Cloud storage company Box (NYSE:BOX) recently had its much-delayed IPO, and the stock soared well above its initial offering price. While cloud storage has quickly become a commodity, the sharing and collaboration platform that Box has built on top of its cloud storage product is the future of the company, as well as its best hope of becoming profitable someday.
Dropbox, which has yet to go public, isn't really Box's main competition, despite its recent push into the enterprise. Instead, Box is competing head-on with Microsoft (NASDAQ:MSFT) SharePoint, a product with an enormous user base and the support of the largest software vendor in the world. Box will be fighting an uphill battle as it tries to pry SharePoint customers away from Microsoft.
SharePoint vs. Box
Microsoft SharePoint is a platform for managing content and collaboration, among other things, and it's been around since 2001. Typically, SharePoint is installed on-premises, but Microsoft also offers a cloud-based version called SharePoint Online both as a stand-alone product and as part of Office 365. SharePoint offers cloud-based storage through Microsoft's OneDrive for Business, allowing access to files from any device over the Internet.
Box began as an enterprise-focused cloud storage company, but it's been increasingly building out a platform on top of its cloud-storage product. Box's platform allows businesses to build applications that utilize its APIs, and the hope is that customers will continue to pay a premium for this added functionality.
As a pure cloud-storage provider, Box is overpriced compared to nearly all of its competitors. Microsoft's OneDrive for Business as a stand-alone product, for example, costs $5 per month for 1TB of data, and it costs $8.25 per month as part of Office 365 Business, which includes the full Office suite. Box has a $5-per-month starter plan with 100GB of storage, but its more fully featured business plan costs $15 per month.
SharePoint Online as a stand-alone product costs $5-$8 per month, and it comes with far more features than Box's platform. Box, on the other hand, offers a simpler and more intuitive interface, but at the expense of less functionality.
Box is playing catch up
Box's platform was being touted by some as the reason to buy into the IPO, but what Box has built isn't unique. SharePoint is the 800-pound gorilla in the sharing-and-collaboration market, and with Microsoft now focusing heavily on the cloud, Box has its work cut out for it.
As of Box's IPO filing, the company had 44,000 paying organizations out of a total of 275,000 that use its product. This means that only a small percentage of users actually pay for the service, with the rest using Box's free tier. In 2012, the on-premises version of SharePoint had sold 125 million licenses cumulatively, and 700,000 users were actively developing on the platform. At that time, SharePoint was a $2 billion business for Microsoft, and it had an enterprise penetration rate of 66%. These numbers are likely higher today.
While Microsoft is pushing SharePoint Online, there will always be a place for the on-premises version. Some companies don't trust storing their data in the cloud, and some industries may be restricted by regulatory or compliance issues. For those customers, Box is no threat to SharePoint at all.
In the cloud, SharePoint Online being tightly integrated with Office 365 gives Microsoft a big advantage. Box can also be integrated with both SharePoint and Office 365, but that's more of a testament to Microsoft's entrenched status in the enterprise than anything else. Companies already using Office 365 have little reason beyond preference to use Box instead of SharePoint Online.
Box's largest expense is not developing its product, but selling it. In the nine months ending in October, sales and marketing spend was about equal to revenue at $152 million, compared to just $48 million for research and development. Box doesn't only need to develop a quality product, but it has to persuade companies to use it as well. Needless to say, Microsoft has gotten pretty good at selling software.
While there was quite a bit of optimism surrounding Box's IPO, the company still hasn't shown that it can even come close to turning a profit. Its platform is not unique, and while it differentiates Box from pure cloud storage products, SharePoint is the clear leader. Can Box steal away Microsoft customers? Sure. But it won't be easy or cheap, and Box can only afford to post massive losses for so long.