Box and Dropbox both eye enterprise collaboration. A looming battle or two ends of a product spectrum?


Box and Dropbox appear to be set up for a struggle to dominate enterprise file storage and sharing. Is there more to consider?

Box product stack
Box product stack – 2018

It must be a serendipitous coincidence (we don’t peddle conspiracy theories here) that the two pure-play contenders in the cloud file sharing cum content management business released business results within days of one another.

As I wrote last week, Dropbox filed the paperwork for its long-awaited IPO that provided details into its finances, operations and business strategy. Days later, chief rival, Box gave its Q4 2018 earnings report, which along with the executive conference call with analysts featured updates on its financial results and business initiatives. Perhaps it’s premature to make a direct comparison since Dropbox has just filed and Box has been public for more than three years, however after reviewing the Box’s filing and command of the issues provided by co-founder and CEO Aaron Levie to analysts, the contrast in strategic maturity couldn’t be starker. Dropbox is still sketching its strategy in pastels while Box is working from a meticulous set of blueprints.

As a reminder, Dropbox sees itself as, “Unleashing the world’s creative energy by designing a more enlightened way of working” with a workplace that “feels organized”, “surfaces only what’s relevant”, seamlessly working with other apps and using “machine intelligence will allow Dropbox to better understand both you and your team.” While worthy goals, their ambiguity resembles something like the pitch Dropbox might have made to secure seed funding from VCs, not a corporate mission statement that logically compels a set of actions.

In contrast, Box describes itself as, “the cloud content management company that empowers enterprises to revolutionize how they work by securely connecting their people, information, and applications.” As Levie says during the earnings call, Box has,

A very, very specific roadmap that we’re driving over the next couple of years around cloud content management and how do we build the most robust platform for customers to be able to manage, secure, govern, enable workflow in collaboration around their content.

The differences between the two aren’t limited to mission statements, since the financials, customer base, and sales strategy show that Dropbox and Box target two very different markets.

A tale of two demographics

As I noted last week, with more than half a billion accounts, Dropbox has an enormous base of potential customers, but very few of whom (2.2%) pay for one of its premium or business service plans. Total revenue was $1.1 billion in 2017, which translates to average revenue per paying user (ARPU) is $111.91, down 1.4 percent over the last two years. Of note is how Dropbox counts a 50-person organization using its Business service as 50 separate users and how it doesn’t target any particular market. According to its S-1 (emphasis added),

Our customer base is highly diversified, and in the periods presented, no customer accounted for more than 1% of our revenue. Our customers include individuals, teams, and organizations of all sizes, from freelancers and small businesses to Fortune 100 companies.

In contrast, Box logged $506 million in revenue in its last fiscal year (which roughly translates to calendar 2017) with just 82,000 paying customers. Note the distinction between users, which Box doesn’t highlight, but says  in its 10-Q total more than 57 million, and paying customer or organizations, which Box defines as “distinct buying entities, such as a company, an educational or government institution, or a distinct business unit of a large corporation, that have entered into a subscription agreement with us to utilize our services.” Thus, Box focuses on larger organizations with multi-seat subscriptions to the tune of $6,170 in average revenue per customer. Indeed, both Levie and Box CFO Dylan Smith made a point of its growth in six-figure deals on the earnings call. According to Smith, Box landed 78 deals of $100,000 or more last quarter, 9 of which were over $1 million, many of these done with service partners, notably IBM.

On the earnings call, Levie was asked about the competition, particularly Dropbox and Microsoft OneDrive, which is bundled free with most Office 365 business plans or enterprise agreements. He said that most of its customers are moving to Office 365, which is why Box has developed tight integration with the Office apps, such as the ability to open and edit from within Box and save files and email attachments from within the apps, and, more recently, Azure services. Levie went on to characterize how he sees the cloud file sharing and collaboration market stratifying into consumer- and enterprise-focused products (emphasis added).

I think we’re in the early stages of becoming better understood from customers that there are going to be these sort of low end products, so the enterprise file sync and share tools, largely driven by OneDrive and more recently Dropbox and … the professional end of the space [where] customers are starting to see the significance of what cloud content management is. Where enterprise files sync and share is really a capability of cloud content management, it is only one set of used cases that cloud content management can drive where we can end up actually replacing a lot of legacy ECM systems, storage infrastructure, document management systems and that is much more broadly what we’re beginning to sell more and more to customers.

(My emphasis added.)

Summarizing the stream of consciousness answer, Levie says Box is becoming the cloud alternative to legacy on-premise ECM systems, which is an entirely separate market from cloud file sharing and backup. Levie went onto highlight differences with Dropbox (emphasis added),

I think it’s really important to think about our business as fundamentally different in a better variety of ways. So I think as you saw from their numbers, they are much more of a consumer-driven company from a metric standpoint, from a financial standpoint with an additional sort of small business revenue stream on top of that; so I think about 30% of the revenue was from their Dropbox for business product and that’s around kind of $330 million or so in revenue as compared to our $500 million which is entirely all enterprise driven; so fundamentally different mix and make-up of the revenue stream.

(My emphasis added.)

He further noted Box’s focus on mid-to-large enterprises which translates to significant differences in how Box and Dropbox market and sell to customers. Box approaches deals holistically, looking for sizeable digital transformation projects where organizations want to update content management platforms and business processes using cloud-native services and applications. In contrast, as Smith pointed out that 90% of Dropbox’s paying customers are self-service, with sales teams only involved in about a tenth of its deals.

Nevertheless, Levie and Smith each point out that the cloud file sharing and collaboration market, which they estimate at $40 to $50 billion, is large enough to support many competitors, leaving plenty of room for both Box and Dropbox to thrive.

Overlapping visions for content-based automation

One area of commonality between the two companies is their vision of how AI techniques like machine and deep learning can greatly enhance and automate the categorization, extraction, and processing of unstructured content. For Box, the vision will be built on the Box Skills platform announced last year that Levie says developers are already using to automatically transcribe and apply metadata to images, audio, and video. For example, Levie said Box is working with an insurance company that is redesigning its claims processing around automated data extraction from unstructured forms and images to create a system that applies appropriate metadata and fills in fields from scanned documents and photos. Says Levie,

Box Skills, it’s not even generally available yet but it has already been very, very helpful for helping customers see that the future of content management looks very, very different than the past.

Likewise, the Dropbox S-1 filing mentions its use of machine learning to improve search and better organize information. As I highlighted last week, an accompanying letter from Dropbox’s co-founders illustrates how it hopes to use AI ML to understand the context of stored data and its relationship to other relevant user information such as schedules, email archives, and project plans.

My take

Box and Dropbox are each still rapidly growing while narrowing their operating losses, however, neither is close to profitability. At Box, this is manifested in 27 percent growth in revenues with a GAAP operating loss that’s 30 percent of revenue, down 8 points in the past year. Meanwhile, Dropbox, with more than double the sales grew at 31 percent last year with a net loss that’s 10 percent of revenue, down 15 points from 2016. To an accountant, Dropbox appears to be the healthier company, with a huge reservoir of untapped users it can convert into paying customers.

As everyone who’s been around technology knows, superficial financial strength can quickly evaporate under the heat of more innovative, disciplined or focused competitors. Each company faces significant market challenges, but as I’ve repeatedly stressed, cloud file sharing by itself isn’t a sustainable business, but that’s primarily what Dropbox still offers. Thus, it’s hard to see an Office 365 shop or G Suite customer finding much value in a Dropbox business plan.

In contrast, Box has a much more detailed strategy with a plan on how to become the next-generation enterprise content management platform, however, faces a different set of significant competitors. While Box is the largest and most advanced pure-play building a cloud- and content-agnostic platform, despite its partnership, it too has to worry about Microsoft with SharePoint. There are also a host of SaaS products from Salesforce (with Quip), Adobe, Slack and others that are already used for various aspects of enterprise collaboration and are equally capable of becoming a cloud-based ECM platform for business process automation.

I look forward to watching how each company evolves and whether their paths ultimately converge to spark the battle royale we always thought would come.

Image credit - via Box

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