This has been a busy week for Cloud storage services. First, Microsoft launched a new desktop sync client for SkyDrive, making it a direct competitor for the popular Dropbox service.
Then there was the much heralded launch of Google Drive, another potential nail in the Dropbox coffin. Coffin?? Of course it is way too early to predict its demise (or similar services offered by SugarSync etc) – it had at least 50 million users just 6 months ago and is likely to have grown further since then.
Newcomers like Google Drive will have their work cut out to catch up. However, a look at the history and financials of Dropbox suggests there are reasons to be cautious about the strategy for future growth.
Potted History of Dropbox – The company was founded in 2007 and operates on the same ‘freemium’ model as most Cloud storage services i.e. it provides a limited amount of storage for free and charges on a monthly basis for upgrades when users want to store more data.
In 2008 it had gained around 200,000 users and raised over $7m of venture capital to fund rapid expansion. In 2009 it reportedly rejected an offer of $800m from Apple to buy the company.  If that offer was a mix of cash and Apple shares it would have been an excellent investment due to the surge in Apple’s share price – from $124 to $600 in the last 3 years…
By 2011 it had grown to 50 million users and raised $250m more venture capital – valuing the company at around $4bn. Impressive statistics certainly but that valuation was before Microsoft launched the updated SkyDrive service with a fully fledged desktop app. It was also before Google launched the new Google Drive…
Let’s take a closer look at the current pricing models:
Free Storage Model – Forbes reported that Dropbox “revenue is on track to hit $240 million in 2011 despite the fact that 96% of those users pay nothing”. 
The old maxim that revenue (turnover) is vanity whereas profit is sanity springs to mind, however, such a low percentage (4%) of paid users is typical in the Cloud storage industry – not in itself a problem. The following quote is more worrying:
“Thousands of people each day blow through the free 2 gigabytes of storage … even if [Dropbox] doesn’t sign up a single customer in 2012, sales will double”.
Amazon Cloud Drive, Apple iCloud, and Google Drive offer 5GB for free whilst Microsoft SkyDrive offers 7GB – these far exceed the default 2GB of Dropbox (customer referrals can boost the default significantly but, in my experience, those who do so are too savvy to end up maxing out into the paid model).
Of course free accounts actually lose the provider money but they are essential in gaining new customers – and the four companies above have more than enough cash reserves to bear the higher costs. Expect to see Dropbox raise its free limit to compete – leading to higher costs and reduced revenue (as fewer people max out the higher limit).
Paid Storage Model – Dropbox offers 100GB of storage for $20.  Google Drive and SkyDrive both cost less than $5 (a quarter of the price) for the same storage whilst iCloud and Amazon Cloud Drive both cost $8.33
This huge difference is similar for 50GB capacity where Dropbox charges $10 for 50GB. MS SkyDrive costs just $2.08 (almost a fifth of the price) and Amazon Cloud Drive costs $4.16 (Google Drive $2.49 for 25GB). Dropbox prices are therefore a multiple of 2 to 5 times more expensive than newer competitors which is unlikely to be sustainable – especially when those competitors have far greater financial and marketing muscle.
Expect to see Dropbox seriously reduce prices to compete in the near future – with corresponding reductions in revenue and profit.
Co-founder Drew Houston may have made a whopping mistake when refusing Apple’s proposed takeover three years ago.
If he currently owns an estimated 15% of the company  at last year’s $4bn valuation he is, in theory, worth $600m on paper. However, that assumes that revenue and profit will not plummet because of falling prices before any future sale occurs…
Three years ago (before the $250m funding) he was likely to have owned up to 40% so, if the reported offer from Apple is correct, that could have netted him around $300m, in the bank. Is last year’s $4bn valuation still realistic in today’s ever more crowded Cloud storage market?
If prices were halved to compete, the valuation could drop to $2bn – and his paper worth to $300m, the same as 3 years ago. If prices have to be quartered, his worth could drop to $150m – still a very tidy sum but just half of what was on offer 3 years ago.
The company is in a strange situation – it’s a major player in the Cloud market yet, as a company, it’s a relative minnow compared to its newer rivals.
No-one wants to see a repeat of the 1999 dot com bubble but the early warning signs are there. Facebook’s recent $1bn purchase of Instagram was an eye-opener but could perhaps be viewed as an exception – a cash-rich company taking a juicy prey out of the reach of its own competitors.
However, the $4bn valuation (some argue $5-10bn ) of Dropbox may be a clearer example of a digital economy bubble – last year’s investors may want to order a few new shirts…
Whilst the quality of the apps available and the service itself are major factors in choosing Cloud services, so is the price, company brand and integration with other services.
Whilst Dropbox (and SugarSync etc) offer a standalone service, newer competitors see Cloud storage more as a means than as an end – they have a close integration of storage services with their other products: Microsoft with Office Web Apps, Apple with iTunes and all iOS products, Amazon with its Kindle, books and music stores, Google with Google Apps.
Perhaps Steve Jobs was right that Cloud storage is in fact just a feature (which may not be profitable in itself) of other products and services – not a product in its own right… 
What do you think? Will Dropbox triumph against the odds or do a Myspace? Is there room in the Cloud storage market for all the current players to thrive? Let us know in the comments.