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.
John — I disagree — LegalZoom is potentially disruptive because it has already demonstrated it’s ability to and interest in moving out of the content box. Content is one of my 4 boxes constituting the totality of the legal services model: process, content, advocacy and counselling. The first two are higher volume, lower value while the latter boxes are lower volume, higher value and characterized by the unique aspects of legal knoweldge and lawyer judgment. The first two, have little, if any of those values, yet are the foundations upon which the current legal delivery system is based. With the erosion of that base by alternative content and process providers like LegalZoom, PLC, and various LPO’s, the economic base supporting tradtional lawfirsm is also eroded.
By providing consultative services, LegalZoom may move adjacently to the process box, or more significantly, to the upper boxes of providing advocacy and/or counselling.
These movements will be disregarded as irrelvant to the “real” legal services industry as they are focused on markets already abondoned by that industry (to wit, consumer and small business law). What this commentary misses is that the entrants serving this market face virtually no impediment to moving upmarket. They will do so first by nibbling at the edges — at the more “commoditized” corporate legal services — but with success they will inexorably move into other areas. The erosion of the foundation will thus become a series of unorganized and random flanking attacks. Whether a frontal assault is ever even necessary is questionnalbe.
Big Law is like the citadels of old — with thick walls, formidable defenses, and a deeply embedded status quo intent on survival. Facing such an adversary, the preferred tactic is not a frontal assult. Instead, one surrounds the citadel, sieges and starves it to weakness to take it’s riches and lands, and perhaps ultimately out of existence.
Disruptive technologies are seldom recognized as such by the status quo — and even if recognized, they are often dismissed or downplayed until it’s too late — that’s precisely the point. As former US Army Chief of Staff Eric Senseki says: “if you dislike change, you’re going to dislike irrelevance even more.”
Jeff:
Thanks for the comment; you may be right over time about LegalZoom.
I agree that some new legal market entrants will move “upmarket.” A few current non-traditional providers are already trying to do so. It just doesn’t seem like LegalZoom is focusing on that right now.
Anyone who wants to pursue the higher-end legal market like you describe it needs to be well capitalized. The cost-of-sales to pursue it needs a larger ticket size than a $99 LLC form.
I’ll have a few more thoughts on this when I wind things up with LegalZoom tomorrow.
~ John
Call me old-fashioned, but I don’t think one can talk about disruption without considering quality. Sure, the task of creating contracts is ripe for commoditization, but there are good and less-good ways of going about it.
In terms of their technology, the customization offered, the reliability of their content, and the contract language they use, LegalZoom and its best-known competitor, Rocket Lawyer, leave much to be desired. Here’s my analysis of Rocket Lawyer’s confidentiality agreement: http://www.koncision.com/rocket-lawyer-contract-automation-fail/.
Given the limited quality of what they have to offer, it’s hard to imagine either service attracting sophisticated users. But that doesn’t mean they won’t make money.
Agree with Jeff Carr on this one: LegalZoom is potentially a classic example of disruptive innovation. Clayton Christensen’s “The Innovator’s Dilemma” describes disruptive innovations as, per Wikipedia, “innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market.”
Could see this happening with LZ: first picking off relatively simple, [low margin] tasks like wills and incorporations, then moving upmarket to more complex tasks. Other advanced legal tech has the same potential. My summary above of Christensen’s work on disruptive innovation does not do it justice–really worth reading “The Innovator’s Dilemma” and “The Innovator’s Solution” if at all interested in this topic.
Ken:
Thanks for the comment and link. This may point out how it could be tough for LegalZoom or others focusing on the consumers/small business space to move easily into the complex commercial market.
While LegalZoom offer low-cost documents, Rocket Lawyer seems to want to draw people in with a “free” document offer and use that experience to introduce customers to pre-screened lawyers who will perform work at a “discount.” Just what that discount is and what it means is of course a moving target.
I know lawyers who have had clients come to them after using one of these companies for a key document or for entity formation. These clients sometimes have a hard time understanding why the specific facts matter and all the law isn’t just a cookie-cutter exercise.
There is something about the concept of “forms” that makes non-lawyers think that doing a business deal is just like making a dessert from an online recipe.
Sometimes it works; other times you get an upside-down cake.
~ John
Noah:
Thanks for the comment; agreeing with Mr. Carr is a good strategy…
As I noted above, I am focusing in this “trilogy” on the S-1, once any company files one of these, you really have something to fix things in time and separate federally-required disclosures from marketing-speak.
I have read Prof. Christensen and seen some of his talks online. You and Jeff may be correct and LegalZoom could perfect the online-to-offline model in the consumer space and then move “upmarket” into the large corporate sector.
If LegalZoom is correct and the consumer/small business legal market is worth circa $97 billion, then even a small slice can be the basis for a great business.
~ John
The real disruption is “free”. It will disrupt LegalZoom and other commodity providers. It’s coming. Soon. Consider a brand as distinctive as Legalzoom offering the same range of services, but for free. John is correct, LegalZoom is not disruptive, it’s distinctive because of the capital it had access to power it’s advertising strategy.
Free is coming, embedded in the social graph and the mobile platform.
Another footnote to this discussion. The Rozman Law Group, an Illinois law firm that was a member of the LegalZoom network of attorneys — sued LegalZoom last week for ethical infractions, breach of contract, and other assorted claims. You read about it and download the Complaint here: http://tinyurl.com/82bz3s8
Richard:
Thanks for the comments; I agree that legal forms are like content on the web, and over time content wants to be free. Or as lead-gen for higher-level services.
I saw your blog post and appreciate the link; as I noted in the last post in the Legal Zoom series, it’s hard for new entrants in the legal plan market to attract and retain good lawyers that can work within those requirements. The timing of the lawsuit you refer to may not have been a coincidence. Having lawyers as customers is not easy!
~ John