Getting Dropbox's Act Together

I'm not sure what Dropbox has been doing since I last wrote about them almost a year ago. There have been many recent headlines of Dropbox's lowering valuation - it has even been branded a dying unicorn, but that might be a bit extreme (as tech headlines tend to be). To me, the path Dropbox should be taking is so clear that I can begin selling vision pills for flustered founders. At the heart of the matter, Dropbox is a company that wants to provide services for consumers, but lives in a market that only thrives in enterprise. 

Selling cloud storage may have been a good business model five years ago (even then it was questionable), but today, it is downright impossible. Just look at Box's financials (hint: unprofitable). Apple, Google, Microsoft, and Amazon have squeezed out any margins that could have been made out of cloud storage by using their massive economies of scale. Cloud storage is effectively a commodity, and Dropbox needs to forget about selling it to consumers. 

That's not to say things are going to be dire for Dropbox. If you want to compete in this business, you've got to offer more than just some terabytes in the cloud. Dropbox's best bet is to go after enterprise. And what better way to go after enterprise than to go directly for Microsoft Office?

Mailbox > Outlook

Nobody enjoys using the Outlook desktop apps (the mobile app, which was originally Accompli and repurposed to be Outlook, is well regarded). Outlook is a codger, anachronistic piece of software that makes email feel like it's 1999 again. It is cluttered with features that very few people use, existing only because some large enterprise client convinced Microsoft to add it. When Dropbox purchased the email client Mailbox, I was sure they would go after the email space. To my surprise, they didn't. 

People want out of Outlook, so give them an option. What Dropbox needs to do is make a semi-powerful enterprise friendly email client. Start with what you have from Mailbox, and build it out. There's already a productivity angle to Mailbox - all that needs to be done now is to make a Web/Windows client, and add some additional productivity features. This would make it much easier to pierce enterprise IT departments. I'm a Mac guy myself, but I'm not oblivious to the fact that enterprise is still very much synonymous with Windows.

Dropbox > OneDrive

This one is easy. Dropbox is already the best (and most expensive) cloud storage provider. Search is fast, the design is great, and the integration with apps is unparalleled. What's not great is the lack of integration with other Dropbox apps. 

Attaching files to an Outlook email is an extremely clunky experience in most corporate environments. What if you could simply open your Mailbox app (on any platform), click attach, and quickly search your Dropbox account for the file. You can sort-of do this now with the Mailbox iOS/Android apps, but for it to truly be powerful, desktop support needs to be added (Mailbox for Mac is in beta). 

Dropbox Office > Microsoft Office

The Grand Canyon is said to have been formed by the Colorado river 5-6 million years ago. Similarly, Microsoft Office has been formed by Microsoft's slow, iterative, and consistent updates. At this point, I wouldn't be surprised if the history of Office will be as storied as the Grand Canyon. With the exception of Internet Explorer, I doubt there's a more popular and long-lasting piece of software than Microsoft Word and Excel. These two productivity apps dominate in both consumer and enterprise markets, and for good reason. They're extremely powerful, have great support for older versions, and have file extensions everyone can open. This creates a positive feedback loop where people use Microsoft Office because other people use Microsoft Office, thereby guaranteeing that when you send someone a file they will be able to open it.

But as great as Word and Excel are, they're not great productivity tools for working in 2015. With competition from Google Docs, Apple iWork, Quip, and probably another few dozen productivity apps, the age of Microsoft Office is beginning to show. Collaborating on a document in Word with multiple people is not ideal. Inserting and marking up an image in Excel is still too much work. File syncing and concurrency issues can be hit or miss. The mobile apps are powerful but feel heavy. In short, Microsoft Office has many pain points that users would love to get fixed.

Dropbox is getting into this m├ętier already, but not quickly enough. If you open a PDF/Word document in Dropbox, it will allow you to view the document without downloading a local copy and opening it in Adobe Reader/Word. Dropbox also has a very awkwardly succour partnership with Microsoft, whereby you can use Microsoft Office and integrate it with Dropbox. But these are half-steps. What Dropbox really needs to do is create competitor products to Word and Excel. The goal here is not to create a me-too product, but to offer a comprehensive enterprise software package that a CIO would want to purchase for his company. It needs to compete with Microsoft on every front, and win on most (Germany is said to have lost WWII by fighting on too many fronts at once, spreading itself too thin. Dropbox should focus on the above three fronts, and abandon the others such as its photo service Carousel). 

The Business Model

Having a great product without a great business model is very much like having a nice TV with no channels to watch - it doesn't stand on its own. The problem Dropbox has had since day 1 is converting free users to paid users. And they still suffer from the same problem, mainly because the value they offer (storage) is too low. That's why it's so imperative from Dropbox to lock in enterprise users. The first major benefit of enterprise users is that they pony up the money. Second, if you get them stuck in your moat, they stay in your moat. 

This is precisely why I'm suggesting Dropbox go right after Microsoft - it's a proven business model that pays great dividends. It's true that enterprise is not in Dropbox's culture, but that's fine. You can design great enterprise applications with a consumer model in mind (great design, UX). Many people already use Dropbox at work, but it is their personal account. Now it's time for them to charge the company for that service. 

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.