Report 2 - What is the future of dropbox?

Case report #2

Dropbox

Cloud storage services

Solvay Brussels School of Economics & Management

GEST-S-484 Technology & Strategy

Professor Manuel Hensmans

Group 4

Andrea Balducci

Axel Forrez

Gabriel Spinnler

Thibaut Van Vracem

GEST-‐S-‐484 Technology & Strategy Group 4 – Dropbox

Dropbox is an American cloud storage and online backup services company founded in 2007

and headquartered in San Francisco. Since the launch of its first product in 2008, Dropbox has

experienced a tremendous growth, both in terms of profits and number of users. This second

case report focuses on the future of Dropbox and the development of strategic options for the

company.

Near future

Case question 5: perform a TOWS analysis of your organization

SWOT analysis

Strengths

(1) Large consumer base and strong brand; with more than 275 Million users, Dropbox is the

leading player in the cloud storage industry. The penetration of Dropbox within businesses is also

indirectly very high as many consumers also use this service for work purposes. Dropbox is seen as

a ‘hot company’ and has been able to attract a lot of positive ‘earned media’.

(2) Innovative start-‐up company culture; the company follows the ‘simplify your life’ mindset

and foster innovation through employee freedom. Furthermore, the users/ employee ratio is

extremely high (more than 300.000 users per employee).

(3) Ability to raise funds; Dropbox is backed by investors like Sequoia Capital, arguably one of the

best tech venture capital firm. With a lot of money recently raised and favorable prospects for the

future, Dropbox is certainly able to get funding to fuel its growth.

(4) Attractive and quality products; consumers praise the simplicity, rapidity and uniformity

across devices of the Dropbox product. Moreover, Dropbox recently announced the future launch of

‘Project Harmony’ which will allow users to work together simultaneously on any document in

Microsoft Office applications. On the whole, the ability to develop user-‐friendly solutions is a real

strength.

(5) Strategic partnerships and acquisitions; with more than 100.000 compatible applications on

its platform and partners as Facebook, Dell and Samsung, Dropbox is able to attract more customers


and bring more value to its product. The ability to create and develop strategic partnerships and

integrate acquired companies is definitively a strength.

(6) Charismatic and visionary leadership; Drew Houston, CEO of the company, created Dropbox

initially as a way to solve its own problems. He has a clear vision for the long-‐term future and under

his leadership, the company has experienced an exponential growth.

(7) Extremely talented workforce; Dropbox is particularly good at attracting extremely qualified

employees. They are literally trying to hire the best in the world for each position (e.g. Python

language inventor, Facebook Like button designer and more recently, Condoleezza Rice, who will

bring her international relations expertise to the table).

Weaknesses

(1) Weaker user data security than competitors; as Dropbox is not yet compliant with numerous

quality standards like HIPAA, FERPA and SAS70, it is being perceived as having a weak security

system in comparison to its main competitors.

(2) Late entrance in the B2B segment; the company has from its beginning targeted individuals as

well as corporation. This has resulted in a lack of focus on the latter. Together with this lack of focus,

it also lacks differentiation, namely because Dropbox is mainly focused on cloud storage while

competitors provide more cloud computing services.

(3) Lower space offered/ price ratio; in comparison to its competitors Dropbox offer less free

space to free users. In addition, the competitors’ prices are also more attractive for premium users.

(4) Potential great man dependence; the earlier described strength automatically forms a

weakness. As a large part of the company thrives on Houston’s successes, it is possible that without

him, the company would have difficulties defining its strategy for the future.

(5) Low presence in emerging markets; Dropbox is extremely strong in North America and

Europe (with more than 60% of pageviews generated). However, the major emerging markets


account for a very small share: 3% of Dropbox’s pageviews in Brazil, 5% in India, 2,5% in Russia and

even less in China and Indonesia1.

(6) Low premium users/free users conversion rate; Dropbox follows a classical freemium

business model. Although the company’s user base is growing faster than Box’, the conversion rate

of a user actually paying for the service is only between 3 and 4 % in comparison to Box’ 6 to 8%.

Opportunities

(1) Trend towards the cloud for businesses; firms are more and more seeking cloud solution to

store, share and organize their files. Linked to this, is the growing demand of corporations to access

more collaborative tools and content management solutions on the same platforms.

(2) Rise of emerging markets in the cloud; analysts predict the emerging markets will outpace

cloud storage spendings in more mature regions and in turn drive the worldwide enterprise storage

growth in the next few years.

(3) Growing global internet penetration; as internet is more and more present (especially in

emerging economies), more and more users can access cloud services.

(4) Businesses seeking to exploit big data; companies can nowadays collect data much more

easily and are looking for ways to analyse and exploit this new goldmine.

(5) Governments moving to cloud computing too; public institutions are also eager to benefit

from the benefits of the cloud.

(6) Consumers increasingly looking for open-‐source applications; cloud computing could be

the next stop for public collaborative software development.

Threats

(1) Plummeting price of cloud storage; cloud storage is becoming a commodity as the market

prices are going down (driven down by the likes of Amazon and Google). Being too focused on cloud

storage could lead to a strong erosion of profits in the future.

1 Retrieved April 2014 from: http://www.appappeal.com/maps/dropbox


(2) Unfavorable public opinion; there is a risk than consumers start to develop a negative opinion

towards Dropbox as the company grows larger, more focused towards businesses and if security

scandals continue to arise. Rising privacy concerns have already been affecting other internet giants

(e.g. Facebook, Google).

(3) Increased global and local competition; Many giant software companies are developing their

own global cloud solution (e.g. Google Drive, SkyDrive, iCloud); with their financial resources,

reputation and ancillary services, they are a real threat. Moreover, regional competitors are

emerging, especially in emerging markets (e.g. True Box in Brazil); they are better positioned to

capture local demand in view of privacy issues faced by the global players from the US.

(4) Disruption within the cloud storage industry; differentiated competitors may arise and

disrupt the industry. One recent example is Transporter, a cloud storage hardware solution, which

allows buyers to create their own private cloud server, therefore overcoming the security concern.

(5) Government blockades in emerging markets; foreign governments may look unfavourably at

US companies hosting national data on their servers. Therefore, there is a risk for US cloud storage

companies to be banned from operating on several markets.


TOWS analysis

Strengths and Opportunities (SO)

(A) Leverage the current indirect penetration of Dropbox within businesses to focus efforts

on Dropbox for Businesses; with employees using personal accounts at work and a strong product

with many business applications (e.g. Project Harmony), all the factors are there to fully take

advantage of the rising B2B demand for cloud services.

(B) Partner its way in emerging markets; Dropbox can take advantage of the rise of emerging

markets by using its strengths AND overcoming its low presence in the emerging market weakness:

the company can leverage its ability to partner, strong brand perception and international relations

skills to ally with companies in emerging countries. As with Facebook in the West, a strategic

partnership with social network sites in emerging countries could increase Dropbox’ local presence.

Potential partners would be Sina Weibo, Kaixin001, Qzone and RenRen in China. Partnerships with

telecom operators are also an option. The Dropbox’s brand track record in the US and Europe and

the product quality will help in the partnering process.

(C) Transform users into developers; use as a strength the large consumer base at hand and the

simplicity of Drobox’ product to allow users to work on an open source software platform to

develop ideas that will add value to Dropbox, thus boosting open innovations.

Weaknesses and Opportunities (WO)

(A) Provide big data exploitation tools to customers; As Dropbox is already providing data

storage and data organization to business customer, providing tools to exploit it could be a next

step. This will overcome the lack of differentiation of the company and allow them to continue

charging high prices.

(B) Target governments and public institutions as customers; this is a risky challenge but if

Dropbox is able to provide cloud services to governments, it will send a signal that the company

security standards are really high and change CIOs’ opinions, which could lead to a virtuous circle.


Strengths and Threats (ST)

(A) Focus on cloud computing and content management; in order to overcome the

commoditization of cloud storage threat, Dropbox could shift its focus toward collaborative cloud

services, the new value pools in the industry. The company can leverage the following strengths:

ability to develop user-‐friendly functionalities, new strategic partnerships (e.g. Akamai Technologies,

KIO Networks) and its talented workforce. Moreover, with its large user base, Dropbox can easily

reach customers with these new services.

(B) Anticipate the potential disruption by acquiring or partnering with disrupters;

Transporter can be very attractive for companies looking for more files security and could very well

become a dominant design in the B2B segment. Therefore, acquiring such companies and combining

their hardware with Dropbox software can be a strategic option. In the same vein, partnering with

this company is a possibility too. Dropbox can here take advantage of its ability to partner and raise

funds. Moreover, with its clear vision and talented workforce, Dropbox can bring Transporter’s

technology to new heights and a larger customer base.

(C) Invest in international relations with emerging markets; to overcome potential

governmental blockades and face the local competition, Dropbox should invest in international

relations (e.g. with C. Rice’s expertise and by hiring new qualified employees).

Weaknesses and Threats (WT)

(A) Go premium in cloud computing; as cloud storage prices are plummeting, expanding the offer

to content management, collaborative applications, big data management and other innovative

value-‐adding applications in the B2B segment could allow the company to maintain its high

margins. By doing so, Dropbox can minimize its weaknesses in terms of lack of focus and

differentiation and transform its higher prices (compared to competitors) into an advantage.

(B) Segment the B2B market and increase focus; the idea here is to segment the B2B market into

two categories: (1) firms looking for more security and a more private (for which Transporter could

be attractive) and (2) firms looking for a more opened cloud, more collaboration with partners and

with lower security requirements. The disruptive threat, the lack of differentiation and the security

weaknesses could be avoided by focusing on the latter and by providing more inter-‐firm

collaboration through the cloud.


Long-‐term vision

Case question 6: what is your vision for the future?

PESTEL Analysis

P

• Intensifying Government’s control on Internet traffic, privacy issues (e.g.: NSA-‐PRISM program)

• Internal political issues will arise as a barrier to adoption • Different policies across countries (information privacy, security, national network

policy and jurisdiction) • Difficulties to address issues such as security, privacy, location and data ownership

for policy makers • US-‐EU Safe Harbour Act and European Union Data Protection Directive: give a close

look at the evolution of the relationship between this EU and US.

E

• Acceleration of the adoption following the economic crisis: cheaper cloud models • From a capital-‐intensive transaction to an on-‐going operational expense: pay-‐per-‐use

model more flexible than old IT model • Quick cloud storage prices drop • Growth of the cloud services market, in both B2B and B2C segments • Emerging markets will lead the demand

S

• Populations more and more tech savvy: need to access to your data from everywhere, anytime and in all devices.

• File sharing is increasingly common (sync ‘n share) • Change in companies’ culture: data stored outside of the company • Confidentiality exigencies from the customers different across countries

T

• Development of mobile internet: More and more connected devices • A lot of technologies underpin the advent of cloud computing (e.g. virtualization, SOA,

Internet, universal high-‐speed bandwidth)

E • More environmentally friendly as outsourcing will help reduce the energy consumption (environmental friendly datacenters)

L • Cross-‐countries differences in terms of companies-‐ and customers-‐related information


Scenario analysis – Confidentiality/security and commoditization

Two variables have been considered:

Commodity: All services such as access to Internet, cloud storage, become so cheap that it will be

affordable and accessible for all the world population. (E, T, E)

Security/Confidentiality: How secure and confidential the cloud storage will be in the future. In

other words, how the government and the law will regulate the industry of cloud computing and

transfer of data across countries. (e.g. Dropbox putting Condoleezza Rice (NSA surveillance

advocate) on its board can shock privacy advocates). (P, S, L)


Who is the strategic customer? From B2C to businesses

There are different stakeholders in the cloud industry:

• Providers

• Developers

• Users (B2C or B2B)

• Prosumers; the future may enable users to become providers and consumers at the same time

For now, the profit pools are switching from premium consumers to businesses that buy extra

storage space and other features that are not available for free. Indeed, the conversion rate on the

consumer side is rather low and as we seen above, businesses are more and more eager to adopt

cloud solutions.

One of Dropbox’s recent strategies to hit business customers was to give away free storage space to

university students for two years, through the Space Race. Two advantage of this strategy: firstly,

the students will be “dependent” of this surplus storage and may be willing to pay in order to keep

this storage space at the end of the two years. Secondly, university students are often future

employees in corporations. This will allow to Dropbox to indirectly penetrate the companies

segment and will increase its bargaining power in selling Dropbox for Business.

Key customer success factors

Since we have identified businesses as the main paying customers, we will focus on the KSF in

reaching the B2B segment.

(1) High security; CIOs often have high security requirements. That is why gaining their trust is

crucial. Therefore, compliance with security standards and the law is key. Moreover, since Dropbox

aim to be a global player, the firm will have to manage the different national laws in terms of data

protection and availability.

(2) Attractive ancillary services and products; Customers need more than simply cloud storage.

They need complementary cloud services to create real value for the customer (e.g. enhanced

collaboration, easier files access and content management, integration with e-‐mails).

(3) Attractive price; business customers have a lower price sensitivity and different incentives

than consumers but the price remain an important decision factor; Dropbox operates in a very

competitive landscape. Segmentation can also help to capture more value (e.g. company size,

functionalities required).


Strategic groups cloud computing

Currently, in the cloud computing industry, there three type of services:

• SaaS (Software as a Service)

• Paas (Platform as a Service)

• Iaas (Infrastructure as a Services)

Dropbox is currently in the SaaS part, but we forecast that in the long term, it will move slowly to a

PaaS model, as Google and Microsoft already did. The three categories differ from each other

following two different criteria (the axis variable below):

(A) Control; how much of your computing do you trust to other providers, and how much do you

keep in house? The higher on the ordinate axis, the bigger the scale of the company. In the bottom

you have individuals (end users).

(B) Value created; the ability of the Cloud service to justify premium prices.


(1) SaaS (Gmail, Google Doc, Box, Dropbox, SAP, Microsoft Office 365)

• Easy to use: everything can be managed by vendors

• Targeting End-‐Users

(2) PaaS (Amazon, Google app engine, Facebook)

• Most complex

• Highly scalable

• High intractability and effectiveness of large staff

(3) IaaS (Amazon EC2, Rackspace, Windows Azure, Google compute engine).

• Users maintain complete responsibility for the maintenance of the system

Mobility barriers

« The barriers from SaaS to PaaS are that their systems are tailored to customer-‐specific

applications and internal infrastructure, limiting PaaS use to small, non-‐critical applications which

require quick, global deployment

The barriers to using IaaS services are similar to PaaS, where CIOs struggle with trade-‐offs between

agility and issues of cost, security, and availability »2

The Barrier for Dropbox to move towards the upper-‐right corner will be: (1) make investment to

improve their security and thus convince businesses to adopt Dropbox; (2) create value differently

than simply supply cloud storage as it is becoming a commodity.

2 http://ceo2ceos.com/2011/06/what-‐are-‐the-‐barriers-‐to-‐moving-‐to-‐the-‐cloud/


Vision statement – How to realize it?

Dropbox’s long-‐term vision is to ‘bury the hard drive’ and be the world’s leading storage provider.

Furthermore, their focus will be on centralizing all the world data on the cloud (pictures to share

with friends, files to collaborate with you colleagues, music, etc.). The goal is that everyone should

be able to access all their files and data through the cloud everywhere, at any time, and be able

to share it with everyone quickly and easily. Dropbox also wishes to increase the world productivity

by simplifying people’s life and companies’ operations.

In order to achieve these long-‐term goals, Dropbox will have to improve security in order to

successfully reach businesses. Buying or partnering with companies specialized in data security and

encryption is a way to achieve this objective.

Moreover, Dropbox will have to create value by increasing the number of added value services;

in other words, the firm must transform itself into a cloud computing company rather than a files-‐

storage and -‐sharing company. Attracting developers, generating more applications internally (like

Carousel) and acquiring specialized firms will help to transform Dropbox into an application

platform with the broadest service range possible. Taking over companies to integrate them in the

Dropbox architecture is particularly interesting; acquisitions of start-‐ups in several domains (e.g.

music, video, books, project management) will allow Dropbox users to access and share all kinds of

files within the Dropbox environment.

Having just landed $500 million in credit financing, Dropbox is acquiring a lot of Start-‐up such as:

• Zulip: corporate chat tool

• Loom: photo sharing app

• Hackpad: collaborative document tool

• Readmill: e-‐book reader

What is now missing to increase the range of services, and so increase the productivity and also the

file sharing? And at the same time increase the conversion rate from free to premium.

• Music sharing/streaming service (e.g. Soundwave)

• Video sharing/streaming service

• Professional inter-‐firms communication tools

• Add-‐ons developed for Dropbox (to-‐do lists, document scanning)

• Enable data adaptability for new devices (wearable technology), like Spritz


As the global internet penetration continues to increase, hard drives will become less and less

attractive in comparison to cloud storage. This is also true for costly hardware storage built-‐in

devices, like computers or smartphones. There is a real opportunity for Dropbox to take advantage

of this by creating strategic partnerships with computers or smartphone vendors and be the

sole provider of storage space for the devices sold by these companies. While partners would enjoy

cost reductions due to the disappearance of hard drive, Dropbox would gain access to their

customer pool. Finally, customers would enjoy lower device prices and more storage space.

In conclusion, we see Dropbox in 10 years as a company that will continue to increase the

worldwide productivity and the “shareability” of all sorts of data, from all possible devices. This will

be done by integrating in the platform an extremely large range of services applied to various

domains such as music, video, gaming, that are still missing in the current Dropbox portfolio.


Bibliography

Alexandre Scialom (Feb. 2012). “Which Company Will Be Worth More In The End: Dropbox Or Box?”. Forbes. Retrieved from: http://www.forbes.com/sites/

Appappeal. “Dropbox usage per country”. Retrieved April 2014 from: http://www.appappeal.com/maps/dropbox

Christof Weinhardt & al. (Oct. 2009). “Cloud Computing – A Classification, Business Models, and Research Directions”. Business & Information Systems Engineering, Vol. 1, 391-‐399.

The Economist (Dec. 2012). “Dropbox : A nebulous future”. Retrieved from: http://www.economist.com/blogs/

Liz Gannes (Apr. 2014). “As It Becomes an App Platform, Dropbox Gobbles Up More Than One App Startup Per Month”. Retrieved from: www.recode.net/

Nur Ainaa Mohd Bakri & al. (2012). “PESTLE Analysis on Cloud Computing”. Retrieved from: http://www.academia.edu/

Rackspace Support (Oct. 2012). “Understanding the Cloud Computing Stack: SaaS, PaaS, Iaas”. Retrieved from: http://www.rackspace.com/knowledge_center/whitepaper/

Skytap. (Mar. 2011). “Demystifying SaaS, PaaS, and IaaS”. Retrieved from: http://www.skytap.com/blog/

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