Consolidation Reshapes Online Backup Market

The online backup market is evolving fast. The market is relatively small -- estimates are that it generates a couple of hundred million dollars in revenue in the U.S. annually. However small the numbers are now, the potential size of the market has attracted some very large players, such as EMC Corp. (NYSE: EMC), IBM Corp. (NYSE: IBM), Iron Mountain Inc. (NYSE: IRM), Seagate Technology Inc. (NYSE: STX), and others. Many have wedged their way into this sector via acquisitions. Consequently, there has been a lot of turbulence during the past few years, and more changes may loom on the horizon.

One reason for the small market penetration is that the first generation of online backup was not all that successful. These services first emerged during the dotcom boom at the turn of the millennium, but they weren't embraced by customers. "Several years ago, the market was stymied by a lack of broadband connections," says Dave Robinson, vice president of marketing at EMC's online backup service Mozy.

In addition, vendors did not have sound algorithms in place so the backups were inefficient. Those problems were solved, and gradually more suppliers began to offer these services.

Like most fledgling industries, the early entrants were venture-capital-funded startup enterprises, many of which have emerged as key players. In fact, some did so well that they have been swallowed up by larger enterprises.

Iron Mountain was the first major vendor to snap up a startup and took a "Try Before You Buy" approach to its online backup acquisitions. In October 2004, the company acquired Connected Corp., a provider of online backup and recovery for PC data, for $117 million. Iron Mountain had been reselling Connected's backup service since 2002.But Iron Mountain was not through: In December 2005, the company acquired LiveVault Corp. for approximately $50 million. The two had established a five year partnership, and Iron Mountain had even acquired a 14 percent stake in the startup.

Acquisitions have been common for the vendor as it has attempted to broaden its product and service suite. The company, which generated $2.7 billion in revenue in 2007, has made more than 100 acquisitions in its history.

Seagate has taken a similar track. In December 2006, it acquired EVault Inc. for $185 million. Like other companies, the vendor has been augmenting its traditional hardware sales with new software-as-a-service offerings and lumped EVault into Seagate Services along with other recent acquisitions ActionFront, St. Bernard Software, and MetaLINCS.

EMC, best known as a storage hardware and software supplier, has also moved into the online backup market. In October 2007, it paid $76 million to acquire Berkeley Data Systems, which had developed the Mozy online backup service. The company initially focused on the consumer market but has broadened its reach to businesses with MozyPro.

IBM is another industry giant and a recent entrant in the online backup arena. In December 2007, the company paid $110 million to buy Arsenal Digital. The startup, which had been in business since 1998, has focused on the high end of the online backup market. The company claimed to have 3,400 business customers, including many Fortune 500 firms and telco service providers.PHNS, which is privately held, is not as well known as its competitors. The company's business has centered on providing IT services to health care companies. In April 2007, the company acquired Network Technology Group, whose data services include offsite information technology, backup, disaster recovery, and business continuity services. This purchase signaled a couple of changes for PHNS. First, they were no longer focused exclusively on health care and, second, PHNS became more interested in storage services. In May, the company purchased online backup supplier, AmeriVault, which had attracted 1,270 customers and now operates as a PHNS subsidiary.

There has been a lot of acquisition activity, but many startups are still left standing. "While there have been a lot of changes in the online backup market recently, I don't think we have seen the last of the acquisitions," says Adam W. Couture, principal research analyst at Gartner.