AOL Boosts Its Data Storage With Xdrive Buy

In a move that might be a timely boost to its ability to compete head-on with Yahoo and MSN and others as a one-stop portal, America Online has said it bought online data storage and backup firm Xdrive for an undisclosed sum.

AOL said that with privately held Xdrive on board, it would be able to boost its ability to offer free and paid storage to users of its AOL.com portal and its original online service to store e-mail messages, digital photographs and other information.

Six-year-old Xdrive will also continue to operate as an independent subsidiary of AOL and keep its home in Santa Monica, Calif., while all 34 employees become part of AOL’s West Coast-based Digital Services unit. Xdrive will continue to offer its online backup storage services directly to customers, offering 5 gigabytes of storage for US$9.95 per month.

Digitization Skyrocketing

“The digitization of consumer home media is skyrocketing, with consumers and AOL members increasingly looking for easier ways to protect and manage a wide variety of important data files and digital media assets,” Gio Hunt, senior vice president of New Business Ventures for AOL Digital Services, said. “Xdrive will further enhance AOL’s consumer storage offerings to deliver a more safe and secure digital lifestyle for our members.”

Portals and would-be portals such as Google have increasingly begun to offer free storage for a variety of media that consumers might want to keep online. The battle began with an escalation of e-mail storage capacity, with Google making headlines with its 1 GB offering that has since been matched by most of its rivals.

The same trend has extended into the photo area, with portals and digital photo sites offering consumers free space to store their images.

Analysts say AOL was likely drawn to Xdrive because it already has an extensive feature-laden online storage offering developed. That includes a security and privacy system that has helped Xdrive’s services win numerous awards in recent years.

Competitive Landscape

Online storage expansion has been driven by the sharply lower cost and smaller size of computer storage media, which enables companies to create and maintain large server farms with billions of bytes of data for relatively little cost.

And with Yahoo, Google and others offering free storage, having similar features on its menu of services is seen as essential for AOL if it hopes to compete effectively with its rivals for user eyeballs, Forrester Research analyst Charlene Li said.

“Portals know that the more a user stores with them, the less likely they will be to leave,” Li said. While the limited portability of Web e-mail has been a loyalty-builder in the past, portals know that if digital photographs and even other media, such as music or home-made digital movies, are added to the mix, users will be that much more likely to stick with a portal for the long haul. “Right now, it’s all about building loyalty, and storage is a great way to do that.”

The timing of the acquisition, the first this year for AOL, was seen as key. AOL is about to begin a massive, $50 million marketing blitz to support its re-invented Web site, AOL.com, which moved the company away from being a walled-off network for subscribers and toward being an open Web portal, one that now ranks third behind Yahoo and MSN.

Longterm Profitability

Li said AOL is positioned to capture Web users’ attention, with its AIM Mail a strong entry into the Web mail fray because of its integration with the hugely popular AOL Instant Messenger and new features such as free AOL Blogs drawing younger users. AOL also has a deep well of content from parent company Time Warner that it can leverage to draw users to the AOL site.

Whether AOL can make the existing Xdrive business profitable long term is another question, however, and most analysts believe the company faces an uphill battle there. For one thing, the services that Xdrive provides are now available from a range of other vendors, from portals to Web domain registrars and many others.

Many of the home-based businesses and on-the-go consumers who Xdrive originally appealed to have now found the cost of having their own backup systems more cost-effective. Xdrive has tried to counter that trend with new offerings, including a recently launched service that enables users of Palm and Sony hand-helds and smartphones to use the Xdrive site to store and deliver digital music.