LegalZoom: Distinction Over Disruption
This is day two of a closer look at LegalZoom in light of its recent S-1 filing with the SEC.
Building a business that is on the threshold of an IPO is remarkable. But is LegalZoom disruptive?
The tech magazine Fast Company said so, when it included LegalZoom in its list of the World’s 50 Most Innovative Companies:
LegalZoom spent a decade making law firms easiest and most lucrative work–wills, uncontested divorces, and incorporations–available to all via easy online forms. Its new online consulting work goes even further to disrupt the $200 billion legal market.
(Incorporations as the “most lucrative work” for law firms? Cancel my subscription!)
The D word was echoed later in that same article by LegalZoom CEO John Suh:
These consultative services have attracted more than 70,000 customers, adding $12 million to LegalZoom’s estimated $200 million in 2011 revenue. “The next 10 years are about harnessing this platform,” Suh says. “We have an insatiable appetite for disruption.”
(The S-1 shows 2011 revenues lower than this, at $156 million, with earnings of $6 million after losses the two prior years).
So is LegalZoom really “disruptive” and does it really matter?
When I think of “disruptive” the classic example of Skype comes to mind: you take something that was costly and hard (international long distance) and make it free and easy. Almost overnight, you could hear the sound of prices falling for the entrenched incumbent telcos that had long priced international long distance at near extortionate levels. (I think I paid about $72 for a 1 hour Mexico-U.S conference call in the early 1990′s).
Skype then did a sort of strategic pivot, and moved into a freemium model where it offered enhanced services to customers and businesses for a fee that leveraged the app everyone already had on their computers and was comfortable using.
One way to see if LegalZoom really thinks it is disruptive is to look at the S-1. Some variants of the word appear in that document, but all in the context of risk factors for the business, and not as a selling point of the business model itself. An example:
We may not effectively ensure that our website is accessible and any significant disruption in our online services could adversely affect our business, brand and reputation, results of operations, financial condition and future prospects.
This doesn’t mean LegalZoom’s business is any less attractive, and it certainly shows that they have reatained quality SEC counsel. Or did they use their own S-1 template, which is on special for $197, this month only?
And as to the size of the market they intend to “disrupt,” Fast Company called it a $200 billion market. The S-1 describes it thusly in the “Business” section:
According to the U.S. Census Bureau, in 2009, there were approximately 26 million small businesses with fewer than ten employees. We estimate that in 2010, approximately two million new businesses were formed in the United States. According to the U.S. Bureau of Economic Analysis, legal services in the United States in 2010 represented a $266 billion market. We estimate that in 2011 approximately $97 billion of legal services were provided to small businesses and consumers, based on a study conducted on our behalf by L.E.K. Consulting LLC.
Now we are getting somewhere. LegalZoom is not trying to “disrupt the legal industry.” Some who have implied that LegalZoom will somehow be a competitive threat for “old-line lawyers” and their firms appear to be off the mark.
They are going for less than 50% of the entire pie, namely the small business/consumer legal market. And $97 billion is certainly huge, and LegalZoom knows as well as anyone that it is notoriously hard to reach profitably for most lawyers. In retrospect, this market choice should have been obvious with one of the founders (and key spokesman) being Robert Shapiro.
What LegalZoom has been doing the last 10 years is building a brand, becoming distinctive.
Initially, LegalZoom looked like it was a pure DIY model: buy law forms cheaply online and go on about your business. As we saw last time, that had UPL issues. But it also had something perhaps worse: one-off customers who buy once and then go away for months or years. To go public they needed the essential feature that tech investors covet: subscription revenues. They need one of these on file for a lot of people:
(Apple had one of these for over 200 million customers as of 2011 via iTunes and it appears to be working OK for them).
As I noted last year, this means over time LegalZoom will be more like Netflix than Nixon Peabody. A Low-cost menu of legal plans that hit consumer or small business credit cards each month, whether they use them or not.
On Tuesday, I will let this topic go with a look at the pricing realities and real competition for LegalZoom and why they are doing a lot of things right.