The Box IPO: Far Worse Than Imagined

Cloud storage start-up Box is set to go public sometime this year, with a difficult competitive landscape ahead as it attempts to gain enterprise market share. Box has filed its S-1 statement with the SEC, and for the first time, potential investors got to peer into the financials of this fast-growing company. While there was good reason for pessimism about Box before the filing, the long-term picture looks worse than imagined, especially given the competition from Microsoft (NASDAQ: MSFT  ) and Google (NASDAQ: GOOG  ) .

The foreseeable future is a long time
The very first risk factor listed by Box in its S-1 should act as a big red flag for investors:

We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.

Startups like Box are rarely profitable, but there needs to be a path to profitability, and it's clear from the company's filing that Box simply doesn't have one. While revenue is growing rapidly, more than doubling in 2013, losses are growing as well. The company burned through $158 million in 2013, up from a $109 million loss in 2012, and there is no sign that this trend is anywhere near reversing.

The ramping of sales and marketing expenses are major reasons why losses are accelerating, with the company investing heavily in maintaining its explosive revenue growth. Box spent more on sales and marketing in 2013 than it had revenue, and total operating expenses were more than twice the company's annual revenue. While it's difficult to say exactly how big Box needs to be in order to have a chance at sustainable profitability, it's safe to say that it's much larger than it is today.

This poses a problem, because time is not Box's friend. Box only had $108 million in cash at the end of the fiscal year, meaning that the company needs to IPO this year in order to avoid running out of money. Even after Box raises the expected $250 million from its IPO, this buys the company less than two years. After that, with the foreseeable future unprofitable, the company will almost certainly need to raise more cash.

Given the cost of building out its data centers -- especially with about 85% of the organizations using Box's services sticking with the free version -- and the growing spending on sales and marketing, Box's race against time doesn't look winnable. And that's to say nothing of the competition.

A feature, not a product
Both Microsoft and Google have cloud storage products of their own, OneDrive and Google Drive, respectively, and both severely undercut Box on price. But the price is only part of the problem for Box. Both Microsoft and Google treat cloud storage as a feature, not necessarily a product, and they use cloud storage as a way to make high-value services more attractive.

Microsoft's recent push to support non-Windows platforms with the launch of an iPad version of Office is a good example. Editing documents on the iPad requires a subscription to Office 365, and this comes with 25GB of free cloud storage per user for businesses. Not only is Office 365 more appealing now that it natively supports the iPad, but the free cloud storage is icing on the cake. And with the iPad version of Office only supporting OneDrive, it makes little sense for Office users to opt for an alternative cloud storage product.

Google does something similar with its enterprise-orientated services. Google's apps for business comes with 30GB of included cloud storage per user, and adding more is dirt cheap. The main draw are the apps, not the storage, with Google Drive acting as a feature, not the main product.

Pricing isn't even the biggest problem for Box. Any business using either Microsoft Office or Google's apps has little reason to pay for additional cloud storage from a different company. Box is attempting to build additional services, like basic file editing, on top of its cloud storage platform. But this can't match the functionality that Microsoft or Google offers.

The bottom line
Box is on an unsustainable path, and the fact that it needs to IPO this year in order to avoid running out of money is a clear sign telling investors to stay away. With companies like Microsoft and Google bundling cloud storage as an add-on to their higher-value services, it's hard to imagine Box being able to effectively compete.

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  • Report this Comment On April 19, 2014, at 5:26 PM, DriveHQJohn wrote:

    I mostly agree with you. Kurt Marko of Forbes.com has the similar view: http://www.forbes.com/sites/kurtmarko/2014/03/28/box-ipo-beg...

    What's more, I think you can replace Box with other cloud storage providers and reach similar conclusions. Indeed, if businesses are using Google Apps or Microsoft Office 365, why do they store files with another storage provider?

    Now can you replace Box with DriveHQ? As the CEO of DriveHQ, with my 17 years of experience in the cloud industry, I want to share some of my thoughts on how we compete in this extremely competitive market.

    First of all, I believe there is a bubble in the cloud storage industry. Now it has reached a critical point, this bubble could burst in one year.

    As we can see, cloud storage service for consumer is no longer viable in the sense that you cannot become profitable, even if you have 550 million users.

    Cloud storage service for business is faced with fierce competition from Microsoft and Google. Small players don't have much advantage competing with the giants, esp. since they have other highly profitable business. This being said, DriveHQ can still effectively compete with Google, Microsoft and other high-profile players:

    (1) Focus on the technology and quality service, not on marketing hype.

    Surprisingly, DriveHQ has been profitable for many years without any VC-funding.

    (2) Lower Pricing ($6/user/year vs. $50-180/user/year)

    Consumer cloud storage service is priced based on storage space. Enterprise service is priced based on user licenses (storage is often free or dirt cheap).

    Many businesses cannot afford, or do not want to spend $50-180/user/year on Google Apps or Office 365. DriveHQ only charges $6/user/year + storage charge. In real-world cases, our enterprise service price is usually 2 to 8 times lower than Google or Microsoft's. Companies like Box and Dropbox charge $180/user/year, which puts them in a very difficult position competing with Microsoft and Google (and DriveHQ).

    (3) Extend PC apps to the cloud, instead of forcing users to switch to web browser-based apps.

    Browser-based productivity apps are not as functional as PC-based apps. Google Apps are browser based. Most business users are familiar with Microsoft Office, and many of them are not willing to switch to a less functional browser-based app. Microsoft’s Office 365 costs $60/user/year without desktop software suite, thus having similar drawbacks as Google Apps.

    Office 365 with Desktop Suite costs $150-$180/user/year, which is too expensive for many companies, esp. if they have already bought the desktop version.

    With DriveHQ’s cloud IT service, users can continue using their existing desktop apps while also enjoying all cloud benefits.

    (4) Enterprises want to keep using “File Server / Drive Mapping” as they move to the cloud.

    The browser-based or folder sync-based cloud storage solutions are too different from their existing in-house solutions and are not efficient. It is not possible to manage millions of files using a web browser, or sync millions of files among 1000s of computers.

    DriveHQ’s Enterprise WebDAV solution is the only reliable WebDAV solution that can be automatically configured for all users in a large enterprise. It can replace traditional file servers while maintaining the same drive letters so employees don’t need to be retrained.

    (5) Microsoft and Google's cloud apps are not feature-complete

    If users need to use PhotoShop, GoLive, Dreamweaver, Premiere, Quickbooks, AutoCAD, Acrobat, Turbo Tax, and many other special business applications, then Google Apps and Office 365 don’t have any advantages. In this case, using DriveHQ’s FileManager or drive mapping is easier and more consistent: whether you edit an office document or a video file, you just need to double click on the file name.

    (6) Cloud Storage is just a feature of DriveHQ's Cloud IT service.

    DriveHQ realized that cloud storage will become a commodity service long time ago. So we had expanded our service to include a very broad suite of services that are bundled as "Cloud IT Service".

    Our service includes many enterprise features such as: Enterprise Online Backup with Central Management and Monitoring; FTP, Email, and Web Server Hosting; Group File Sharing and Collaboration; Enterprise Folder Synchronization; Drop Box Folder; File Manager, Enterprise WebDAV Solution; Multi-level Group User Management, Active Directory Integration and SSO, Co-Branded and White Label Service, etc.

    DriveHQ is unlikely to challenge Microsoft or Google, but our technology advantages and low-cost service will help us gain market share, esp. when companies need many user licenses; and we are not afraid of competition as our competitors simply cannot match our price of $6/user/year.

  • Report this Comment On April 21, 2014, at 6:28 PM, caltowns wrote:

    A couple years back, Dylan Smith said the company did not expect to turn a profit until 2018. Now with how the industry has exploded, and with major players like Google making major price cuts, it makes you wonder just how much longer this company can really last.

  • Report this Comment On April 22, 2014, at 4:57 PM, MoreInsight wrote:

    This is definitely a fools argument, so I have come to the right place. Box fully understands that Sync and Share is a feature and thus have focused on collaboration, control, and the platform as the key tenants for their business. It is uninformed articles that lump Box in with consumer services like DropBox, Google Drive, and Onedrive that make me believe that there is quite a market to be had for Box. Please do some research on the product and the SaAS ARR model before writing such an uninformed article.

  • Report this Comment On April 24, 2014, at 8:44 PM, DriveHQJohn wrote:

    MoreInsight: I encourage you to read my previous comment, and also visit our comparison pages:

    http://www.drivehq.com/help/solution/Cloud_Storage_Backup_Se...

    >>> "Box ... have focused on collaboration, control, and the platform as the key tenants for their business."

    It might differentiate Box from Dropbox in some way, but it does not differentiate Box from other cloud service providers. Feel free to compare the enterprise features with DriveHQ.

    I also want to correct you that both Google Drive and OneDrive have business versions. Google Drive is bundled with Google Apps for Business; OneDrive is bundled with Office 365. Box does not have cloud based productivity apps to compete with Microsoft and Google, not to mention Box's service price is more expensive than Google Apps and Office 365.

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