Two of the most highly anticipated IPOs expected to take place sometime this year are Dropbox and Box, rivals in the cloud storage market. Dropbox has amassed around 200 million users, mostly consumers, while Box is focused on the enterprise segment, claiming more than 20 million users at 180,000 businesses. But with the cloud storage market heating up, and with companies like Google (NASDAQ: GOOGL ) and Microsoft (NASDAQ: MSFT ) all vying for a piece of the pie, does either Dropbox or Box stand a chance? Or will their IPOs create more bag-holders than anything else?
The big problem
A cloud storage service offers a convenient way to to access files from anywhere, on any device, by storing data in the cloud. All of the various services offered do essentially the same thing, making it difficult for companies like Dropbox and Box to differentiate themselves from the competition. Free storage and price are two ways, but after Google's recent price drop on its Google Drive service, the picture doesn't look pretty for the upstarts.
Google Drive offers the most free storage to users with 15 GB, followed by Box with 10 GB, Microsoft's OneDrive with 7 GB, and Amazon's Cloud Drive with 5 GB. Dropbox offers only 2 GB, and SugarSync, another popular service, recently stopped offering free storage entirely. Some of these companies allow users to earn additional free storage through referrals and other means, but the real story is the cost to buy additional storage. After Google's price drop, $1.99 per month will get users an additional 100 GB of space, with a terabyte of space costing just $9.99 per month. Dropbox charges $99.99 per year for 100 GB, putting the equivalent plan on Google Drive at less than 25% of that price. Box charges $10 per month for 100 GB, putting the company in the same predicament.
Even before Google's price drop, both Dropbox and Box were still more expensive than either Microsoft or Amazon. I suspect that Microsoft and Amazon will cut prices in order to compete with Google, leaving smaller competitors in quite a pickle.
The problem for Dropbox and Box is that Google and Microsoft probably aren't trying to turn a profit directly from their respective cloud storage services. Google's productivity apps are integrated into Google Drive, and Gmail and Google+ both use the same pool of storage. The goal for Google is likely to boost the number of people using its services, and offering a lot of free storage and dirt cheap additional storage is a good way to do that. Cloud storage is a commodity, and additional services on top of that cloud storage is the differentiator.
Microsoft seems to have the same general idea as Google. OneDrive is integrated directly into the Windows 8 file system and Office 365, and up to 100 GB of free storage can be obtained through an Office 365 subscription. For Windows users, OneDrive is by far the most convenient, and it also undercuts both Dropbox and Box on price significantly. Office 365 plans for businesses include 25 GB of cloud storage space per user, and with Microsoft Office still the de facto standard in enterprise, OneDrive is a compelling choice for businesses.
Are Dropbox and Box doomed?
The key for both companies is to offer not just cloud storage, but services on top. Both companies have been moving toward this, with Dropbox creating APIs for developers to integrate the service into applications, and Box allowing for the editing of documents via Box Notes. Microsoft should be worried about any potential Office competitor, and Box Notes is certainly one of them, albeit a far less sophisticated product.
On the consumer side, Dropbox is going to have a very difficult time competing with the likes of Google. The company is valued at around $10 billion based on its last funding round, and if Dropbox IPOs at that market capitalization, the stock price will be about 50 times 2013 revenue. Even if Dropbox wasn't facing such monumental threats, 50 times sales is a preposterous price to pay. And given the competition and lack of any competitive advantage, Dropbox is definitely an IPO that should be avoided.
Box has a better chance than Dropbox, given its penetration into the enterprise market so far, although the company is facing both Microsoft and Google at the same time. It will take a lot more than simple file editing to displace Microsoft Office -- even Google has failed to do so thus far. Box expects its revenue to more than double to $200 million this year, putting the $2 billion valuation from the last round of funding at 10 times the projected sales, and more than 20 times sales from 2013. Box seems more likely to succeed in the long term than Dropbox, given its enterprise focus, but the road ahead is a very long one.
The bottom line
It's important to remember that a company and its private investors look to go public at the most favorable time, when the stock will fetch the highest price on the open market. For investors, this is often the least favorable time to buy the stock, as hope and euphoria are often at their peak. Both Dropbox and Box are facing an incredible amount of competition, and paying dozens of times revenue for either company is unlikely to lead to satisfactory results over the long term.
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