Box vs. Dropbox: Battle Within the Cloud Storage Market
There exists several core technology trends that are dramatically changing both individual behavior and enterprise IT infrastructure. Workers and consumers now expect to be able to ubiquitously access content from any internet-enabled device. Further, they demand solutions that are as simple to use as consumer internet applications, such as Facebook, LinkedIn and Twitter. However, traditional on-premise IT architectures were not built for ease of operation or mobility. IT departments, in turn, are increasingly pressured to find more user-friendly solutions that simultaneously address employees’ changing work styles and protect confidential content.
Box and Dropbox are two such solutions that have been and will continue to be very successful. Both firms have a strong footprint in the massive data storage market, where competitors have been slow to innovate, which allows room for several large players. While both firms offer great products, they are very distinct businesses. Box is focused on enterprise customers, who care about encryption, integration with other enterprise applications (i.e. Salesforce and Google Apps), and which other businesses use the service. As of fiscal year end 2014, Box had over 32 million registered users and supported over 275,000 organizations that collectively interact with the firm’s content on average over four billion times per quarter. Box’s customers include over 44,000 paying organizations globally such as Ameriprise Financial, Bechtel, Eli Lilly, Gap, Schneider Electric, and Viacom. The firm’s go-to-market strategy combines end-user-driven bottoms-up adoption with top-down sales efforts and employs a freemium business model, which offers individuals a free basic version of Box to provide them with a live experience of the simplicity and effectiveness of its service. This solution then spreads within and across organizations, as users adopt Box and invite new users to collaborate. Box monetizes this network effect by making it easy for users and organizations to subscribe to paid versions of its service on its self-service web portal.
In contrast, Dropbox focuses its business on individual consumers, who simply desire to download and use the service as quickly and effortlessly as possible. While over 200 million people currently use Dropbox to store and share content, only a small percentage of them pay to do so. For this reason, combined with a strong threat of substitutes such as Google, Microsoft, Apple, and Amazon in the consumer data storage market, Dropbox is beginning to hone in on its efforts in the enterprise market, where paying money for a service is a more acceptable way of doing business, and has recently rolled out various features for corporate users. Despite these initiatives, Dropbox is stuck in the middle of a combination of generic strategies. Professor Michael Porter warns that a firm that attempts to achieve an advantage on all fronts may achieve no advantage at all. Thus, Porter argues a firm must select only one generic strategy in order be to be successful in the long-term.
Next, Box sells “collaboration, platform, and the future,” while Dropbox merely sells storage. Box founders Aaron Levie and Dylan Smith made an early assumption that storage would become a commodity. The consequence is that Box never really had storage as the primary value proposition for the product. Instead, Box focuses on adding features around raw storage (sharing, collaboration, platform) to make sure a file hosted on Box has more value than anywhere else. Unlike consumers, who like things free, Box’s customers are happy to pay for the company’s service. Dropbox has a superior sync client that users have enjoyed since its inception. Currently, the firm still sells storage that users upgrade when they need more GB. This puts them under extreme competitive pressure from large companies that can subsidize their storage product to offer a more competitive $/GB. The other consequence is that Box’s margins are significantly higher than Dropbox’s as people use less storage on Box than on Dropbox.
Box ultimately has a unique opportunity to become a huge company. Jim Cramer states, “Box happens to be far superior with some truly staggering numbers. Box is not just about storing your data in the cloud, and sharing your files with friends, it’s created a popular cloud-based mobile optimized business collaboration platform…Basically Box has cracked the code to file-sharing for the enterprise with a highly powerful and secure and scalable platform that’s extremely easy to use.” First, Box is focused and differentiated, while Dropbox still needs to find itself. Box began its transition to the enterprise market in the summer of 2007 and started to focus solely on this market early 2009. Currently, Box’s billings are up 103% year-over-year, and revenue is up 70%. Box’s average customer value (ACV) is $3,653. Aaron Levie explains, “The whole power of this subscription revenue model is that you have a lifetime value of a customer that is very different than the initial annual revenue from the customer and the cost to acquire that customer.” With this subscription model, Box has successfully bolstered customer monetization as 10% of Box’s customers pay for the service, versus only 7% when it first filed. Further, retention rates have also improved as only 5% of its customers chose not to renew their subscriptions in 2014, which is a decrease from the previous year. Given these factors, if Box grows revenues at a 50% clip, then the stock would trade at 5X 2015 sales, which is not expensive for a fast-growing cloud-based stock as the average software as a service (SaaS) stock trades at 8.4X sales. On the other hand, Dropbox still struggles to make the decision of being enterprise or consumer-focused.
Michael Porter states, “If the primary determinant of a firm’s profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns.” Box benefits from such positioning and its first-mover advantage as it is the pioneer of the enterprise data storage market. This will be a long-term advantage for three core reasons. First, if Box can continue to grab market share, it will be difficult for companies to switch to other solutions. Next, Box will likely use this enterprise user base to start selling new products that are based on storage. Thus, steep barriers to entry and high switching costs in the enterprise data storage market, combined with Box’s tremendous ambition, vision, and leadership, will result in Box’s valuation to continue to expand, creating more value for investors in the near future compared to Dropbox.