Don't Drop the Box, Dropbox

Not long ago, cloud storage was extremely expensive to purchase. There was Dropbox at first, but Google, Microsoft, and then Apple soon offered cloud storage. Other smaller cloud storage services like Box exist too, but I won't focus on them in this post (I think they're just waiting to be acquired, and simply offering cloud storage isn't a viable business model). 

So that leaves Dropbox, which is not in a good place right now. Cloud storage has become a commodity; it's already offered for free in small storage amounts (around 30GB is given for free), and I expect unlimited cloud storage will be provided for free within the next few years from huge tech giants (Google, Microsoft, Apple, Amazon) which can subsidize it through their other revenue generators. Amazon already offers unlimited cloud storage for photo's for Prime subscribers, free of charge. Similarly, Microsoft offers unlimited OneDrive storage for Office 365 subscribers. Apple is slow to catch up here, but they will undoubtedly offer unlimited cloud storage too (they likely don't have the infrastructure to do so currently, but it's being built). The data centers are a fixed cost investment, and once they are built it costs very little to provide the additional users with cloud storage. And since these tech giants make money through their other services, they can afford to subsidize cloud storage, and tout it as an additional feature. Dropbox can't afford to do so, since cloud storage is their main money maker. 

Although I believe Dropbox's management knows that cloud storage isn't a sustainable business by itself, they haven't done enough to differentiate themselves. When broken down, Dropbox the company is three distinct products: Dropbox cloud storage, Mailbox, and Carousel. Dropbox purchased Mailbox in 2013, and launched its photo service Carousel in 2014, but in terms of products, that is all they've got. In most recent news, Dropbox also partnered with Microsoft, allowing Microsoft Office users to access the Dropbox directly from the apps. Here's my breakdown of those three Dropbox products:

Dropbox the service is unquestionably the best cloud storage provider - it's beautifully designed, cross-platform, fast, and extremely stable. But it's also the most expensive option, and great design will not convince users to pay when they can get a slightly worse designed cloud storage service for free.

Mailbox is a Gmail client, and how Dropbox plans to monetize this product is unclear. They can put ads into the app, but its been over a year since the acquisition, and no ads have been added yet. Of course, it can simply be a value-add for Dropbox subscribers, but it's currently offered even to free users.

The last product under the Dropbox umbrella is Carousel, which is also their least successful product. It's a glorified photo viewer that integrates with your Dropbox account. Again, nobody would pay extra for this when free options exist that are not much worse.

None of these things scream sustainable businesses. For people to pay for Dropbox, it must add considerably more value to them than competitor services. At the moment, this is not even close to being true.

That leaves Dropbox with a few, difficult options.

1) Sell Itself. Steve Jobs infamously called Dropbox a feature, not a product, when in negotiations to purchase it. While it looked for a little while that he was dead wrong, as soon as cloud storage became a commodity, Steve's quote seemed to ring true, and it certainly rings true today. Dropbox could easily find a purchaser today, and cash in for a few billion dollars. I would put their value at around $2B, but more speculative investors value it much higher. Google, Microsoft, and Apple would definitely be interested in such a purchase, if only for the design and engineering talent. 

2) Go Public. This can be a terrible option, as Twitter is currently learning. Going public would infuse Dropbox with a lot of cash, which it could use to hire more people and develop a larger portfolio of products. But I doubt that would give them a new business model and ways to become profitable 

3) Release More Products. This is easier said than done. In essence, what I'm saying here is that Dropbox should create entirely new products that may generate them revenues for sustainable growth. They tried with the acquisition of Mailbox and the creation of Carousel, but both of those products generate no revenue (goodwill, maybe, revenue, no) and function as slight supplements to Dropbox the service.

Dropbox is one of my favorite companies, which is why I want them to start thinking of how they will differentiate themselves. Currently, their future looks bleak. It would be a shame if they were acquired, but that looks like their best and most lucrative option.

HBO Will Finally Unbundle Itself from Cable

Last month, HBO announced that in 2015 it will offer an unbundled tier, allowing customers to view HBO content without a subscription from cable TV companies. Basically, HBO plans to compete with Netflix, Hulu, Amazon Instant Video, and many other similar internet streaming services. This raises a few questions.
 
Will HBO offer all of its shows as part of this package? Currently, HBO subscribers have access to HGO Go, which allows them to stream almost the entire HBO catalogue. In addition, HBO allows subscribers to stream its latest episodes at the same time they are premiered on television. Will this new option only let customers access the back-catalogue of older HBO TV shows and movies? If so, that will reduce excitement for this news considerably. 

It's also worth exploring why HBO finally decided to unbundle now. Currently, if you want to subscribe to HBO, you have to do so through your cable TV provider. So you end up paying the provider, who then pays HBO. With an unbundled tier, you will pay HBO directly, eliminating the cable providers from the equation. HBO must know there is pent-up demand for their content from cable cutters, but they don't know if it will provide them with enough revenues to totally cut them off from cable providers. That's why they haven't said what the unbundled tier will include - it's a decision they haven't made yet. The question HBO needs to answer is will they make more money by going directly to consumers, or through cable companies as they do now? 

I wonder what HBO will charge for this unbundled tier. If it was my decision, I would price it in the $30-40 range, because cable TV cutters are desperate for the service, and would have no issues paying that much for their favorite channel. In addition, the quality of HBO shows is in a class of its own. Their closest competitor is Netflix, which charges $8.99 per month. But the common complaint with Netflix is the quality of its content. I have only found old TV shows and movies on it. Once in a while I will find some fairly new movie or show, but that is far from the norm. HBO, on the other hand, has the best TV shows in the business, and should charge accordingly.

Thoughts on Apple Pay

Credit cards became an instant success because they removed the friction in purchasing and created unbelievable value for consumers. In simple economic terms, the benefits of credit cards exceeded the costs. For Apple Pay to succeed, in needs to do the same. After a few weeks of using Apple Pay, here is what I found.

• Most businesses still don’t support it. I live in a large college campus, and none of the businesses in the area support it. Of course, this is not Apple’s fault, and the liability shift in 2015 should fix this, but consumers don’t care who's fault it is. They just want it to work.
• When the retailer does support it (the ShopRite, Wegmans, and Walgreens near me all support it), the technology is glorious. Payment is quick and easy. There is no need to carry a wallet with me. I feel like value is created because I can get in and out of the store quicker.

Most major banks and credit card issuers already support Apple Pay, but it’s the merchants who are holding out. I won’t delve deep into why, as Ben Thompson already covered this topic, but the effect is nonetheless the same: consumers are not able to use Apple Pay everywhere, seriously diminishing its value. Meanwhile, the merchants are also creating a mobile payment solution, a cute play on words called CurrentC, but it’s unlikely to gain any traction. 

Despite merchant opposition, I predict that Apple Pay (and Google Wallet, for that matter), will become the victors in the mobile payment space. Every iPhone 6 and 6 Plus comes with a NFC chip that enables Apple Pay, as will future all Apple devices. Consumers will come into stores wanting to use them, and the stores will budge. At the end of the day, it's money we are talking about, and merchants will accept it in any way possible. 

Twitter's New Strategy Statement

I’ve written quite a bit about Twitter in the last month, beginning with my External Anaylsis, followed by my recommendations for the company. Yesterday, the company announced their long-term strategy to allay investors who are worried about declining growth. That strategy?

Reach the largest daily audience in the world by connecting everyone to their world via our information sharing and distribution platform products and be one of the top revenue generating Internet companies in the world.

Pointed out by many, this new strategy doesn’t even fit in 140 characters. It is a sign that the company is just as unfocused as before, if not worse. Every internet company wants to be one of the top revenue generating companies in the world. Just stating so doesn’t make it so. Fortunately, investors weren’t duped by the new strategy, and Twitter stock fell the day after the announcement by about 6%. What this announcement means to Twitter users is a different, although similarly depressing, story. The story is a simple one, it’s more ads. 

Twitter doesn’t charge users to use the service, so the only way investors can expect greater revenues is through more ads. I’m a user of Tweetbot, a third party Twitter client that doesn’t display any ads (yet), but most people use the official Twitter app. I would expect lots more ads in your Twitter feed if you use the official client. 

Twitter is my favorite social network by far, so I’m extremely saddened by the unfocused management team. The latest strategy statement only makes matters worse, indicating the company is yielding to investors instead of coming up with new innovative ideas. I always believed that Twitter should have stayed private and raised equity through other means, but now, it looks like it's learning how harsh the realities of being publicly traded really are. 

Microsoft Makes Office Free

This week, Microsoft did what was unthinkable just a year ago. It made its Office apps free for everyone (premium features still require an Office 365 subscription, but those features are for advanced users which most are not). This is important for the following reasons:

A. They needed to compete with free services from Apple and Google. While the document editing services of those competitors are getting better, Microsoft Office is still king. This move to make Office free just confirms it. 

B. Indoctrinate the young. Microsoft needed to get young people using their products from an early age, so that they may become lifelong Microsoft users. Without a free tier, these young users would be indoctrinated into Apple's and Google's ecosystems instead, which would be terrible for the future sales of Microsoft products. Hooking these young people early is an investment for the future, when they grow up and have disposable incomes to purchase other Microsoft products. 

C. Separate the consumer business from the enterprise business. Ben Thompson put it best:

On the consumer side, Microsoft hopes to make money from devices and advertising: they sell Surfaces, Lumias, and Xboxes with differentiated OS’s, hardware, and services, and they have ad-supported services like Bing and Outlook. The enterprise side is the exact opposite: here the focus is 100% on services, especially Azure and Office 365 (to use the Office iPad apps for business still requires a subscription).

Microsoft needed to clearly delineate its two major businesses - one aimed at consumers, and the other at enterprise. Offering the Office apps for free makes their consumer business stronger. In turn, these consumers will expect the same services from their employers (many large businesses already pay for Office 365, but this is about those who don't, such as small to medium sized companies).

Overall, this is an excellent move for Microsoft. As of this writing, Microsoft Word is third most downloaded app in the App Store. The investment has already started to pay off.