As Dropbox Transforms From Utility To Platform, The Bulls And Bears Emerge

Dropbox is a fascinating company, and undergoing an interesting transformation. Already valued in the billions, I wanted to take a look and see what the challenges and opportunities were for the company as it wades into unchartered territory. The post below was published on TechCrunch yesterday.


Earlier this week, one of the Valley’s most steady high-growth technology companies held its first-ever developer conference — DBX — marking a potentially historical turning point for an already large company with the potential to become even larger.  The company — Dropbox — has all the ingredients for the breakout status it has earnestly earned. The founders are from MIT, the initial idea looked so simple (perhaps, only a feature) that some of today’s savviest investors passed  early, the company took root inside Y Combinator, perfectly timed its cloud storage offering, differentiated against incumbent solutions on speed and efficacy, fine-tuned and arbitraged a wickedly clever business model against declining storage fees and increasing rates of device obsolescence, famously spurned an acquisition offer by Steve Jobs, a multi-billion dollar valuation, and now, with a feature in WIRED and from 2013 looking ahead, is embarking on a path very few companies get the opportunity to experience: to potentially be a great, independent, standalone technology company.

In the Valley, most people believe this will happen and, for a variety of reasons, want to see it happen. That said, there are also some who are skeptical of Dropbox’s ability to make a critical transformation in its core business — from a utility providing seamless storage across a range of devices, to a platform where developers invent new ways for end users to access and interact with data. In short, there is a “Bull Case” and “Bear Case” for Dropbox as its valuation creeps higher and higher. The bulls contend the high-growth, usage rates, and lock-in give it every chance to become a robust platform and a stand-alone, neutral piece of real estate that will continue to earn consumers’ trust while other larger technology companies fiddle with their own native solutions and lack of seamlessness. On the other hand, the bears — mostly comprised of late-stage and public investors — marvel at Dropbox’s net receipts yet can’t help but wonder if and when their margins will shrink as the price of storage approaches zero and if one of the two biggest infrastructure providers — Google and Amazon — will attack those declining margins by giving away space for free.

The Dropbox Bears have valid concerns, especially in the post-Facebook IPO wake which unfortunately marks this current crop of technology startups, for better or worse. Lucky for Dropbox, the revenue streams they enjoy now, combined with nearly $250M+ in venture capital, afford it the rare luxury to invest in making this turn into a platform. The company is able to recruit some of the world’s best engineers because very few emergent companies can offer the top class a chance to work on complex problems at such astronomical scale. Additionally, within the last 12 months, Dropbox has also dipped into the M&A waters by acquiring Snapjoy, buying Audiogalaxy, and most recently, scooping up Mailbox, to help accelerate this transformation, as consumers’ shift in using devices (especially mobile) presents a rare opportunity to bypass legacy solutions.

Taken in full, Dropbox indeed has a rare opportunity though is not without thorny challenges. Will consumers (and eventually enterprise) opt for native solutions, either motivated by laziness or top-down security protocols? Will developers build new applications on top of Dropbox, only to compete against a rapidly growing and fragmented app ecosystem that uses different storage options? Or, will Google and/or Amazon see Dropbox as a growing threat and undercut its prices by giving away the store? Of late, Google seems to be bent on, well, owning the entire web, and Jeff Bezos has slyly remarked “your margin is my opportunity.” Yikes! I believe any startup has the chance to compete against an incumbent like Google and tell Apple to buzz off, but Bezos is the last guy I’d want to face in the dark alley of cloud infrastructure.

All this said, hundreds of millions in revenues is enough to hit the public markets with already, no doubt. And, they will. No question there. The real question the company will need to answer is “What is the quality of that revenue?” How long will Dropbox be able to charge for access to a commodity when for their competitors, those revenues are a line-item expense and write-off? And, most interestingly, will Dropbox’s march to remaining an independent, public, standalone company have been the right economic choice given today’s public market scrutiny? Only time will tell, of course, but in these twists and turns of a young company, I not only applaud the ability to resist the temptations to cash out, but also fundamentally believe today’s environment of technology giants fighting each other on every front imaginable (and allegedly collaborating wit government to share data) creates a rare opportunity for a company like Dropbox to continue to gain the trust of individuals and businesses to store their data. It also helps that Dropbox’s software is lightening fast and, well, it does just work. The future syncs bright.