Carbonite CEO Feeling Rosy about EMC Reportedly Buying Mozy

9/25/07Follow @wroush

David Friend, CEO of Boston-based online backup company Carbonite, says the rumored acquisition of rival Mozy by Hopkinton storage giant EMC (NYSE: EMC) is great news for his company, too.

Both companies launched in 2005 with bankrolls of around $2 million. Both provide software that automatically encrypts and copies the information on users’ hard drives to servers on the Internet. And now Mozy’s sale to EMC will fetch a cool $76 million, according to an unconfirmed report in technology blog TechCrunch.

The sale “puts a real peg in the ground and shows that somebody is willing to pay real money for one of these companies,” says Friend. “That’s going to make the money-raising task much simpler for us.” Mozy and Carbonite are often mentioned together as the two examples of so-called “second generation” online backup services—those designed and launched within the last couple of years, when the economics of broadband connections and hard drives have made it feasible to offer large amounts of storage for only a few dollars a month. Now that Mozy is off the table, there will be less competition for investment capital, Friend says.

And that could be important for Carbonite. While online backup services offer a low-cost, low-maintenance alternative to storing data on an external hard drive, consumer awareness of the category has been growing only gradually, and Carbonite has been spending a million dollars a month lately on marketing (money coming out of its $15 million Series B round, which closed in May). “We want to be to backup what Norton is to antivirus, and that’s the kind of money those guys had to spend at the beginning too,” Friend says.

Just as significantly, EMC’s absorption of Mozy might ultimately leave a bigger chunk of the consumer market to Carbonite. “Mozy is more of a ‘techie’ product than Carbonite, which we have tried to make as ‘feature free’ as possible,” says Friend. “They have been pushing into the enterprise market—they announced a big sale to GE a couple of months ago—so [the rumored acquisition] makes sense, because EMC has thousands of enterprise customers. But the consumer side is a big investment right now, and I seriously doubt that EMC will want to sustain the kind of losses that our VCs are expecting us to incur for marketing. So the sale of Mozy, in a way, reduces the threat from our most able competitor.”

At $76 million, EMC would be lavishly overpaying for Mozy, in the view of some observers, such as Om Malik of GigaOm. But Friend is so sure of the future of the online backup market that he doesn’t bat an eye at that price. “When we exit I’d like to see an extra zero on the end of that number,” Friend says. “We sold our last company for $200 million, so $76 million would be a big disappointment for our investors.” (Friend is referring to FaxNet, a Boston-based Internet fax service for corporations, which he sold to Critical Path in 1999.)

Friend says Carbonite’s strategic advantage—and the factor that differentiates the second-generation backup companies from older rivals such as X Drive—is its data storage system, which was designed to store data more efficiently and to be scaled up at low cost. “Ten years ago, the thought of selling 15 gigabytes of backup for $3.75 a month was insane—-everybody would have thought you were nuts. But then Mozy came in with a very efficient way to utilize their disk storage, and we came up with a different but equally effective one, and both products are designed to scale to large numbers of users. The old guys started out with the idea that they were going to sell 10,000 subscriptions for $100 a month. We’re going to sell a million for $4 a month.”

Given that big Internet companies such as Microsoft, Google, and Yahoo might eventually want to provide online backup services as part of their consumer strategies—but might want to buy such a service rather than build it themselves, as EMC has apparently decided to do—Carbonite could end up looking like an attractive purchase, even at a price well north of $76 million. Maybe with an extra zero on the end.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • evil vulcan

    I don’t think EMC understands the economics of Mozy or online backup in general. They just bought a company that pays users to store data with them. That’s right. Mozy pays users to store data with them. That is fine in the startup world when you are flush with venture capital, but how long will EMC continue to pay people to use it’s consumer service?

  • dorky trekkie

    Right evil vulcan, EMC just bought Mozy without looking at their financials. Last I heard Mozy has over 7,000 businesses using their corporate version – and I don’t think Mozy pays for them.

    And flush with capital? $1.9M in venture capital to last over 2 years is flush?? Mozy was making REAL MONEY off their business which why they didn’t have to raise money.

    And Carbonite is going to sell for $760?? Yeah, they wish – because they are so deeply buried in liquidation preferences from their investors. LOL.

  • VentureWatcher

    I have to agree with Dorky Trekkie on both points – 1) Mozy has/had a real business, and 2) Carbonite is going to have to sell for a truckload given the investment they’ve taken.

    The two other interesting companies in the space are Box.net and ElephantDrive. As far as I can tell, ElephantDrive (online backup plus sharing) does not appear to have taken any VC money,and Box (basically a locker service) took a small investment from DFJ.

    If I had to guess, you’ll be reading about another deal soon.

    Sidebar – can some clarify whether Mozy’s 300K customers are free or paid? At 4.95/month, that’s $18M in annual revenue (if they are paying). If they aren’t, is if fair to call them customers?

  • vulcan returns

    Have to agree with Vulcan… you guys are clueless as well. Both Mozy and Carbonite spend in excess of 1 million dollars per month in just marketing to hit their numbers. The vast majority of their accounts are free accounts. They spend an average of $40 to get each free account. The more free accounts they want, they can get, they just have to buy them!

  • Callaway Driver

    Our firm conducted extensive DD on Mozy/Berkeley Data a few months ago when they were considering raising a Series B. While I can’t share too much because of NDA, I can say that they are doing extremely well financially and spending next to nothing on marketing. Keep in mind; they raised *less than $2 million* over two years ago.

    If I remember correctly, roughly 1/3 of the Mozy free customers convert into paying customers and they have somewhere north of 100k Mozy unlimited subscribers paying $55 per year. Furthermore, the MozyPro business is very high margin for Berkeley Data and adding 100+ new business customers per day. Add in the $10mm (reported) deal they signed with GE and well… do the math.

    I think Mr. Friend has a nice business with Carbonite, but it’s a bit concerning that he’s spending $1mm per month on marketing and still lagging so far behind Mozy. Also, contrary to his belief that this acquisition “reduces the threat from our most able competitor”, EMC has been giving every indication that they are prepared to make a major push into the consumer and SMB markets.

    http://www.vnunet.com/itweek/news/2199395/online-storage-extending-appeal

  • dorkie trekkie

    vulcan returns – you need to work on your math skills.

    How is it that Mozy is spending $1M per month, when they raised less than $2M over two years ago??

    I can’t verify what Callaway Driver is saying, but at least his numbers seem to work out.

    Carbonite is doing the classic “throw money at the problem” and buying customers, where Mozy is obviously *making* money. There is no other explanation for how they have flourished the last two years with only $2M raised. They really figured it out, and now EMC has.

  • http://www.intronis.com Backupforbusiness

    I have to say that I am in the space and I am with a company that has grown organically from a $100,000 initial investment to a $3 million a year company in under 5 years. Mozy may have only taken about $2mil in VC, but there were founding partners that each had a multi million dollar investment put in. Mozy has never been making money. So what they got GE as an account. The logistics of the deal put Mozy as a preference for their individual users, NOT backing up the corporate data. They do offer a great service for the cheapo home user, but when it comes to building a business, the model is not very efficient.

    As for carbonite, Friend says right in this that he developed a ‘feature free’ product. Great, you developed a dummy proof product. Good luck selling it. EMC did not buy Mozy for their customers, EMC bought Mozy for the technology. EMC has been saying for months now that they were working on developing an online backup, turns out their development team couldn’t get it done fast enough.

    Also, what happened when Seagate bought eVault and Iron Mountain bought LiveVault? I give you a hint, they didn’t get cheaper. There is no way that EMC is going to pay $76 Million for Mozy and not start charging the customers. Thus, Friend is right, its good for Carbonite. Keep spending your million a month on marketing, if my math is correct they have about 9 months left before they are done blowing their VC, then we will see how well they are doing with their 100,000 free customers and their 20,000 “paying” customers.

  • Alan

    I know there are many startups around the world about backup online, the most are in USA and only few in the rest of Europe. One of this is MemoPal direct from Italy. Mozy and Carbonite are now on the cover pages, but soon I think we will see other big competitors from outside USA.