Dropbox is going public, and it's going to have to face off against some insanely tough competition. In this clip from the Industry Focus: Tech podcast, host Dylan Lewis and Motley Fool contributor Evan Niu answer a listener question: How does Dropbox stand out?
Click play to find out how hard it will be for Dropbox to compete against players like Google (NASDAQ: GOOGL) (NASDAQ: GOOG) and Apple (NASDAQ: AAPL), what it might do with the money it raises from its upcoming IPO, and more.
A full transcript follows the video.
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This video was recorded on March 2, 2018.
Dylan Lewis: OK, we have two questions that are getting at the same thing here. Casey asks, "What is Dropbox's unique selling point which differentiates it from other companies in the market? Especially Microsoft, which has fully integrated Office bundled with OneDrive? Also, where would they like to deploy money raised from the IPO?" Oren asks, "How is Dropbox going to compete with Google Docs or any other behemoth tech company?" Both of these questions are raising this very real concern of, there are a lot of players in this space that have really deep pockets. Apple's there, Google's there, that's just two. Microsoft's there. What's going to set Dropbox apart?
Evan Niu: Honestly, I don't think there is a whole lot of differentiation, fundamentally, with cloud storage. It's a commodity. Which really kills pricing power and undermines any pure plays that rely on this as their main business. Dropbox is very easy to use, it's very intuitive. They do have that going for them. But that's also very easily copied, and that's not something that's a sustainable advantage.
Speaking of Microsoft, from personal experience, that's actually why I stopped using Dropbox. Once I signed up for Office 365, they bundled in a terabyte of free cloud storage in addition to Office. So, for me, that killed the need to even have a free Dropbox account, because now I got way more for what I was already paying for Office 365.
And another thing of differentiation that they look at is integrations. But I would also argue that these third-party integrations with other services and software, that's all also pretty much table stakes at this point, so I don't think that sets them apart, either.
Lewis: Listeners that have been following and listening to some of the most recent shows know that I was in India recently and went to a wedding. The bride and the groom sent out a Dropbox link asking people to upload pictures there so they could go through them and share them with everyone, but my friends were using Google Photos to share pictures among the people that were traveling on this mini trip. And I have all my stuff backed up on iCloud. So that right there is the big players in this space, in one anecdote. It's a very fractured space, and I think there's room for all of these companies to exist, but I don't know that that sets up Dropbox to thrive and really add a meaningful number of people. You look at the offering that comes from Google, they give away 15 gigs for free, 100 gigs for $2 a month. That's pretty tough to compete with, especially when you consider the suite of stuff that comes with Gmail and how robust it is.
Niu: And that's the thing. All these large tech giants can basically offer this stuff at cost. As costs come down over time, the prices come down, and they're basically offering it for more or less break even on the side just to support their primary businesses. Whereas, companies like Box or Dropbox, they're pure plays on cloud storage. And if you're a pure play, you have these giant companies cutting prices, your pricing power goes out the window. You have to cut prices in response to competition, and then depending on how you're managing your cost structure, it's really hard to squeeze out a profit. That would be one of my concerns, that these pure plays, it's going to be really hard to compete with these giant companies.
And really quick, as far as the question about what the proceeds will be used for, they mentioned general corporate purposes, which is also, again, standard boilerplate legalese. But, they did mention one specific thing that they'll use the IPO proceeds for. They're going to pay down part of a revolver that they have that they're going to tap ahead of the IPO to cover some RSU settlement costs, these restricted stock units. There's some costs associated with settling those, so they're going to borrow some money to cover these costs. They're going to use some of the IPO proceeds to pay back that money. They also haven't specified how much.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Dylan Lewis owns shares of Alphabet (A shares) and Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.