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Dropbox shows it’s still possible to defy tech giants

libadmin April 7, 2018
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Dropbox co-founders Drew Houston, center left, Arash Ferdowsi, center right, and company executives ring the opening bell at the NasdaqMarketSite in New York to celebrate the company’s IPO on March 23. (AP Photo/Richard Drew)

In the age of the tech giants, start-ups face daunting odds. Through aggressive acquisitions, blatant mimicking of smaller rivals, and the built-in advantages of their user networks and Internet infrastructure, tech titans rule the scene. But at least in the case of Dropbox, an online file-sharing company, it’s still possible to defy them.

During its market debut last month Dropbox’s value leaped nearly 40 percent, a jolt of optimism that arrived in the middle of a tech industry backlash. The success of Dropbox’s initial public offering came despite facing big-name, multibillion-dollar competitors, such as Google, Microsoft, Amazon.com and Apple. Dropbox’s stock is up almost 50 percent from its IPO price.

But beyond the company’s public market splash, experts say Dropbox can effectively compete with much larger, dominant tech companies because of its focused strategy and distinct services, its ease of use and the customer loyalty it has built up.

Founded in 2007, the same year that Apple released the iPhone, Dropbox became a compelling alternative to do-it-yourself file storage. For many people at the dawn of the mobile era, that process was cumbersome and restrictive, as anyone who has tried to email themselves dozens of vacation pictures or frantically searched for a lost thumb drive can attest. In its filings with the U.S. Securities and Exchange Commission, Dropbox phrased its foundational aspirations this way: “Life would be a lot better if everyone could access their most important information anytime from any device.”

Dropbox’s business relies on selling file storage subscriptions to individuals and teams within companies. Users can save text documents, pictures, music and other types of files to  Dropbox’s system, which makes that material accessible across their devices. People can also share stored information with others. The basic version of Dropbox is free, but paid subscriptions, which start at $9.99 a month, offer additional features and more space to save files. More than 500 million people have registered to use Dropbox. But only a fraction of them, 11 million, pay for it.

According to the SEC filings, Dropbox generated $1.1 billion in revenue last year, up 31 percent from 2016. The company has not reached profitability, but it reported that its losses are shrinking, from $210 million in 2016 to $111 million last year.

Of course, a triumphant tech IPO doesn’t guarantee long-term success — just ask Snap. The parent company of Snapchat, the social media app that lets users share pictures and videos that disappear after a set time, went public last year. Its stock price climbed more than 40 percent before slumping to its offering price of $17 a few months later. Snap is now trading  below that. Twitter, too, dazzled investors during its IPO in 2013, but it has struggled to keep its footing.

But analysts said that online file storage is a strong business with future growth, and that Dropbox has set the standard in this space. Microsoft, Google, Apple and Amazon all have file sharing services — OneDrive, Google Drive, iCloud and Amazon Drive respectively. But what sets Dropbox apart, experts said is that the service allows people to share and edit files across disparate platforms — from Word documents to Google Doc files, a specialty that’s harder to displace. Its competitors are set up to keep customers within their own ecosystems.

It’s the combination of an intuitive product and a focus on a subset of the market  that separates Dropbox, said Rishi Jaluria, an analyst at D.A. Davidson, a financial services firm. “You’d have to question whether it’s worthwhile [for competitors] to put in all these resources” to unseat Dropbox, Jaluria said.

Another thing Dropbox has going for it is how it has gained traction. More than 90 percent of its revenue is generated by customers signing up for premium services, according to the SEC filings. This translates to lower marketing costs, as well as the kind of viral product adoption that starts with individuals who use it at home and then bring it to work, where it then spreads around the office, the company said. In addition to employing a smaller sales force than competitors, Dropbox targets specific teams within a business, rather than entire corporations, as do other file sharing firms, like Box, analysts said.

To capture what he called Dropbox’s “technical excellence,” Matt Ocko, a co-managing partner at DCVC, a San Francisco venture capital firm, used a tech analogy from an earlier era. He compared the product quality of a multipurpose cassette player-alarm clock-9-inch TV to another device with a singular purpose, the Sony Walkman. “It didn’t break. It sounded better. It worked when you were running.” he said, emphasizing the merits of doing a few things very well, as he said Dropbox does.

“The funny thing is people sneered at Dropbox and said that would result in their extinction, but being a one-product company, of having relentless focus, is in fact the very advantage that has allowed them to out-compete the cloud giants,” he said. “In fairness to Apple and Google and Amazon and Microsoft, they are trying to serve many masters.”

In an undertaking that proved costly to Dropbox, but ultimately fortified its financial health by lowering its expenses, the company moved most of its user data off third-party services, like Amazon’s data storage platform, and onto its own custom-built infrastructure by 2016, according to the SEC filings. Like many technology companies, Dropbox relied on Amazon’s cloud storage unit to free itself from hardware costs. (Amazon chief executive Jeffrey Bezos owns The Washington Post.) But analysts say the feat of creating its own data center boosted Dropbox’s long-term prospects and was crucial to positioning the company for an IPO.

Dropbox declined to comment for this story, citing the SEC-mandated “quiet period” following an IPO, which restricts companies form making certain public statements. But in recent interviews,  executives have sketched a plan to fend off much larger companies lurking nearby: Help customers juggle an array of office apps and continue to invest for the long-haul.

Chief executive Drew Houston told Business Insider that when he meets with customers at roundtables, they show him their app-packed phones, equipped with a mash-up of work-related tools, such as word processors and spreadsheets hosted by different software companies. “They turn to us, and they’re like, ‘Hey, can someone build a cloud to sync my clouds?’”

Dropbox itself sees ample room to grow. Citing industry estimates, the company said investments in its market of collaborative apps, project management and public cloud storage will total more than $50 billion next year.

“The fear that any competitor, even at the margins against the GANFAMs is going to get crushed, I think isn’t fair,” said Jaluria, referring to one of several acronyms that stand for tech’s dominant forces: Google, Apple, Netflix, Facebook, Amazon and Microsoft. “These companies are not going to control everything. They are just not going to. In some cases it’s because they cant, and in some cases, it’s because it doesn’t make sense to.”

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