Xmarks CEO: Knight-in-shining-armor rescue likely

The public announcement last month that browser bookmark sync company Xmarks was out of money and options and preparing to shut down may be the thing that saves the service, even while the company itself ceases to exist.

CEO James Joaquin has been uncommonly forthright in his blog about the events, miscalculations, and market changes that led to the failure of the Xmarks business. He also told me he's been gratified and surprised by the serious interest he's been getting from potential acquirers now that the company has stated it has no independent future. Joaquin said in a blog post today that he now has "multiple offers on the table" from potential acquiring companies and that he expects no service interruption.

One could conclude that this statement, without names and figures to back it up, is no more than an attempt to light a fire under hesitant suitors, or incite a bidding war where none would otherwise exist. Joaquin promises this is not the case, however.

Xmarks fans wait in the wings
The impending shutdown also brought Xmarks fans out of the woodwork. Enough were interested in paying to keep the service going that the company set up pledge bank to raise $1 million to $2 million, enough to keep the operation in business for a year. So far, the pledge drive is about a third of the way there.

But this and the distressed sale are the fallback plans. Xmarks as a company is terminal. It's going to either be acquired and merged into a larger company, or drastically reduced in scope and reach as a paid service.

The product that Xmarks' fans want to keep alive is its cross-browser bookmark synchronization service. Unfortunately for Xmarks, bookmark sync is being built in to today's browsers (Firefox and Chrome so far). While browsers' built-in sync functions aren't completely competitive in that they're not cross-browser (you can't sync Firefox to Chrome as you can with the Xmarks add-ins), Joaquin admits that 75 percent of Xmarks' users only use a single browser.

Xmarks never made money, nor hoped to, directly from the sync feature. Instead, the company planned to mine its rich database of millions of saved bookmarks into a recommendation engine against which it would sell advertising. Users never flocked to that service, and Xmarks was left supporting a well-liked tool and customer acquisition engine that wasn't, in the end, sending users to the related service where money could be made from them.

The money had to be spent
Joaquin recognizes that Xmarks could have made it if it set out to be a small Web technology company. It could have survived had it raised less money, had more modest ambitions, and a much smaller staff. The technology costs (hosting and bandwidth) for the sync tool are only about $8,000 a month, he said, and the service generates more than that in AdSense revenue. Just not enough more. After taking in $9 million and hiring a staff to build out the more ambitious database business, the entire company ended up relying on that project's success. When it didn't happen, it killed Xmarks' future.

Absent an acquisition, Xmarks can survive -- maybe -- as a small company running a paid browser bookmark sync service, but the transition will likely cost it 90 percent to 98 percent of its 2 million users and forever kill the possibility of building the robust database of sites to make the Plan A business model possible.

Joaquin notes that the "freemium" model can work, even with a 2 percent free-to-paid conversion rate. Evernote's business, for example, is based on that metric. However, it's very hard to back into that business model. Converting a business from being based on having enough traffic and users to make big money from advertising, to a smaller operation with a small number of paying users means, in most cases, a complete rewrite of a business model as the majority of users abandon the product.

Joaquin is convinced that the Xmarks sync service that users like will stay afloat one way or the other. That's even as the company itself sinks, and its original ambitions with it.

Previously: Xmarks may live on, in paid form.