Dropbox – Here to stay?

Four years ago on a bus, after realizing he left his USB stick in his dorm, Drew Houston realized that he was too dependent on a device. He went onto co-found Dropbox, the web-based file hosting service, that now claims 45 million users, a billion new files each day, and revenue that is expected to exceed $240 million. Dropbox went from an undergraduate idea funded by Y Combinator, to rejecting a 9-figure offer by Apple, and now finds itself on the cover of the latest issue of Forbes, and in midst of a fight for technology’s most desired prize: the Cloud.

How did this happen?

Whilst Drew Houston’s idea was hardly revolutionary at the time, Dropbox’s rise is unprecedented. This is reflected in the company’s structure. Most of the 70 employees are engineers, and, instead of hiring PR specialists, Dropbox focused on word of mouth marketing. Houston attributes both factors to having learned that “best practice is not necessarily best practice”.

Simplicity is the key

Surfing the web and using devices to store data have become daily routines for most of us. Emails have dominated corporate culture since the mid-90s, yet we still haven’t figured out an effective and simple way to store and send files. Simplicity was perhaps the key reason Jobs believed that an acquisition of Dropbox would be a “strategic asset”, and it has certainly been the reason for its success. It is extremely simple to get to grips with. After you install the application a blue box appears, in which you can drag files into. These are then replicated across all your devices. It’s so easy that Houston summarizes the concept in a 4 minute clip, whilst adding inside jokes a plenty (http://www.youtube.com/watch?v=7QmCUDHpNzE). The name of course sums up the process, and therefore the company, perfectly. Along with the minimalistic website it echoes Job’s “focus and simplicity” mantra.

Dropbox is centered around an idea – an idea that can make life for anyone storing files on several devices much simpler. It shifts the focus from the device to the content. Now, it doesn’t matter whether you forget your USB stick before boarding a bus or you leave your Exam notes on the kitchen table.

Share thy files

Besides simplicity, there is another explanation for Dropbox’s success: it allows for files to be shared with other users. Virtually anything can be shared from individual files to whole folders to HD movies (if you pay up for the extra space). This has made Dropbox a hit across campuses, in offices and with the authors of this blog. as it allows for the seamless co-editing of documents. Add to that that Dropbox works on all major platforms (including the mobile OS systems), and it has a massive competitive edge over the likes of Amazon's Cloud Drive, Microsoft's Sky Drive or Apple's iCloud. On the other hand, it faces fierce competition from other success-hungry startups such as Box.net or SugarSync, which are busy marketing their file sharing capabilities. Although Dropbox still boasts more VC funding attention than any of its young rivals, it's not the new(est) kid on the kid trying to claim the collaborative cloud.

Housing problems

Perhaps Dropbox’s biggest cause for fear is also the main problem many cloud startups face - the cost of infrastructure. Data centers are expensive (Apple recently shelled out $1billion to build its newest one), and companies such as Dropbox can't afford to build their own. In light of this, Dropbox teamed up with Amazon to use its hosting spaces, but Bezos' online empire launched the Amazon Cloud Drive at the end of March. This highlights a big problem for Dropbox: its competitors, whether Amazon, Google or Oracle, have far greater economies of scale, and can therefore deliver similar services at lower internal costs. Dropbox can either charge higher fees, which risk putting users off, or run on lower profit margins, which does not bode well with investors.

The bottom line

Dropbox’s meteoric success is explained by designing a straightforward solution to a problem that is as old as the internet: How can I best access and share my files from any device. By rejecting a series of possible buyouts, Houston again signalized his intent to build “a big company” (as he explained to Jobs back in 2009). However, to do so it must compete with the web’s big players. Dropbox being smaller and (especially internationally) far less well-known, makes this no easy feat. Whilst it teamed up with HTC last week, hoping to capture the Cloud in the Android world, it now has to compete with Google Storage, run by Android’s parent company. Furthermore, Google is rumored to be introducing Google Drive, a storage device which is free AND gives users twice the space of Dropbox.

Dropbox illustrates the current situation of the software industry well: it's effectively run by an oligopoly that provides a full range of services, from operating systems, to email accounts to IaaS-based storage. Dropbox has managed to break into this exclusive circle. However, to remain in it, it will have to innovate beyond the “focus and simplicity” mantra, raise its profile, and find a way to make up for its far smaller economies of scale.