Where Dropbox success is coming from and how they can compete today?

Dropbox is a personal cloud service storage system. It is a place where you can store all your files and they automatically will appear on all your computers, phones and tablets. With Dropbox one can open his documents from anywhere.

Dropbox was founded in 2007. It used the network effects in a remarkable way to grow its user base. Because there was no competition in the beginning, they were able to charge high prices, without focusing on costs. They created a great product and were able to capture 10x what they should, because there were no other alternatives.

Dropbox scale up their business and exhibited direct and indirect network effects.

  • Direct network effect:
    • Joining shared folders to collaborate: Every time a user shares a folder with other people, it creates a link that other people can use. This creates an eco-system where new users start using the service because their friends shared a file with them. This creates a barrier to switch to a different file-sharing system. The effect is stronger when people use Dropbox at work, which also incentives them to use it at home. In the first six months Dropbox had 100,000 early adapters. But because these early adapters started sharing files with their friends, they hooked new users into the systems.
    • Ecosystem of platforms and devices for developers: Dropbox runs on every desktop operating system and every mobile device, (including competitors’ devices). As a developer you want to integrate to a cloud product that runs on all devices. The more developers develop apps with Dropbox, more users are attracted to choose Dropbox over its competitors.
  • Indirect network effect:
    • Savings in storage costs: When 10 different people share the same file, Dropbox saves the file only one time. More users use Dropbox to share one file, more the storage costs per user decrease. This allows Dropbox to drop prices and offer a more attractive product to its users.

While there are strong network effects, these network effect are not as strong as in Facebook. The switching costs are not as high. Users can use one platform to store their files and another platform for collaboration.

When Microsoft, Google and Apple entered to the cloud storage for consumers business, the growth of Dropbox slowed. Though the big tech companies were new in the cloud storage space, they already had a huge user base that trusted their products, and was happy to use new products offered by these ecosystems.

For example, Google Drive was introduced four years after Dropbox was founded. Google used its huge user base to hook them with its own storage system. Google Drive’s major advantage that it was integrated with other Google services. According to Forbes, Google claimed to have 240 million user for Google Drive, compared to Dropbox with 300 million users, and 250 million users for Microsoft’s One Drive, as of May 2014.

Now, how can Dropbox compete?

With price, value and speed.

Dropbox recently announced that it is going to drop its prices to only $10 for a Terra byte of storage. Dropbox realizes that it cannot compete only on prices, therefore it is adding new features to their professional version and the also add special security features. Their strategy is to position themselves better than their competition.

Dennis Woodside’s, COO of Dropbox, view is “Speed is what is going to win”. He opened five offices abroad to serve customers who are not in US, and doubled the company’s head count, mostly through sales. He believes that in order to compete in this market, Dropbox has to go as fast and as big as they can.

 

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Student comments on Where Dropbox success is coming from and how they can compete today?

  1. Great post Sabina! I think that the competition Dropbox is facing in the consumer segment is almost unfair. Amazon now offers free unlimited storage for Amazon prime users. It will be hard for Dropbox to compete on price versus a competitor that is offering free storage. Dropbox excels in collaboration and I think they do it better than anyone else. I think that they should focus on enterprise collaboration where they are better than Sharepoint .

    1. Oded, thank you for your comment! I agree, Amazon is a huge threat for Dropbox. Though Dropbox product might be superior, it will be hard for them to compete with Amazon’s ecosystem.

  2. Thanks for the post, Sabina! DropBox is definitely a company I’ve been curious about, particularly with competitive offerings like Microsoft OneDrive, Google Drive, iCloud, etc.
    You’re spot on with the risks DropBox faces. The switching costs between Dropbox and these other platforms are actually quite low (I don’t imagine it being that difficult for a company or an individual with terabytes of files to drag everything from DropBox and drop it into Google Drive, for example). The switching costs here are pretty low, and competitors like Google are able to take advantage of their scale to allow viral distribution of their platform.
    DropBox will have to find ways to compete with these behemoths with tons of cash, however I don’t envision this offering being a winner-take-all model because of the following reasons:
    • There are low switching costs
    • Multi-homing costs are low (I think there are many people out there who have and use multiple platforms – e.g., Google Drive, DropBox, iCloud – on their systems)
    • There is limited demand for differentiated products (all I want is a place to store and easily access my files – there isn’t much more to it)

    What will be important is for these companies to find ways to differentiate themselves on a value creation perspective. DropBox can (and probably should) try to grow as quickly as possible, but quick growth doesn’t necessarily lead to sustainable revenue streams in this type of market. However, quick growth can possibly lead to short-term value capture (since economies of scale via reduced fixed costs are available), which can help fund future R&D efforts focused on differentiation.

    1. Schwas, thank you for your comment! I agree that it is not clear how Dropbox can build a sustainable strategy and protect itself from the competitors. One point that I was surprised about is that a superior product is not enough to create a strong network effect and a sustainable revenue stream.

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