After the disastrous Facebook Inc (NASDAQ:FB) IPO last year, which followed botched IPOs from Zynga Inc (NASDAQ:ZNGA) and Groupon Inc (NASDAQ:GRPN), many Silicon Valley investors have lost their appetite for newfangled dot-com stocks that base their businesses on social media and cloud-based integration. Yet two popular cloud-based storage boxes – Dropbox and Box – might go public in 2013 or 2014. Cloud-based services are a hot industry, as the rising adoption of smartphones, tablets and other mobile devices have increased the need for instantly synchronized data that can be accessed across a myriad of devices.
Yet this is an industry currently dominated by tech heavyweights such as Google Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL), all of which have made cloud-based storage an ancillary, not primary, source of revenue. Therefore, is there room for two companies, which base their entire business models on cloud-based storage, to flourish? Or will these two companies be dead on arrival due to their underestimation of the steep challenges in the market?
Stuffing a cloud into two boxes
In contrast to more full-featured services from Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT), Dropbox and Box offer a simple storage service that emphasizes operating system integration and seamless synchronization. Pictures taken on a smartphone, for example, can be instantly uploaded to a cloud-based backup folder, while documents placed in a synchronized folder on a desktop will instantly be available across multiple devices. The simplicity of Dropbox and Box’s system of cloud-based synchronization has made carrying USB flash drives or e-mailing documents to oneself outdated habits.
Dropbox has notably focused on average consumers, providing them with 2 GB of free storage that can be upgraded upon user referrals. This approach has helped the company rapidly grow its active user base to approximately 200 million. Dropbox is valued at approximately $4 billion. Box, on the other hand, is more focused on enterprise consumers, and boasts more robust security features and integration with products from cloud computing giant salesforce.com, inc. (NYSE:CRM). Box provides free users with 5 GB of storage and has 15 million users. It is currently valued at $2 billion.
Two Davids vs. an army of Goliaths
First, we should compare Dropbox and Box to their larger rivals.
Free Space | Premium Space | File Size Limit | Best used for: | Supported Platforms | |
Dropbox | 2-18 GB (referral based) | $99 per year for 100 GB | Unlimited | Seamless Syncing | Windows, Mac, Linux, iOS, Android, BlackBerry |
Box | 5-50 GB (referral based) | $180 per year for 1000 GB | 2 GB | Seamless Syncing | Windows, Mac, Linux, iOS, Android, BlackBerry |
Google Drive | 5 GB | $59.98 per year for 100 GB | 10 GB | Web apps (Google Docs) | Windows, Mac, iOS, Android |
Microsoft Skydrive | 7 GB | $50 per year for 100 GB | 2 GB | Web apps
| Windows, Mac, iOS, Android, Windows Phone |
Apple iCloud | 5 GB | $100 per year for 50 GB | Free: 25 MB
| iTunes, Mac to iOS syncing | Mac, iOS, Windows (basic tools) |
Advantage | Skydrive | Box | Dropbox | N/A | Dropbox/Box |
While Microsoft Corporation (NASDAQ:MSFT) is the most generous in its initial free space allocation of 7 GB, its premium option is not as impressive as the amount of space offered by Box. In fact, neither Microsoft Corporation (NASDAQ:MSFT) nor Google Inc (NASDAQ:GOOG) can match the paid storage capacities of Dropbox and Box.
Different methods for different goals
However, Microsoft and Google Inc (NASDAQ:GOOG) are concentrating on seamless document creation, via Office and Docs, respectively, and not mass file storage. Microsoft has also integrated Skydrive into its Windows Phones, which seamlessly pairs its mobile products with its Windows 8 devices. Microsoft Corporation (NASDAQ:MSFT) also offers free, watered-down versions of Word, Excel and PowerPoint to compete with Google Inc (NASDAQ:GOOG)’s document creation tools.
Apple Inc. (NASDAQ:AAPL)’s iCloud, on the other hand, isn’t a serious contender yet, since individual file size limits are much lower. This restricts iCloud backups to media files, photos, apps, e-mails, contacts and calendars. Apple is focusing on invisible background syncing across its ecosystem rather than maintaining a massive storage locker. The iCloud desktop and iOS application feature a basic notepad, calendar tools, and contacts, but no full-featured office suite to compete with Microsoft Office and Google Inc (NASDAQ:GOOG) Docs.
What distinguishes Dropbox and Box from these larger rivals is their dedicated focus on file storage and synchronization. While Dropbox and Box offer viewing options for popular file formats, they do not operate web app front-ends like Google Docs, Office or iTunes. While Google Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL) are all expanding into cloud-based storage to support their primary operations, Dropbox and Box must generate the entirety of their revenue from premium memberships. That business model could prove to be a tough sell to cautious IPO investors.
Two opaque boxes
Since both Dropbox and Box are privately held, no one is clear how much revenue they are actually generating. While Dropbox reported that it generated $240 million in revenue in 2011, nothing is known about its 2012 revenue. Box generated $11 million in revenue in 2011, and is estimated to have generated $85 million in 2012.
Based on traffic recorded by Palo Alto Networks Inc (NYSE:PANW), Dropbox users generate 54 times as much traffic as Box users. However, Palo Alto Networks Inc (NYSE:PANW) spokesman Mike Haro has pointed out that the higher traffic can be attributed to Dropbox’s focus on the consumer market rather than the enterprise one.
If both companies go public, I believe that Box could be more successful, due to its lower traffic and dedicated focus on enterprise customers. Dropbox users, who tend to use the service for the larger storage of media files, could gobble up bandwidth at a much faster rate than enterprise customers, which could make it difficult for its top and bottom line growth to remain in sync. Box would also have more paying customers, since everyday consumers could be more reluctant to pay for cloud-based storage than enterprise ones.
Box CEO Aaron Levie believes that his company’s focus on enterprise will be a more profitable segment that the consumer market. Dropbox seems to be aware of this, and recently added more enterprise features to its cloud-based storage system. While Dropbox CEO Drew Houston has stated that an IPO would be possible later this year, Box’s Levie has claimed that he is not in a hurry to go public, claiming that it was a race that his company would “be fine to lose.”
The Foolish Bottom Line
Dropbox and Box might be hot names in Silicon Valley now, but it is unclear if their services can survive as standalone businesses. Many consumers will wonder if the cost of a cloud-based storage service is worth it when a new hard drive can serve the same backup purposes for a cheaper, one-time price. A 500 GB external hard drive currently costs roughly $50, and can offer users immediate access to all their backed up data without the need for constant Internet connectivity. A wireless external hard drive, which can share files with smartphones and tablets, only costs $100 for 500 GB of storage and can serve the same purpose as a cloud-based storage locker.
In addition, Dropbox and Box might need to offer more document creation or viewing tools to compete effectively with Google Inc (NASDAQ:GOOG), Microsoft or Apple Inc. (NASDAQ:AAPL). Expanding its services could be costly, especially when bandwidth costs will account for most of their expenses. Therefore, I think investors should ignore the buzz regarding these two potential IPOs and focus on upcoming tech IPOs with more potential, such as social network Twitter, Inc. or payment services company Square, instead.
The article The Battle of the Cloud Boxes Begins! originally appeared on Fool.com is written by Leo Sun.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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