Dropbox faces predictable disruption

Just before he stepped down as CEO of Apple, Steve Jobs tried to buy DropBox for Apple. But he and Dropbox founder, Drew Houston, had a dispute about what DropBox was. Jobs had claimed it was “a feature, not a product.” I agreed, much to the consternation of some.

This week saw the “feature” story gain weight with Google’s launch of its own competing product,Google Drive, and Microsoft’s significant upgrade of its own competing product, SkyDrive. Each of these offers a folder just like DropBox. And each of these is designed to enhance the provider’s other services: In Google’s case, Google Docs; and in Microsoft’s, Office. According to this analysis from The Verge, they match Dropbox feature for feature with very few exceptions. From the consumer’s perspective, it’s hard to see a difference.

Now what is true is that Dropbox has been the innovative start-up in this area. It was very easy to use and so was able to get a leg up against a set of rivals including Box.net. There has even been some recent entry from Logmein (the providers of remote desktop services) who launched Cubby. And there is also SugarSync (which I use and will discuss later).

But what if we asked the classic It’s a Wonderful Life question: “If DropBox were to disappear tomorrow what would happen?” For most consumers, the answer is probably nothing. They could take their DropBox folder and put it in SkyDrive or GoogleDrive and not skip a beat. Look how close they are in this picture from my computer. I’d have to coordinate a few shared folders with others, but that would be it.

You might argue that without Dropbox, the space would lack competition, but Google and Microsoft will still provide us with the benefits of competition, making their services more robust.

And herein lies the issue. Dropbox is positioned as a product and it’s priced as such. Even as the company knew competition was coming, it only offered 2GB for free and charged $199 for 100GB per year. Google and Microsoft are pricing services, charging $59.88 and $50, respectively, for the same thing. The two tech giants know that lower prices will draw more users and allow them to earn money on other products. In other words, DropBox — the start-up — was too expensive and ripe for disruption.

The disruptors are not doing Dropbox’s job more cheaply. Google and Microsoft really have the same cost structure, dictated by the costs of cloud infrastructure. And, unlike Apple’s iCloud, they’re not offering distinct features like the photo sharing and music service.

Instead, disruption came from those firms who were not focused on cloud storage and syncing. This is the same thing that happened when Gmail disrupted other web-based email services. Gmail launched as a feature that referred users to advertising and search, not really as a standalone product. That meant they didn’t have the same cost equation as, say, Yahoo’s email service, which was a product.

DropBox’s pricing model is not sustainable. Given that, I suspect it’s pricing is already as low as it can afford. That does not bode well for it as a stand-alone company. I suspect that the Apple option is looking better everyday. But I also suspect it is getting cheaper for Apple with each passing day, too.

Among those in the market, the stand-out alternative is SugarSync, a product I have used for many years, whose innovation was to allow multiple folder syncing directly from the user’s own documents folder. Because it keeps the document folder the same across computers, it functions as a real backup alternative. I have a ton of old computers with files on them.

SugarSync offers more than most rivals, and that will keep me using the product for some time. The issue is: for how long? In response to Google’s entry came a nervous post from SugarSync welcoming the new entrant, claiming “this is further confirmation that we’re in a hot market.” I know they’d like to think of this as a good thing, but, in a few upgrades’ time, will they have a good answer to the question of what would happen if they disappeared tomorrow?

The bottom line is this: it is possible to enter and sell a good product. The problem occurs when that product can easily be a feature for others. In that world, you are vulnerable to strong competition from those who can earn revenue elsewhere. Best to cooperate with them sooner rather than face disruption later.

[This post was originally published at HBR blogs on 26th April 2012]