Silent Circle woes highlight challenge of turning digital privacy into profits

While the company is among the most celebrated secure communications providers, its near bankruptcy underscores the difficulties for startups selling digital privacy tools.

After former National Security Agency contractor Edward Snowden revealed the scope of US spying to the world, a slew of tech startups emerged with tools designed to thwart government snooping.

One of the most talked about was Silent Circle. Mr. Snowden even gave the company a ringing endorsement. Tech blogs hailed its $629 Blackphone as possibly "the most secure Android phone" on the market.

But as Silent Circle soon discovered: Digital privacy isn't an easy sell. Many of the post-Snowden startups have already failed, and now Silent Circle is struggling to reinvent itself. Its chief executive officer left the company after 17 months and Silent Circle is using a $50 million infusion from investors to pay off debts and change direction.

"In 2013 going into 2014 and probably throughout 2014, if you used the word 'security' in a sentence, that got you some fundraising," says Matt Neiderman, Silent Circle's interim chief executive officer. "These days, that wave has certainly crested."

The company's pedigree gave it an early boost. The well known cryptologists Jon Callas, who has since joined Apple, and Phil Zimmermann, who founded the widely used PGP software, and former Navy SEAL Mike Janke founded Silent Circle in 2011. The company made news in 2014 for relocating its headquarters to Switzerland, a move that Mr. Janke told the Washington Business Journal allowed the company to connect with its European customer base.

It was also meant to avoid increasing US and European surveillance following the Snowden revelations, the founders said.

"Every dystopian society has excessive surveillance, but now we see even western democracies like the US and England moving that way," Mr. Zimmermann told the Guardian in May 2015. 

To address those concerns, the company offers an app, called Silent Phone, and in 2014 launched the Blackphone smartphone line, two products meant to meant to avoid eavesdropping by encrypting communications. The Blackphone earned largely positive reviews (a 7.6 out of 10 rating from ZDNet, and a 7 out of 10 from Wired) but most consumers did not notice.

Silent Circle reportedly sold 6,000 Blackphones, just a fraction of the expected total, according to company documents uncovered by Forbes. Samsung, by comparison, sold 81,186 Android smartphones in the first quarter of 2016, according to Gartner.

Now, Mr. Neiderman says, the company will prioritize its encrypted software and back away from plans to sell the phone (although Blackphones will still be for sale). 

"Stay tuned," says Neiderman. "We’ve definitely got a lot of exciting stuff from a sales perspective, from a product development perspective, and from a partnership perspective."

But Silent Circle still faces an uphill battle when it comes to convincing general consumers to care about privacy, says Nathan Hecht, founder of the secure communications startup Dstrux.

"Frankly, with the exception of a very small niche market that Silent Circle is addressing, the masses just aren’t interested, says Mr. Hecht, whose company has lost several million dollars and struggled to attract users. 

Like Silent Circle, Dstrux launched amid international outrage with over the Snowden revelations. But the app topped out at 400,000 active users, compared to the more than 1 billion people around the world who use WhatsApp. 

"We have to look at the reality of the issues here: the masses don’t care," Hecht said.

That challenge became even more complicated when tech heavyweights like WhatsApp and Apple began to build encryption into products that many customers already own. That removed the need for the fraction of privacy conscious users to migrate to a specially-built device like Silent Circle’s Blackphone, said William Stofega, mobile phone program director at International Data Corporation, a market research firm.  

Still, public opinion polling has consistently shown Americans are nervous about their digital privacy. For instance, in a January 2016 Pew Research Center survey, 91 percent of respondents agreed "consumers have lost control of how personal information is collected and used by companies." Respondents also reported that phone conversations, geolocation data, the contents of text messages and other mobile information was among the most important data to protect. 

But it's clear those concerns aren't leading to sales for the companies trying to address them.  

“We’ll do surveys asking people ‘Why do you want to buy something?’ or ‘What are the two biggest things factors in deciding to buy a smartphone?’” says Mr. Stofega. “The biggest one is price."