Dropbox claims half a billion users, but does that make it a viable business?

0

Cloud collaboration and storage provider Dropbox says that its registered users now number over half a billion.

Privately owned Dropbox is one of a couple of hundred companies known as ‘unicorns’ – startups that are valued at over a billion dollars – by a Wall Street that has grown suspicious of cloud providers’ high growth to profit ratios. In a jittery global market, investors are beginning to favour old-fashioned profits over promises, fearful of another tech bubble.

With a notional $10 billion valuation and its ‘will they, won’t they?’ IPO strategy, Dropbox is a rarer beast still, a ‘decacorn’, alongside other cloud-born outfits such as Airbnb and Uber. But does Dropbox have a real-world business model to rival that of disintermediating the holiday accommodation and taxi trades?

The company says that its file-sharing and collaboration platform has spawned over three billion cloud connections. That sounds impressive, but what it really means is that each of its registered users is connected to an average of just six people via the platform – many of whom will have signed up to the free service because someone had used it to share a file with them.

In this sense, Dropbox is a pyramid in the cloud – an entirely legitimate one, of course. Investors have long been attracted to pyramids, but only when they have promised predictable long-term revenue streams, just as cloud services promise scalability and predictable costs to their users (the flip side of the coin). But using a service once or twice because a contact has used it to send a file is not the same thing as being a loyal, returning customer.

As cloud storage and file-sharing vanishes as a competitive differentiator, Dropbox has done many of the right things to diversify and stop itself from competing in a race to the bottom.

For example, its paid-for Dropbox for Business service is used by eight million corporate customers, including News International, some of whom rely on it to add speed and agility to their business, claims the company.

Clearly, therefore, trust and security must be Dropbox’s mantra from now on; but trust, security, and file-sharing in the cloud do not make easy bedfellows, especially when employees do it informally with no oversight from the IT department. A single high-profile customer breach via the Dropbox platform and the provider’s reputation could crumble.

Put another way, if a majority of its users have adopted the service passively, informally, and for free, then the only customers who really count are those eight million corporate ones, unless a way can be found to turn the rest of its 500 million registered users into cash without irritating them with intrusive ads. Alternatively, they need an incentive to upgrade – beyond a vague feeling that the free service is not as robust.

What kind of company is it?

Currently, Dropbox is less than clear about where its focus lies: the enterprise or the consumer space. The walls may be tumbling between enterprise and consumer technologies within many organisations, but investors don’t see the upside unless the profits are pouring in, and neither do many IT strategists who struggle with the governance and security challenges of shadow IT.

Dropbox’s lack of clarity about what type of company it is makes institutional investors nervous, too – despite the company appointing a CFO last year, a move which many saw as heralding its IPO.

Since rival Box’s IPO last year, shares have fallen back to roughly IPO level, meaning that anyone who stayed for the journey has gained little, if anything, to date. The situation may change when it announces its Q4 results, tomorrow.

Then again, the same thing happened to Facebook, which, at the time of its own flotation, was making barely a dollar for each of its (non-paying) users. Since then, Zuckerberg has bounced back and used the cash wisely – in the main.

Dropbox may choose to stay private and play a long game, but long games favour clarity of purpose. Or it may close down the questions by moving to IPO sooner rather than later. With the global financial markets balanced on a knife-edge, and with a volatile US election nearing that may yet destabilise that country, its window of opportunity may be closing.

About Author

Chris Middleton

Chris Middleton is a widely respected business and technology journalist, author, and magazine editor. In recent years he has been Editor of Computing (where he remains Consulting Editor); co-founder and Managing Editor of Professional Outsourcing – a magazine he developed from scratch and grew to be the leading magazine in its field; Editor of CBR in its most successful year; and co-founder and launch Editor of Sourcingfocus.com. Today, he is co-Director of EastwoodMiddleton Publishing, and founder, designer, and Editor in Chief of Strategist magazine (UK), the boardroom magazine that provides strategic insight for business leaders, and of its mobile-first digital edition at www.iamtheStrategist.com. He is also co-founding Editor of Child Internet Safety magazine, and a contributing Editor of Diginomica.com. Over the years Chris has also written for, among many others, The Guardian, The Times, the BBC, and Computer Weekly. He is the author of several successful books on digital media, and a commissioning editor of more than 50 books.