Unlimited Cloud Storage From Microsoft Could Prove Fatal for Box and Dropbox

The price of cloud storage has been declining rapidly over the past few years, and this trend has raised serious questions about the long-term viability of cloud storage companies like Dropbox and Box. Both Microsoft (MSFT 1.92%) and Google (NASDAQ: GOOG) (GOOGL 2.01%) offer competing cloud storage products, and aggressive price cuts from these two companies have forced smaller competitors to rethink their business models.

Microsoft dealt another serious blow to Dropbox and Box last week, announcing that all of its Office 365 subscriptions will come with an unlimited amount of cloud storage through its OneDrive service. This severely undercuts the competition, and it seems unlikely that either Box, which is hemorrhaging cash according to its IPO filing, or Dropbox, which has yet to file for an IPO but is very likely losing money as well, will ever be profitable.

The big problem facing Box and Dropbox
Both Dropbox, which until recently targeted mainly the consumer cloud storage market, and Box, which has been focusing on the enterprise for quite some time, have amassed a tremendous number of users. Dropbox reached 300 million users earlier this year, and at the time of Box's IPO filing in March, the company claimed 25 million users and 34,000 paying organizations.

Most of these users don't pay either company a dime, however, instead taking advantage of the free tier of service. Both Dropbox and Box rely on a fraction of these users eventually paying for a plan with greater storage and more features, but Microsoft's aggressive move to bundle unlimited cloud storage with Office 365, as well as Google's bundling of cloud storage with its productivity apps, throws a wrench in this business model.

In short, there's not much of a value proposition for either Box or Dropbox:

Sources: Microsoft, Google, Dropbox, and Box. 

Both Microsoft and Google now offer unlimited cloud storage along with their respective productivity suites for less than either Dropbox or Box sell their storage solutions. Cloud storage has officially become an expected feature, not a stand-alone product, and that poses a huge problem for Dropbox and Box.

Integrating with the enemy
Both Box and Dropbox going forward will need to convince users to pay for additional features built on top of their respective storage products, because cloud storage itself is now a commodity. Box built basic file editing features into its product, but with Microsoft Office still being the dominant productivity suite, especially in the enterprise, lacking Office integration was very likely preventing many businesses from using Box's product.

Back in July, Box announced that its product would soon be integrated directly into Office 365, in the same way that OneDrive is tightly integrated, and in October, this integration tool was officially released. Dropbox has also formed a partnership with Microsoft, making Office the default way to edit files stored in Dropbox and integrating Dropbox directly with Office 365. 

These integrations are a double-edged sword for both Box and Dropbox. While Office integration expands the addressable market for both companies, the fact that Microsoft offers unlimited cloud storage free with Office 365 means that using either Box or Dropbox with Office makes little sense. Microsoft's most profitable business is Office, and it makes sense for the company to integrate with competing storage solutions in order to continue growing that business. But why would any company pay for both Office 365 and an additional storage service?

These integrations are a far better deal for Microsoft than they are for either smaller cloud storage company, and in the long run, I suspect they will result in Microsoft's OneDrive becoming a lot more popular than it is today.

Microsoft offering unlimited cloud storage with Office 365 may prove to be the final salvo in the cloud storage battle. Neither Box nor Dropbox can possibly compete on price, and both companies have now integrated with Office. With Office 365 growing rapidly, it's only a matter of time before the idea of paying for cloud storage becomes antiquated. Perhaps Microsoft or another tech company will eventually acquire either Dropbox or Box for their user base, but as stand-alone companies, neither makes much sense.