World anti-virus software leader Avast to deepen Czech roots

Avast is a worldwide leader in antivirus software with a lot of the technical work and development carried out in the Czech Republic. And Czech based company is keen to continue strong growth by offering free software to companies as well as its traditional stronghold of the general public.

Photo: Avast

For many people the first surprise about the free anti-virus software company Avast is that it is Czech. The second is the fact that it makes hundreds of millions of dollars in profit although its main activity is giving away its software for free.

Two Czechs, Eduard Kučera and Pavel Baudiš found the predecessor of Avast, called Alwil Software with the software developed even before the fall of the Iron Curtain in 1989. And ironically, it was lack of orders from private Czech companies and state institutions that later helped the company to make the fateful step to offer its anti-piracy and antivirus software free. As Kučera said, it costs the same to make the software if it is sold to one person or given away to a million.

But the free software model has proved amazingly successful. Last year Avast free software was being used by 230 million users worldwide with the download protecting just under a third of the world’s personal computers. The company earned around 217 million US dollars in 2014.

And in spite of rocketing growth, Avast is keeping loyal to its Czech roots. Around 90% of its worldwide workforce of just over 500 is based in the Czech Republic. Most of the around 200 new hires this year will also be based in the country although the Czech Republic now represents just 1% of the company’s market.

Vince Steckler has been the chief executive of Avast since 2009. At the company’s 2014 results press conference near the company’s new offices in Prague, he explained how Avast unfailingly keeps hitting really high growth and profit figures.

“I think what has actually made us successful is our focus on the non-English market. So, the companies that focused on the English markets, those companies are rich so you can make revenue quickly, but they are relatively small compared with the non-English markets around the world. So what Avast did is that we focused on the non-English, you know, Spanish, Brazilian, Portuguese, Russian, and South-East Asian languages. And those are the markets where the PC growth is strong. And they are also markets where there is much less competition. So we have been able to take large share in those markets and, frankly, that has what has fed our growth while most of our competitors, such as Kapersky, Kapersky relies hugely on the US language market for their consumer business and we don’t and we’ve grown.

Vince Steckler, photo: archive of Avast

“On the mobile side, the emerging markets are shifting to mobiles faster, in many cases they are skipping over the PCs. So you see you see the greatest growth there. But the growth you have there tends to be with lower and less powerful devices. So still, in the mobile market the devices that are most at risk are the devices that are most at risk are the devices that are processing a lot of sensitive information and data and that is still predominantly the Western language markets.”

Going back to your basic model which is supplying protection for free, how can you make money out of that?

“Well, pretty much every successful Internet-based company these days in the consumer market is for free. I mean, when was the last time a user paid to Google, or to Facebook, or to Twitter, or anyone. And that is because the distribution model is free, you find other ways of making the money. Google, Twitter, etc, they make money out of advertising. – or at least Google and Facebook do – or they make money on other products and services. For someone like Google, most of the money is made from search, that is companies pay them for search results. We do a somewhat similar thing. We fix a user’s search settings, in which we get paid by the search companies for doing that. Or we distribute something like Google Chrome, which is basically a browser tied to Google Search, and, of course, Google pays us for that. And then there is three groups of users that upgrade from our free to our paid product.

“Frankly, I use our free product. It’s damn good, I don’t need anything else. But some users do. One, the paid product has a lot of extra protection for your online banking that no-one else has, so they upgrade for that. Two, there is a group of users, especially in the English language market, who think that a paid product is just better than a free product so they pay for it. And third, I was raised a Catholic so it’s a great one, which is guilt. There is a large number of our users who tell us Í have used your free product for so long, I feel guilty.’ And they upgrade to the paid.”

And you are going to take this free model, which you developed on the consumer side, and shift it to the business side, the corporate side, as well. Can you say a bit about that?

Photo: Michelle Meiklejohn / FreeDigitalPhotos.net

“Yes, we have been very successful on consumer because of two things. One, the product is very good. Secondly, is a very disruptive distribution which made it very easy for the consumer to get the product. And they got the product basically on the recommendation of family or friends. In every group there is one or two people who are the geeks. They provide the tech support to everyone else. And they’re the ones who recommend our product. SMB [small and medium business] is very inefficient distribution right now because to reach small businesses on a global scale, if you want to reach globally like we do and not just in one country like the United States, you need a network of tens of thousands of middlemen around the world who kind of buy your product from distributors and then they sell it to SMB’s. And throughout that whole process you lose a lot of margin, you don’t have much support from the middlemen and, frankly, the SMBs are paying a lot more. There is a recent study that SMBs pay over two times as much per seat for a security product as a larger business and a lot of that is the inefficiencies of the distribution network. So what we are trying to do is make that distribution more efficient and disrupt it, and we expect to do the same thing we did with consumer.”

That’s going to hurt a lot of your rivals though isn’t it because the corporate area was where they were making their big money?

“Well it is going to hurt our rivals and that’s what we want. That is why they are called rivals – our job is not to make business easier for them. The strange thing in the software market is that the biggest profits come out of consumer and not corporate, so companies that rely just on the corporate are much less profitable than companies which have a consumer segment. And that less profitable is because of the distribution channel. If they sell a product at 30 dollars a seat to a small business or if they sell it for 30 dollars a seat to a consumer, with the consumer after that initial purchase they keep all 30 dollars. With the small business side they only keep 15 dollars. So there is much less opportunity for profit. And, of course, that’s the reason we can afford to distribute it for free.”

You have just announced revenue growth of around 50% and profit growth around the same level. Can this growth continue in the long term or will things even out at some stage?

Photo: Barbora Kmentová

“Well, we have been saying it’s going to even out because that is what you always say, you always want to set expectations. But if you look at our history over the last six years, it has been 56% to 57% CAGR (compound annual growth rate) and frankly over seven or eight years it has probably been the same. So, historically we have a 50% plus growth rate. There is an interesting study that was just published by McKinsey a month or so ago that in order to be long-term successful, software technology companies have to focus on annual growth of more than 50%. If they drop below that 50%, they are basically dead.”

Finally, you have just announced you will be moving into a new centre in Prague this year. What is your commitment to the Czech Republic?

“This is going to be our base. It is a great base to operate from. Because we are a free distribution company our product has to succeed on the basis of how good it is. People will not use our product just because it’s free. It has to be damn good because there are too many choices out there. And frankly, the amount of money they save from using our free product is not huge, it is not about to bankrupt anyone. So the product has to be very good. And the Czech engineering talent is just fantastic. And frankly, you know we can’t replicate the talent elsewhere that we have here. There are functional areas that are a challenge.

“Strong as the Czech Republic is in software development and engineering, it’s not strong in sales and marketing. But software development does not need to be close to the customer. Most of our US competitors are doing their development in India or China, not in the United States. So as we move to more higher touch sales models where we need to be closer to the customers, we will be putting marketing and sales staff in those countries. But the company is a Czech company, that’s not going to change, it’s actually, I don’t think we mentioned it, but it is our tax base. We pay Czech tax on our worldwide revenue, we don’t run through tax havens like Amsterdam or Cyprus or Malta or Ireland. It’s all done here.”