Microsoft Boosts OneDrive Storage to 1TB, Taking Aim at Dropbox, Box, and Google Drive

Microsoft (MSFT 0.46%) recently took aim at cloud storage services Dropbox, Box, and Google (GOOG 1.43%) (GOOGL 1.42%) Drive by increasing its OneDrive for Business storage from 25GB to 1TB per user.

Microsoft's move is clearly aimed at accelerating its efforts in cloud storage solutions, a market that is expected to grow at a compound annual growth rate (CAGR) of 40.8% to $47 billion by 2018, according to a report from Markets and Markets. Although Dropbox didn't issue a response to Microsoft's big upgrade, Box CEO Aaron Levie stated in a blog post that Microsoft's "closed" system would strand "hundreds of millions of users and customers that have chosen Box, Dropbox, Google Drive, and others."

Source: Microsoft.

Flattening the competition in one fell swoop
To understand how aggressive Microsoft's upgrade is, let's compare its pricing plan to Dropbox, Box, and Google Drive:

Source: Cnet, company websites.

With one fell swoop, Microsoft undercut its main rivals and sent out a loud and clear message -- that it plans to wipe out competing services on its home turf to create a cohesive operating system. This is a bleak development for Dropbox and Box, which could both go public soon.

In a blog post, Microsoft argued that it made more sense to purchase an all-in-one computing solution (Windows and its ecosystem) instead of stitching together various services for everyday needs -- such as Google Drive for word processing, Dropbox for file storage, and Firefox for web browsing.

A new take on a classic strategy
The idea of Windows as an all-in-one computing solution isn't a new one for Microsoft. It's the same idea that got Bill Gates into trouble with the Department of Justice in 1998 when the company bundled Internet Explorer with new Windows installations.

Today, Windows is still installed on over 90% of the world's computers, but fewer users are upgrading to newer versions -- 49% of computer users still use Windows 7, while another 26% are still clinging to Windows XP. Only 12% use Windows 8 or 8.1.

Under Steve Ballmer, Microsoft struggled to keep its old business model of periodic OS upgrades alive. As fewer users felt inclined to upgrade, Chrome OS, and Linux gained attention as viable free alternatives. Microsoft suddenly realized that it might not be able to convince customers to buy a new OS every few years anymore.

When Satya Nadella, the former VP of Microsoft's Cloud and Enterprise Group, took over as CEO in February, he realized that the best option was to increase Microsoft's dependence on subscription-based cloud services, instead of retail versions that are only purchased when a new version is launched.

Why OneDrive matters
Microsoft has one key advantage over Dropbox, Box, and Google Drive -- its ecosystem. Although those services can be integrated with the Windows Shell as a natural folder, they aren't integrated with Microsoft Office or Outlook. Moreover, Windows Phones, which IDC forecasts to be the fastest growing mobile OS with an 8% market share by 2018, relies heavily on OneDrive integration.

That's why Google launched Chrome OS and its Chromebooks -- to tie together its apps in an operating systems without Microsoft. Meanwhile, Dropbox and Box lack the resources to create entire operating systems to rival Windows or Chrome OS. As a result, they could both be marginalized as OneDrive and Google Drive gain popularity with lower prices and better OS integration.

At $2.50 per month and $30 per year for 1TB, OneDrive is also competitively priced against physical storage solutions. A physical 1TB drive costs between $50 to $120 on Amazon -- meaning that users will actually pay more (within a year) for a less reliable and convenient storage solution.

The bottom line
For now, Microsoft's storage upgrade for OneDrive clearly complements its subscription-based Office 365.

Yet looking further down the road, it's not hard to imagine Nadella turning Windows into a subscription-based service. That way, there won't be any more drama regarding Microsoft discontinuing support for dated products like Windows XP. Nadella could also make Windows free, but charge subscription fees for various services, such as antivirus protection, Office, and OneDrive.

Either business model would be much more flexible than the rigid upgrade cycle business model that Gates and Ballmer stuck to over the years. Lowering the price and boosting the capacity of OneDrive is just one of the Nadella's earliest steps toward realizing those plans.