e-discovery 2.0

Last month, Gartner updated its Magic Quadrant for Email Active Archiving. I have spoken to the analysts (Carolyn DiCenzo and Ken Chin) many times, and have found them to be keen observers of the archiving market. So, it’s interesting to read what they’ve concluded from all their customer interviews, and track what’s changed in the past 12-24 months. Comparing this year’s report to those from 2007 and 2006, I was struck by 3 observations, leading to 1 simple conclusion.

Observation #1: The Status Quo Is Alive And Well
Despite the thousands of hours that I’m sure vendors have spent trying to influence Gartner, about 80% of vendors in the report have seen no meaningful change in their rankings since last year. Most notably, Symantec is still the only company in the “Leaders” quadrant, while Autonomy/ZANTAZ remains rooted in the “Visionary” quadrant where it has been stuck for the past 2 years. Unlike Forrester, Gartner does not believe that Autonomy’s acquisition of ZANTAZ has made a shred of difference to ZANTAZ’s “ability to execute”, which is the main criterion by which it trails Symantec.

Observation #2: To Move Up, You Have To Differentiate
Only two vendors have significantly improved their positions over the past 2 years. One is Mimosa, which has separated from the pack by moving up from “Niche Player” to “Visionary”, primarily because it is “easy to deploy and manage” and offers “near continuous data protection and recovery features”. The other is CommVault, which has overtaken 8 other vendors. Gartner attributes CommVault’s rise to its new release which “supports the archiving of SharePoint and files, and dramatically improves search, single instance store, and ease of use”. In both cases, vendors are only able to improve their ranking by differentiating their products and offering something new.

Observation #3: E-Discovery Is A New Way To Differentiate
Each year, Gartner emphasizes that e-discovery functionality is becoming increasingly important to archive purchase decisions. In 2006, it advised vendors to “integrate with tools to manage the discovery process”. In 2007, it added that vendors must “offer more than just search and packaging, but also provide tools for review and case management.” This year, Gartner expanded its comments by also saying:

“Discovery tools are fast becoming a requirement to play in the enterprise part of the market. Robust search, review and export features are not only required but are the focus for most scalability concerns… many archiving vendors are partnering with e-discovery vendors to provide multiple options.”

To reinforce the point, Gartner moves EMC down from “Challenger” (top left) to “Niche Player” (bottom left), and cites the fact that EMC has “no e-discovery beyond search” as a major factor in its decision.

Conclusion
As the archiving market matures, it’s becoming increasingly hard for vendors to improve their rankings. Symantec is the runaway leader and the only way for someone to catch them is to find new ways to differentiate. Mimosa and CommVault are making progress because that’s exactly what they have done, but everyone else is either stuck or, in EMC’s case, slipping backwards. As those vendors consider how to move up and to the right, they should take a close look at e-discovery as an area of growing importance where meaningful differentiation is possible.

UPDATE: Since writing this post, I have received additional information suggesting that this deal was NOT for Zantaz’s Desktop Legal Hold product, as previously reported. Please see comments section for full details.

I must confess, I was skeptical when ZANTAZ announced its new desktop legal hold solution without a single reference customer. But events have proved me wrong:

On January 3^rd, Autonomy (ZANTAZ’s parent company) let slip in a UK publication that that “an unnamed major international bank” had purchased ZANTAZ’s “compliance and regulatory solutions” for an eye-popping $70 million. Later reports confirmed the number, and provided more detail: Citigroup will pay ZANTAZ $70 million over 4 years for Desktop Legal Hold.

Citigroup is an existing ZANTAZ customer with a lot of data in Digital Safe. My guess is that the deal covered much more than just Desktop Legal Hold, and that many of the scheduled payments are tied to performance milestones. But regardless, this is a spectacular transaction (perhaps the largest ever e-discovery software deal?) and I offer the ZANTAZ team my hearty congratulations.

Beyond being good news for ZANTAZ, the deal has broader significance in two regards:

1. It confirms that the sub-prime mortgage crisis is driving demand for e-discovery software. That syncs with my own experience with several of our financial services customers;
   
2. It may spur other archiving vendors to add desktop legal hold solutions to their product portfolios, so that they are not at a competitive disadvantage to ZANTAZ.

This deal will also accelerate Autonomy’s increasing focus on e-discovery. In its core market of enterprise search, Autonomy is caught between a “rock” (Google) and a hard place (Microsoft, which announced the acquisition of Autonomy’s larger competitor, FAST). Moving towards e-discovery is the obvious way Autonomy can avoid getting crushed by the giants. I expect more news about Aungate is coming soon.

First ZANTAZ, then Stratify, and now MetaLINCS – all within 5 months. The e-discovery space is consolidating fast!

On December 6, Seagate announced its acquisition of MetaLINCS. Financial terms were not disclosed, but my sources tell me that the price is $80 million. Given that MetaLINCS is a 50 person company with fewer than 25 customers , this is a fantastic outcome and I congratulate the MetaLINCS team. My educated guess is that in 2007 MetaLINCS will earn $5 million to $10 million in bookings, making this a healthy multiple of 8-16X. Contrast that to the 5X revenue paid by Iron Mountain for Stratify, and MetaLINCS shareholders clearly got a great deal.

That still leaves the question of why Seagate, a non-entity in e-discovery, would want to pay such a rich price. The answer, according to Seagate, is its desire to grow beyond manufacturing hard drives by having its services group provide a broad range of “solutions”, including archiving, back-up, recovery, and e-discovery. EVault, acquired last year for $185 million, is the backup and recovery part of that equation; MetaLINCS is the e-discovery component; and, say the analysts, don’t be surprised if an archiving acquisition is next.

Does Seagate’s entry into the e-discovery market make any sense? I don’t think so, and here’s why: there is a mismatch between Seagate/MetaLINCS and its target market. Seagate’s services offering will appeal most to mid-market companies which often outsource archiving, backup, and recovery. Seagate admitted as much when it announced the EVault deal. But the mid-market will be the last place to adopt e-discovery software like MetaLINCS; it is the Global 2000 who will move first, as they are the most sophisticated and in the greatest pain. For the limited amount of mid-market e-discovery business that is out there, Seagate/MetaLINCS will compete with every other service provider, from Kroll to Stratify to the hundreds of mom-and-pop shops across the country.

Net net: this acquisition is great for MetaLINCS, is small enough to be immaterial for Seagate, and will likely have no impact on the e-discovery market which will be won and lost in Global 2000 companies that are not interested in a Seagate/MetaLINCS service offering.

First ZANTAZ, then Stratify, and now MetaLINCS. It makes you wonder who will be next.

Technology companies are notorious for aggressive marketing, whereby they either announce products that do not exist or wildly exaggerate their capabilities. So when ZANTAZ announced its new Desktop Legal Hold solution alongside an image claiming that it can help you “become your company’s superhero”, I was naturally wary. Reading the press release only heightened my suspicion that ZANTAZ’s marketing department may be running ahead of its product development team. For example:

• The release cannot name a single customer using Desktop Legal Hold. The best ZANTAZ could do was quote a retired executive from BASF, who spoke about the potential value from this type of solution (not the actual value realized from this specific solution by a current customer);
• ZANTAZ makes a series of wild claims about the solution. My personal favorite: “Desktop Legal Hold automatically overcomes spoliation, obfuscation, misclassification and non-classification of important data” Need I say more?
• Desktop Legal Hold is not listed in the “Solutions” or “Products” sections of ZANTAZ’s website. Perhaps I’m missing something, but I can only find it mentioned in the press release.

All of this will be re-assuring in the short-term to Guidance, whose Encase product is the leading desktop collection and preservation tool. I doubt customers will be rushing to entrust something as important as their legal holds to ZANTAZ until the product looks more proven, and its capabilities are more clear.

That said, ZANTAZ has clearly signaled its intention to attack Guidance’s core market. ZANTAZ wants to make it easier for its customers to get data into its archives. And it wants a piece of the revenue in this market: from Guidance’s quarterly financials, if you deduct revenue from services and its e-discovery product, it looks like the Encase business is worth $30-35M per year in license revenue. That’s a meaningful prize for ZANTAZ.

It will be interesting to watch how this develops.

People get married for a million different reasons. Some do it for love; some for a green card; some because their parents tell them to; and others just because it is time to settle down. So it is with corporate mergers, where many different motives come into play. When I heard about Autonomy’s acquisition of ZANTAZ for $375M on July 3, I could not help wondering what had led to their marriage.

In announcing their union, the happy couple explained that the #1 reason is to achieve “significant scale in a number of key financial areas”. A second reason is that combining the companies will lead to cost savings of $25M per year. In other words, according to the companies, it is a love marriage, in a similar vein to Veritas’ acquisition of ZANTAZ’s main competitor, KVS, in 2004. In that case, Veritas paid 10x trailing revenue for an industry leading product to which it then added tremendous value by building out distribution in the US.

In this case though, the evidence does not support a love story. ZANTAZ is already doing $100M in revenue, so adding Autonomy’s $260M in annual sales does not exactly propel it into a different league. If cost savings are the motivation, then why run ZANTAZ as a separate subsidiary instead of integrating it with Autonomy more closely? Two other things also arouse suspicion: timing and price. On timing, I have to ask: who makes a major announcement on July 3 when half the country is on holiday and the other half can only think about fireworks and hot dogs? Either Autonomy/ZANTAZ’s PR departments are incompetent, or they are trying to downplay the whole thing. Second, on price, why is it so low? ZANTAZ sold itself for 3.75X trailing revenue, a fraction of KVS’ multiple and less than the 4-6X revenue that CommVault and Guidance trade at today.

The story makes more sense as a marriage of convenience. Consider what buyer and seller each get from the deal:

• Autonomy: It is easy to understand why Autonomy is a willing buyer. As my friend Dave Kellogg likes to say, their core business of enterprise search is caught between a “rock” (known as Google Enterprise Search) and a “hard place” (custom apps leveraging open source components like Lucene and MySQL). Yes, Autonomy continues to have the occasional good quarter, but long term their revenue will likely trend down. In that situation, management only has a couple of options. One is to bulk up, for example, by giving up 11% of the company to increase its revenue by 38%, which is what the ZANTAZ deal does. A second option is to diversify into new, growth markets where Google is unlikely to follow, like email archiving and e-discovery. Again, ZANTAZ fits the bill.
• ZANTAZ: In many ways, ZANTAZ is a remarkable company. Having spoken to some of its early investors, management team, and employees, I have huge respect for the way that they weathered the technology downturn early in the decade and built the company back up. The company grew rapidly on the back of big deals for tape restoration into Digital Safe (hosted archive). When ZANTAZ saw the on-site archiving market grow, it added EAS via a smart acquisition. The problem is, having done all that, shareholders had no way of realizing a return. The public market is not interested in the low-margin hosting business that provides the bulk of ZANTAZ’s revenue; for larger companies who want to acquire an archiving product, there are many cheaper, less complicated options. Enter Autonomy who, if nothing else, can provide ZANTAZ’s patient shareholders with liquidity.

Missing from this analysis is any mention of the value Autonomy will add to ZANTAZ’s business, mainly because I cannot think of any. Best case, it leaves ZANTAZ alone, as EMC wisely did with VMWare; worst case, it merges Aungate and the IDOL platform with ZANTAZ and they spend the next few months debating how to reconcile the product roadmaps.

None of this is to say that the marriage will not be successful. As anyone who has seen When Harry Met Sally can tell you, there is no single formula for a successful marriage. I, for one, certainly wish the happy couple well.