Carbonite Puts Its Online Backup Software on Lenovo Computers, Raises $20 Million

9/8/08Follow @wroush

Automatic Internet-based backup services—the first form of “cloud computing” to hit the mainstream market—have been making news lately. Last Wednesday, the Mozy division of Hopkinton, MA-based EMC (NYSE: EMC) announced that its software will power an online backup service available to buyers of Thinkpad SL notebook computers, the newest line of business laptops from Lenovo. Not to be outdone, Boston-based Carbonite is expected to announce soon that it has formed an even broader partnership with the Chinese computer maker: All Lenovo IdeaPad and IdeaCentre computers—the company’s lines of home and home-office laptops and desktops, respectively—will now come with Carbonite’s online backup software pre-installed.

If IdeaPad and IdeaCentre owners give Carbonite an e-mail address and password, they’ll get 30 days of free backup service on Carbonite’s servers, after which they can elect to continue the service at $49.95 per year. The arrangement is a coup that could bring Carbonite tens of thousands of new users at a time when the competition for customers of online backup services is all about exposure, branding, and name recognition.

At the same time, Carbonite is about to announce formally that it has closed a $20 million financing round, the third since the company’s founding in 2005. (It raised $2.5 million in Series A funding in February, 2006, and completed a $15 million Series B round in May, 2007.) Carbonite co-founder and CEO David Friend, a veteran of the Boston technology scene with five previous startups to his name, calls the new financing round “a real achievement for the company,” given the general sense of caution prevailing in investment markets. All of the company’s existing investors—including Menlo Ventures, 3i Group, and CommonAngels—came back for the latest round, but it also included a new institutional investor, Performance Equity of Stamford, CT.

For the Series C round, “We were looking for somebody with their feet more in Wall Street than in Sand Hill Road, to show that we have a working business model,” Friend says. “This is no longer venture capital that we’re raising—it’s expansion capital, and the people who gave us term sheets did so because they looked at Carbonite and saw that we have a marketing engine where we can put a dollar in the top, turn the crank, and get four or five dollars out the bottom over the next two or three years.”

Whether online backup services really turn into that kind of money machine—and who ends up with the profits—will depend to a large extent on how quickly consumer awareness of the technology spreads and which company can get its name in front of computer users first.

Most computer users are aware of the possibility of losing the data on their local hard drives, whether through theft, hardware failure, or some other disaster. And most make at least desultory efforts to back up crucial business or personal data, often on DVD-RW discs or on a second, external hard drive. But relatively few people so far are aware of services like those from Carbonite and Mozy, which copy the data on PC hard drives to far-away data centers over broadband Internet connections. These backups occur automatically whenever there is new data to be duplicated. In the event that local data is lost, it can be restored by copying it back from the companies’ servers. Users don’t have to be concerned about where the services’ data centers are located, or how they’re run—which is what makes online backup an example of cloud computing.

Mozy and Carbonite, the two leading brand names in the online backup market, both offer unlimited storage, and are roughly equivalent in price—the home version of Mozy costs $4.95 per month, while Carbonite’s $49.95 annual fee breaks down to $4.16 per month. (The Mozy-powered online backup service offered with the Lenovo Thinkpad SL is a 90-day free trial with a storage limit of 5 gigabytes; the Carbonite service preinstalled on Lenovo Ideapads is a 30-day free trial with no storage limit.)

Both services are designed so that users can “set it and forget it,” as the saying goes. (I’ve been using Mozy for several months to back up both my home and office computers, and for the most part, I’ve found that it lives up to this promise. The only time I have to pay attention to the software is when I’m sharing bandwidth with other people and I need to manually interrupt the automatic backups.) But the fact that the services are designed to work in the background means that they’re largely indistinguishable to users.

I asked Friend how Carbonite will be affected if online backup comes to be seen as a commodity. “I hope it does become a commodity, because our view is that a really good backup service should have no features—it should just work,” he replied. Which means that for backup providers, “it just comes down to the issues of marketing and costs.” Customer acquisition is Carbonite’s key challenge right now, because the more people it can sign up, the greater the economies of scale in its data centers, and the higher the barriers to potential rivals, who would have to build equally large data centers to compete on cost.

That’s why the new funding round will go mainly toward growing the company’s data centers—for each new customer, Carbonite has to spend $15 to $20 on storage arrays, Friend says—and toward advertising (the company takes out spots on radio talk shows such as Rush Limbaugh, Howard Stern, and Bill O’Reilly) and cross-marketing arrangements like the Lenovo deal. Carbonite’s backup software is also pre-installed on Packard Bell computers sold in Europe.

“To the extent that this does become a commodity, it’s going to come down to brand,” Friend says. “If you have Carbonite and you have Mozy and they’re the same price, which one are you going to buy?” Carbonite’s strategy, he says, is to align itself with trusted brands and partners like Lenovo and Packard Bell. “If you survey people, one of the things they will ask when they hear about online backup is ‘How can I trust them with all my data?’” Friend says. The message of the company’s partnerships, he says, is “it’s real, it’s available, and a company like Lenovo says you can trust these guys.”

Currently, Carbonite’s user base numbers in the hundreds of thousands, and is tripling yearly, Friend says. That may exceed Mozy’s user base—third-party analysts cited by Carbonite say that the company has the leading share in the online backup market. “We want to be at a million paying subscribers sometime next year, and if any of these deals like the Lenovo deal work out, we could blow past that,” say Friend. “Once we get to 10 million, we will be the size of a McAfee, which is basically where we want to be. We want to be to online backup what a Norton or a McAfee is to antivirus—and anybody who is willing to pay $50 a year for antivirus software is probably going to be willing to pay $50 against the risk of losing all their data.”

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

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