Should investors be worried that EMC lost a bid to sell its document protection software to a big buyer of its storage hardware? Surely such revenue represents a tiny proportion of its total — after all data storage hardware remains its biggest source of revenue and profit. But with the law of small numbers on its side and a market-leading technology, a startup is growing fast and taking business from EMC in the $10 billion document security market.
The startup in question is WatchDox, a Palo Alto, Calif.-based provider of document security, that claims it recently won a “seven figure” contract from EMC after its Syncplicity product — based on technology from a startup that Boston Business Journal dubbed a DropBox also-ran acquired by EMC in May 2012 — failed a test given by a 50,000 employee insurance company.
EMC spokesperson Dave Farmer said on September 15, “EMC does not discuss specific customer situations, but this is factually inaccurate.” However, Farmer declined the opportunity to explain what he meant when he said “this” — did Syncplicity win the contract or did it not fail the test described below?
WatchDox has implemented a new idea for corporate information security. As I wrote in February 2012, “Instead of trying to tie security to specific physical devices, WatchDox wraps a security envelope around corporate documents.”
For a movie producer, there is nothing worse than the script of a movie getting into the public’s hands before the movie is released — as happened this January with Quentin Tarantino and his script for The Hateful Eight. After all, that unintended release could spill the beans on a key turn of the plot — and change what would have been a blockbuster into something that most people decide they don’t need to pay $15 to see in a movie theater.
Before getting into the threat that WatchDox poses EMC, it’s pretty clear that EMC has been hanging on — despite a plunge in its stock price from around $100 in 2000 to its current $29.46. For the first half of 2014, EMC reported $11.4 billion in revenue – up about 3% from the year before – and net income of $1.05 billion which is down 23% from the same period in 2013, according to its most recent quarterly statement.
EMC makes most of its money from selling data storage hardware and virtualization software and services. According to its most recent quarterly statement — which reports on five business segments – 68% of EMC’s first half 2014 revenue came from information storage, 25% from VMWare, and the balance from RSA (4%), Information Intelligence (3%), and Pivotal (1%).
Document security is an unspecified part of EMC’s Information Intelligence Group which suffered a 13% drop — down $72 million in the first half of 2014, according to EMC’s second quarter 2014 report. “This business continues to make progress as it continues to innovate to meet customers’ demand for technologies that work seamlessly in mobile cloud environments, like xCP and Syncplicity,” notes EMC’s 10Q.
Moti Rafalin — a summa cum laude graduate of Israel’s Technion and Harvard MBA — who I interviewed in February 2012 begs to differ. Before co-founding WatchDox, Rafalin was the General Manager of Application Management Business at EMC — a job be got when EMC acquired nLayers. Rafalin claims that he turned “nLayers technology into a profitable business, doubled its team, and quadrupled its revenue and product portfolio.”
In a September 12 interview, Rafalin told me that WatchDox won a “seven figure contract” from a 50,000-employee insurance company against EMC’s Syncplicity product. Rafalin said, “The insurance company tested Syncplicity and the testers were able to log into the documents of the company’s chief information security officer. So the insurance company went with WatchDox’s product even though EMC offered to give Syncplicity at no charge to the company along with the EMC hardware it was buying.”
Rafalin takes issue with EMC’s comment that “this” is factually inaccurate. He said, “We have several enterprise customers that formerly used Syncplicity as well as other solutions. When it comes down to it, enterprises need more than good file sharing, they need the data-level file protection that only WatchDox provides — at the end of the day, [rival solutions like Syncplicity] can’t provide that.”
Ovum’s principal Enterprise IT analyst, Richard Edwards, believes that WatchDox’s claim sounds plausible though he is not familiar with this particular case. As he said in a September 14 interview, “I’m guessing that [the reason WatchDox passed the test that it says Syncplicity failed] was the rights management technology.”
WatchDox — which Rafalin told me “has six of the top 12 private equity firms including Blackstone Group and five of the six largest Hollywood studios including Sony as customers” – also claims that EMC announced at the end of 2013 that it was going to introduce the same product functionality that WatchDox provides but that EMC has not yet released that functionality.
WatchDox’s chief product officer, Ryan Kalember, explained on September 12, there are many estimates for the size of its market. He thinks that the median forecast is $10 billion and growing at 40%.
WatchDox is a small company growing fast. According to Rafalin, “Since 2012, we have more than doubled to 100 people, our funding has reached $35 million, and our revenue is up four-fold into the eight figures. And we have 400 large customers through OEMs like Hewlett Packard.”
Ovum – in an August 28, 2014 report that surveyed 5,197 users — concluded that WatchDox leads the “Enterprise File Sync and Share” industry in product features — but not in market share. Ovum wrote that WatchDox ”ranks highest on the Ovum Decision Matrix in terms of features that address end-user and IT management requirements, but the vendor’s market impact is very low.”
Gartner is not as sanguine about WatchDox — noting in a July 2014 report that ”WatchDox is a relatively small player in terms of employees and revenue. Supporting large on-premises implementations with complex requirements has been challenging for the vendor on a few occasions.”
When I think about how EMC makes money, document security is not too important — unless technical weakness in its Syncplicity product casts a dark shadow over the security of all the other products EMC sells to big companies.
