Carbonite Eyes IPO, Aims to Be the Symantec of Online Backup

1/27/10Follow @wroush

The first thing you should know about Carbonite, the Boston-based online backup company, is that it is indeed named after the ice-like substance in which Darth Vader encased Han Solo at the end of The Empire Strikes Back. David Friend, Carbonite’s co-founder and CEO, even has a replica of the frozen Solo in his office.

But if you ask him whether there’s an intentional resonance between the idea of preserving your data online and being frozen in carbonite, the answer is not really. “That’s an added benny of the name, but my first criteria for a name are that if you say it you should be able to spell it, and the URL should be available,” Friend says. “If it means something cool that’s relevant to your product, so much the better.”

In other words, Friend is a certified nerd, but with a hard-edged, practical bent. And that’s more or less how Carbonite spins its service, too. Most PC users don’t back up their data at all, let alone on the Internet, so cloud-based storage of the type Carbonite offers is still an exotic, high-tech idea for many people. Yet Carbonite spends most of its advertising dollars buying spots on populist radio and TV talk shows hosted by the likes of Glenn Beck, Rush Limbaugh, and Rachel Maddow.

Its pitch is simple, playing to the same widely held fears about data loss or malware attacks that drive many consumers to buy anti-virus software from McAfee or Symantec. Even Carbonite’s pricing and service model—$55 per year for unlimited Internet-based backup, period—is meant to save customers from having to fuss over the details. (The company was the first to offer flat rate, all-you-can eat backup, and takes credit for converting most other backup providers, including archrival Mozy, to this model.)

David Friend

Carbonite, in other words, is a smart company with some very sophisticated technology in the back room—but it’s even more focused on the challenges of marketing that technology to a non-tech-savvy public.

Next week I plan to compare Carbonite’s backup service to Mozy, its main competition, in a detailed review. But today I want to focus more on Carbonite’s business strategy, drawing on a January 13 interview with Friend at the company’s 14th-floor offices at 177 Huntington Avenue, in the Christian Science complex. The most important takeaway from the interview was that the serial entrepreneur, who has co-founded five previous technology companies, from music-synthesizer maker ARP Instruments to Web conferencing startup Sonexis, has big plans for his sixth. If all goes according to plan, he says, Carbonite will register for an initial public offering this year and go public sometime in 2011.

That’s not because it needs the money to keep growing—revenue has doubled every year since the company launched its service in 2006, and the company still has $15 million of the $20 million Series C money it raised in late 2008 in the bank. (That’s not even counting the additional $20 million in Series D funding that it raised earlier this month.) Rather, it’s because Friend sees Carbonite as the next Boston-area tech-and-marketing company that could go really big—the next VistaPrint (NASDAQ: VPRT) or Constant Contact (NASDAQ: CTCT).

And he’s not daunted by the downsides of life in a public company: the investor scrutiny, the endless Sarbanes-Oxley compliance requirements. “It’s expensive and it’s personally risky” to go public, Friend acknowledges. “But what you get for it is access to capital at a rate that is far better than what you would get in the private markets. I’m looking forward to spending a few years running a public company—I love talking, I love road shows, I would love to get out there and pitch Carbonite to the investor community.”

Becoming a publicly traded company is also an important “branding event” for a small firm, Friend notes: “A quarter of the antivirus products on the market are actually viruses, but when you install antivirus on your PC from a McAfee or a Symantec, you don’t worry about that, because their reputation precedes them; they are public companies.”

If Carbonite isn’t yet a household name like those firms, it’s because the world is just now beginning to catch up with the company’s original idea of simple, flat-rate, unlimited backup. There were already a few online backup vendors when Carbonite turned on its service in May 2006, but they all charged by the gigabyte—and they all forced users to use custom software to choose which files they wanted backed up.

“When Jeff [Flowers, Carbonite's co-founder and chief technology officer] and I did our original market research, we realized that once you get beyond the techno-geek crowd, most people don’t have a clue about where their stuff is stored on their PCs,” Friend recounts. “And what customers were telling us was that they wanted something more like car insurance: ‘I’ll pay you $55 a year and I don’t want to spend any effort on this.’ That’s what [the flat-rate pricing] was for—everybody interpreted it at the time as a pricing thing, but it was really an ease-of-use thing.” That’s also why the company didn’t build a separate user interface for the product, but simply worked from the existing contextual menus in Windows—because Friend’s research told him people didn’t want to learn yet another piece of software.

The flat-rate strategy had its risks. For one thing, Carbonite knew that its plan wouldn’t initially bring in enough money to pay for the thousands of disk drives it needed to equip its data centers, given the relatively high cost of storage back in 2006. “There was no margin in it at the time,” Friend says. “We were praying that storage costs would come down, because there was no way we could make money at $50 a year.”

Luckily, the bet paid off. “Disks have been getting cheaper at a rate of about 40 percent per year. We were also praying that broadband would become pretty much ubiquitous, and that bandwidth costs would drop as well. It was a very good time to launch the product, because all of those things have really come to pass.”

But while memory and bandwidth trends moved in its favor, Carbonite had to scramble to make sure it could keep track of all of the files consumers wanted to back up. Typical commercial file systems just aren’t designed to store tens of billions of files, Friend notes.

“Every time you double the size of your installed base, pieces of software that used to work stop working,” he says. “You have to scramble and write around it. I remember when we outgrew Microsoft’s NTFS file system [the one used in Windows XP, Windows Server 2003, and later versions of Windows]. We’d call up Microsoft and they’d ask, ‘How many files do you have on the system?’ and we’d say ‘Half a million,’ and there would be dead silence. Eventually they would say, ‘We didn’t have that in mind.’”

So all of the networking software within Carbonite’s data centers—the rules that determine how incoming files get spread out over the company’s disk farms, how to compensate for dead drives, and the like—had to be written and rewritten in-house. The company will bring its fourth major generation of file management software online this spring.

“We have more data than Yahoo Mail,” Friend says. “There are probably 10 data centers in the whole world with this much data.” Though Carbonite won’t reveal how many customers it has, Friend says the company currently stores about 39 billion files, and that over time, it’s restored about 3.2 billion.

The scale of that effort creates an inherent barrier against the emergence of a second major competitor, Friend says. “If somebody said they were going to raise $50 million and try to compete with Carbonite, they couldn’t. Until you get to this size and this number of customers, there’s no way to test it. You have to grow incrementally.”

As Carbonite itself has grown, it has stuck largely to its simple message about helping customers survive computer disasters. But it’s also added a few innovations along the way. Last March it finally introduced a Mac version of its backup software. (Friend says that was a two-year project, because the first version of the Mac client “looked too much like Windows,” forcing the company to start over. The lesson: “You don’t take Windows developers and put them on a Mac product—the Mac people can smell it right away.”)

At the same time, Carbonite introduced a remote file access feature that let customers access individual backed-up files over the Web, from any computer. This was much more of a stretch than rolling out a Mac version, because for the first time, it meant the company was venturing beyond just duplicating customers’ files, and transforming its service into something resembling a cloud-based hard drive or file sharing system.

Carbonite’s free iPhone app, introduced quietly this month, demonstrates the power of the remote-access feature; it lets Carbonite customers browse their backed-up files from the screens of their phones. “It’s pretty cool,” says Friend. “If you’re sitting at the bus station and you have nothing to do and you want to read that document that somebody sent you yesterday, you can drill down into your files.” Files of types that the phone can handle, such as PDFs or Excel spreadsheets or Word documents, can be opened right on the device.

With more features like this likely to pop up in the future, I asked Friend whether he thinks of Carbonite as a cloud computing company. He was reluctant to take on the label.

“Certainly, what we do is a great example of cloud computing, and online backup is one of the few examples of cloud computing that anybody actually seems willing to pay for,” Friend says. “But that term doesn’t mean much to anyone outside the computer industry. The average person who hears about us on Rachel Maddow or Rush Limbaugh could care less about cloud computing. We are a consumer product, and how we solve the customer’s problem is of no consequence to the customer—all they see is the benefit.”

With the introduction of a beta version of Carbonite Pro last fall, Carbonite also became a business product. Here, the company has departed from its flat-rate model: the service is priced in tiers depending on how much data a company wants to back up, starting at $10 per month for up to 20 gigabytes and ranging up to $250 a month for up to 499 gigabytes. The Pro version put Carbonite back on a par with Mozy, which has long offered both Windows and Mac versions and both home and professional versions of its online backup service.

While Friend is adamant that Carbonite’s easy-to-use software interface makes it a better choice for home users than Mozy, he acknowledges that Carbonite Pro and MozyPro “are very similar in many respects…They’ve been in the market a couple of years, so we are going after them aggressively.” In the business-backup space, however, there’s plenty of room for both companies to grow, Friend believes. “You’d be amazed at the backup processes most small businesses have,” he says. “They’ll go over to Best Buy and buy two external hard drives and do a backup and send one home with the receptionist to keep in her basement. This is what we’re competing with. So we’re both going to do great in this market.”

In fact, while Carbonite’s main rival in the marketplace is Mozy, both companies have a bigger competitor: apathy. Most computer users simply don’t back up their home or work computers, or they wrongly assume that their employers are doing it for them, Friend says. That’s pretty frightening, given statistics showing that 35 percent of PC users experience a complete data loss at least once over the life of their desktop or laptop machine. If consumers grew as vigilant about backing up their data as they are about computer viruses, Friend said, it would make Carbonite into a “huge win” for its investors.

“There is no reason Carbonite couldn’t be as big as a Symantec or a McAfee, with 25 or 50 million paying subscribers,” says Friend. “Anybody who is willing to pay them $50 or $75 a year to protect against viruses would probably be willing to pay that amount to protect their data as well.”

To promulgate its argument about the value of online backup, Carbonite has to be a marketing company as much as a technology company. It may spend a lot on essentials like disk drives, bandwidth, rent, electricity, and customer support—but from all indications, it spends even more on advertising, marketing, customer acquisition, and brand management. (The company is so zealous in this area, in fact, that last year Internet users uncovered cases dating to 2006 in which two junior Carbonite employees had planted positive reviews on Amazon without identifying themselves. The episode attracted scathing criticism from New York Times tech columnist David Pogue and others; Carbonite removed the reviews and Friend apologized for the incident, attributing them to the employees’ inexperience and overenthusiasm.)

“Consumer marketing is in our bones,” says Friend. “If you were to ask what’s the big difference between Carbonite and most of the other people in this business, it’s that we really want to build a brand—to be to online backup what Symantec is to antivirus. When you think of backup, you should think of Carbonite first. And that’s where the bulk of our money goes, to be honest.”

An IPO would presumably bring in enough cash to let Carbonite boost the volume of its marketing campaign by several more notches. So this is one group of nerds that you’re probably going to be hearing a lot from in the next few years.

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

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  • Shaw

    I use the service as a consumer and find it easy and comforting. A friend uses it, had to draw on the backup and said the help was great

  • Sara

    As a consultant in the industry, I can tell you that the money Carbonite spends in marketing may pay off for their brand, but its clear their spending less on their backend operations. Lost data, slow upgrades, and slow restores indicate that in terms of technology, Carbonite is going with the same marketing idea: “cheap”.

    In order for a business to rely on a vendor like Carbonite, price shouldn’t be the only differentiator. Software capabilities and reliability, as well as support are also important. Without sophisticated software and hardware, the brand promise will get much weaker over-time.

    Other companies to consider for businesses are: Backup My Info!, Iron Mountain, and Evault.

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  • http://www.elephantdrive.com Mike

    Thanks for the profile – lots of useful information for understanding their growth.

    I’m curious what kind of metrics (i.e. revenues, subscriber counts) do you think they will need to execute a successful IPO?

    Also, I’m confused by the statement (or perhaps, implication) that because they have grown revenues consistently, they do not need more money. In a business like Carbonite’s, the cost of customer acquisition is likely the single biggest cost. While it may make sense in the long run, they may be operating at a loss in the early stages of a customers life – in fact, their impressive growth rate and marketing spend almost certainly requires the sort of capital they have raised (and will continue to raise). I’m not suggesting there is anything wrong with the strategy, only that I think it is probably not the case that the won’t actually need the money they’ve raised to continue the marketing and infrastructure development required to achieve the scale necessary for a legitimate IPO. Thoughts on that notion?

    Disclaimer: I’m affiliated with another company in the online backup and storage space.

  • http://www.genotrope.com tsummit

    Interesting that they are so very “old school” interruption marketing driven. I hope that they do become a home run company here in Boston. Just seems ironic that here in the hotbed of Inbound Marketing, they aren’t up to speed. Surely that will have an effect on profitability in the long term. Also, they should look over their shoulder for Dropbox. I know they think it is for nerds, but that is so wrong, just ask my mom, even she can use it.

  • http://www.xconomy.com/author/wroush/ Wade Roush

    @tsummit: Hey Tom. Yeah, my sense is that Carbonite thinks of their target market as a group that probably isn’t even using the Web enough for “inbound marketing” to be effective. But we may also see some changes coming in their advertising strategy. I will check out Dropbox, I don’t know enough about it.

    @mike: You raise an interesting question. My understanding is that Carbonite has about $35 million in the bank. I suppose they could easily spend all of that on customer acquisition (counting advertising) between now and the time of their hypothetical IPO in 2011. Which would require some careful timing.

  • David

    Carbonite has seen a lot of success but I think it’s missing features that other companies are offering. Has anyone reviewed or used Egnyte? I did their demo and was very impressed.

  • http://backupdataonline.com.au Steve

    I agree that apathy is the biggest competitor. But for the apathetic computer user online data backup services provided by the likes of carbonite is surely the easiest & most automated way to backup valuable information. Hopefully they will realise this before its too late