Dropbox and Box, the two largest independent cloud storage companies, have been fighting a losing battle against tech giants Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL). Cloud storage has become a commodity, and both Microsoft and Google severely undercut Dropbox and Box on price.
Beyond Microsoft and Google, there's another threat facing Dropbox and Box that could put additional pressure on the companies. BitTorrent, the company behind the BitTorrent peer-to-peer file sharing protocol, launched a beta version of BitTorrent Sync last year, a file synchronization tool available for every popular platform that allows files to be available on all of a user's devices without the cloud acting as a middleman.
Next year, BitTorrent will launch a paid tier of the service, priced well below the offerings of Dropbox and Box, aimed squarely at the enterprise, and it could prove to be a compelling alternative for organizations with privacy and security concerns. Dropbox and Box are already facing enormous challenges, and BitTorrent Sync will only make things worse.
Getting rid of the cloud
All of the cloud storage services work in essentially the same way. A file created on one device is automatically uploaded to the cloud server, making it available everywhere, and then, optionally, the file is automatically downloaded on other devices. A copy is always stored in the cloud, making for easy access as long as an Internet connection is available.
BitTorrent Sync bypasses the cloud by connecting devices together directly. A folder on one device is designated to sync, and then this folder can be shared with other devices through a link or a QR code that can be scanned by mobile devices. When a folder is shared, the files are downloaded from one device to another, and as long as both devices remain connected to the Internet, those files will be automatically synced when changes are made.
BitTorrent Sync has a couple of important advantages over cloud storage services. First, Sync is typically much faster. When two devices are on the same network, they can connect without going over the Internet, meaning that files can be transferred at gigabit speeds or faster, depending on the networking hardware. When the devices are not on the same network, Sync still connects the devices directly, as opposed to cloud services, which require an upload to the cloud server followed by a download to the second device. An outage in the cloud server would render the service useless, while Sync can't have an outage since there's no server to begin with.
The second advantage is security. Cloud services store a copy of the files in the cloud, and the recent celebrity photo hack scandal is one example of the dangers associated with storing sensitive information on a server outside of one's control. BitTorrent Sync, on the other hand, simply copies files across devices, and files are never stored anywhere else. For organizations concerned about security, BitTorrent Sync could be a viable alternative to the cloud storage services.
What it means for Dropbox, Box, Microsoft, and Google
As of August, BitTorrent Sync had been installed 10 million times, so it already has a significant user base. Mainstream success will be difficult to achieve, given that Sync isn't as simple to set up compared to cloud storage services, and those without security concerns are unlikely to consider it as an option. But Sync has the potential to carve out a niche among users who don't trust the cloud, as well as those needing to share large files locally.
Dropbox and Box are already in a world of trouble, unable to compete on price with Microsoft and Google, and BitTorrent Sync could make it even more difficult to convert free users into paid users. A recent survey done by 451 research found that only about 18% of companies actually paid for an enterprise file-sync product, while most used the free versions of those products instead. It's clear that the cloud storage market is still in its infancy, but the existence of noncloud options like BitTorrent Sync provides yet another lower-priced competitor for Dropbox and Box to contend with.
For Microsoft and Google, none of this really matters. Both companies use their respective cloud storage services to sell higher-value products, and I doubt either company intends to turn a profit directly from cloud storage. Microsoft bundles an unlimited amount of cloud storage with its Office 365 subscriptions, and Google does the same with its productivity apps. Office users opting to use BitTorrent Sync to sync files across devices, as opposed to OneDrive, wouldn't 't change the fact that they're still paying for Office.
BitTorrent Sync marks an interesting development in the cloud storage market, and it represents another threat to Dropbox and Box. Neither company currently has a viable long-term business model as it is, given that Microsoft and Google are essentially giving cloud storage away, and BitTorrent Sync only compounds the problems facing the two companies.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.