most people were using an external hard drive, or burning a DVD once every six months," Friend says. "And those who aren't doing that kind of backup know that they should be." But key to the business was finding a way to acquire customers cheaply enough that they could be profitable. For the first year or two of the business, Carbonite's cost of acquiring a customer, which includes advertising and marketing expenses, as well as any phone or electronic contact required to sign someone up, surpassed $100.

Now, Friend says it is less than $50 - about what consumers pay for the service in their first year. (More than 80 percent of customers renew the subscription when it expires, according to Friend.)

Most customers learn about Carbonite through radio ads read by personalities like Howard Stern, Rush Limbaugh, and Dr. Laura. "Ad rates are down, and people are willing to cut deals if you've got money," Friend says.

The company keeps customer support costs down by offering help via live chat (the support employees are based in India). For an additional $20 per year, you can purchase a "premium support package," which allows you to pick up the phone and talk to someone.

Friend says about 40 percent of Carbonite's customers are small businesses seeking to keep important data. By the spring, the company plans to introduce Carbonite Pro, aimed at businesses that want to install multiple copies of the service. "They want to administer the service centrally, and they don't want to have to sign up and put their credit card in 20 times for the 20 computers they have," Friend says.

Mozy already offers a service targeted at businesses. The monthly pricing is a buck lower than the $4.95 consumers pay, but while consumers get unlimited data storage, businesses pay 50 cents per gigabyte. (Carbonite says it won't levy a per-computer fee, but instead will only charge businesses based on how much storage they use; Friend implies that the cost will be lower than Mozy's.)

"We have more consumer users than business users, but we have more business dollars that we receive each day," says Mozy spokesperson Devin Knighton. "We're interested in continuing to serve both markets."

In reviews, Carbonite often wins praise for its simplicity: Install it, and it works. But Mozy seems to be the pick of a larger number of tech critics, who like the ability to customize its functions, like specifying times and dates for a backup to take place, or limiting the amount of processing power your computing spends on the backup while you're trying to do other work.

Mozy claims to have "more than 900,000 users," but won't be specific about how many pay, and how many take advantage of the service's free service (which allows up to 2 gigabytes of storage). Carbonite won't say how many users it has, but alludes to a recent survey by NPD Group that estimated it has twice Mozy's market share.

It's hard to tell how aggressively EMC, Mozy's parent, will pursue the consumer and small business market. Chief executive Joe Tucci has occasionally mentioned that 70 percent of all information is being created by individuals, rather than corporations.

But the company also frequently notes that the consumer and small business segment offers thinner profit margins than the company's traditional business of selling storage hardware, software, and services to big companies.

In the company's most recent earnings call, the word "consumer" came up exactly once, while the rest of the call was focused on EMC's enterprise sales.

"One of our rules on acquisitions is, don't break what you've bought," says Chuck Hollis, EMC's chief marketing officer. "Mozy had cool technology, a pretty cool business model, and all they needed was more resources."

A hands-off relationship with EMC could be a positive thing for Mozy's future, giving the company sufficient flexibility to keep growing and evolving. "EMC can be a more strategic, patient investor than a venture capitalist," says Forrester Research analyst Frank Gillett. But EMC has already tinkered with Mozy's management, installing a new executive, Harel Kodesh, to oversee the service last month. And Mozy's founder and onetime CEO, Josh Coates, recently left the company, though Knighton says he is still involved in a "strategic consulting role." The effect of those changes is yet to be seen.

When EMC announces its fourth-quarter results on Tuesday, it won't break out the revenue Mozy generates, or the larger "cloud infrastructure and services division" of which it is a part. That revenue is "not yet material to our overall business," says Michael Gallant, an EMC spokesman. He says that while EMC plans to cut about 2,400 jobs this year, Mozy's division is "adding key talent." (Carbonite is also hiring.)

Friend says his company won't need to raise any more venture capital to get to profitability. And he adds that he doesn't yet see any negative effect on his business from the slow-down in consumer spending: "January looks like it's going to be a blockbuster," he says. "And I think 2009 will be a pretty good year."

That's not a sentiment you hear from very many CEOs right now.

Scott Kirsner can be reached at kirsner@pobox.com.

Audio: Starting Up

Carbonite's David Friend talks about his company's strategy, and raising the money to get it off the ground. (Click Play to listen, or use the link below to download the mp3.)
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