Battle of the Boxes: Box vs. Dropbox

January 25, 2015

“Design is a funny word. Some people think that design means how it looks. But of course if you dig deeper, it’s really about how it works.”

– Steve Jobs

The Steve Jobs quote above goes right to the heart of what I believe distinguishes Box from Dropbox. In essence, both companies were designed to perform similar functions and services for the market as a whole. However, each is based on a different concept, designed to work differently and is in service to different types of customer. This does not mean that they will not compete for some or even many of the same customers, because they’re already doing so. Despite their contrasting design, Box’s and Dropbox’s core value propositions – and thus the category or categories that they inhabit – are similar though by no means identical. To cut to the chase, my assertion is that their differences outweigh their similarities, and therefore I predict that they will each have their own patch of the garden to cultivate – provided they don’t get gobbled up by a larger company. So let’s look at what unites them as well as what divides (or separates) them.

Put simply: Box, founded in 2005, is designed to serve corporate organizations while Dropbox, founded two years later, is designed to serve individual users, whether consumers or prosumers. Sure, each company can, will, and does serve the other company’s sweetspot customers, but they cannot and will not do so with the same effectiveness. Whether or not the difference will matter over time is for customers to decide.

The core concept driving Box, as writer Jack Busch stated in a 2011 G Post article, is that of an online workspace. In contrast, the key concept that led to Dropbox, founded two years later, was a “magic pocket” (or folder), available whenever and wherever you need it. Today Box describes itself as an enterprise content collaboration company, whereas Dropbox describes itself as a file storage and sharing company focused on individual users, whether at work or at home. It is fair to ask whether or not these are distinctions without a meaningful difference.

Let me try to answer this question. We have seen over decades that tech companies whose business model is designed to fulfill enterprise customer needs can “minor” in serving individual users, but they won’t ever do so as completely or successfully as vendors whose business model is tailored specifically to consumer or prosumer needs and preferences. The same is true inversely for consumer or prosumer focused businesses that over time discover that they have, say, 20,000 users who happen to work for Coca Cola. Hmm, they think, perhaps we ought to negotiate a volume-discount and support contract with the Coca Cola corporation in order to not only keep the users we have but encourage the entire population of Coke users to jump on board and create a corporate network effect.

This is exactly how Microsoft, which originally targeted individual consumers for DOS and its Office productivity products, eventually developed a B2B business, dealing directly with CIOs and their IT staffs to help manage the massive population of Windows and Office, then Outlook and Exchange, users. Over time Microsoft became more of a B2B company because products like Sharepoint, SQL Server and the Dynamics business applications that it acquired over time required a business-focused marketing and sales strategy. Having said that, after all these years Microsoft is still a volume operations company that moonlights as a quasi complex systems business. In the process it does quite nicely in terms of having a sizable number of customers without ever running the risk of becoming particularly relevant or highly profitable in them. This is because the metrics that drive decisions at Microsoft will always favor a high volume of sales transactions over a much smaller volume of high-value, sticky corporate relationships. As a result, all of the complex systems businesses at Microsoft suffer from resource malnutrition by the mother ship.

Whereas Box specialized from the start in working with corporate organizations and thus provides strong security and administrative functionality such as granular usage permission levels, the ability to create user groups, and password policy enforcement, Dropbox designed its services from the start to be easy to use on any device, and it has fulfilled that promise spectacularly. An early slogan characterized its value proposition succinctly: “Dropbox – It just works”. So, from the beginning Drew Houston, co-founder and CEO, and his team focused single-mindedly on ease of use, providing automatic file syncing on any device identified with a specific user. Later, in 2011, as was inevitable, having a fast-growing population of users who happened to use the service at work as well as for their personal photos and files led to the company launching its Team offering, which two years later morphed into Dropbox for Business. Even so, according to a Gartner report published as recently as July last year, Dropbox provides only basic security and administrative functionality. None of this is remotely surprising in light of the company’s business, and thus product, design.

By now it should be self-evident that business-focused tech companies reach users through their corporate relationships, whereas consumer-focused companies reach enterprise organizations, large and small, through their individual users. It is inevitable, therefore, that the two types collide and compete, but if they are smart they do so by positioning, pricing, marketing, selling, delivering and supporting their offerings quite differently. Thus Box has long fielded field sales, professional services and customer support teams to augment the lower-touch inside sales and web download parts of its business, whereas Dropbox still basically operates a low-touch, mainly automated selling process, and the fully transparent pricing published on the web site that one expects of a volume operations business model. So even for Dropbox for Business you know that you are going to pay $15 per user per month for unlimited storage.

In contrast, when you go to the Box site, alongside the same freemium pricing structure from basic use to Teams – what both companies refer to as their Business offering, albeit with different storage limitations – you see one option that Dropbox doesn’t offer: Enterprise. Just as it should have based on decades of precedent in enterprise IT, this option has opaque, custom pricing, asking you to “Get in touch” for a sales consultation. One route to market that could permit Dropbox to make up the difference against Box in enterprise-grade functionality and services is via alliances. This why Dropbox announced late last year an alliance with Microsoft, which will be able to take them deeper into the enterprise though still with a lighter version of enterprise services. A more vivid example of a pure volume ops company reaching into enterprise organizations via a commercial alliance is probably Apple’s recent initiative to partner with IBM to help make its iPad and iPhones more part of the formal corporate fabric. Twitter followed soon after, forging a similar alliance with IBM, which today is anxious to leverage the “cool” factor that both of these new partners provide in the eyes of its corporate end-users.

With Box and Dropbox we have two companies in similar but not identical categories that develop and deliver their services using quite distinct business models. This critical distinction goes some way to explaining their very different customer bases and even their respective different valuations, something we haven’t touched on yet. Volume operations companies like Dropbox deal in hundreds of thousands and millions of individual user transactions, whereas complex systems businesses think in terms of their hundreds and thousands of corporate customer relationships. In the B2C world, VCs and investors are hypnotized by large user numbers almost independently of (profitable) monetization, often leading to disproportionately large valuations. Look at Facebook’s and Instagram’s recent valuations. The same applies to Dropbox. In contrast, B2B businesses grow at a more measured pace, engaging with one company at a time rather than 100,000 users at a time. As we’ve seen in many other cases, B2C businesses tend to have explosive valuations, especially at frothy times – just look at Uber’s spiraling $40bn. valuation. Dropbox was most recently valued at $10bn, whereas Box was valued in its last VC funding round at $2.4bn. Interestingly, Box’s going-out on valuation Friday was around $1.5bn. though the stock experience a fairly encouraging 66% bump upwards, resulting (temporarily at least) in a valuation of $2.7bn. As multiples of estimated annual revenues, Dropbox’s valuation has a P/S multiple of approximately 25:1, whereas Box’s P/S ratio equates to something like 10.

Doubts have frequently surfaced about the viability of both companies as their IPOs were filed in early 2014, then deferred for months. In Box’s case, the company appears to have really splurged on marketing and sales expenses, resulting in some very unflattering (un)profitability numbers. Tomasz Tunguz, a VC partner at Redpoint, compared Box against 40 other publicly traded companies. Some of his conclusions, published in October, were not positive for Box:

  1. “Box’s profitability in year 9 of its life is -136%. No other comparable company comes close in terms of net income % in their ninth year.”

  2. “Box’s burn rate is twice as large as the next comparable firm, and nearly 10x the average.”

  3. “Box spends about 137% of their revenue on sales and marketing. This sales and marketing expense figure is 3x the average of 42% of revenue found across all other publicly traded SaaS companies at this point in their lifecycle.”

In a more positive light, Tunguz’ study also pointed out “Box is among the fastest growing SaaS companies at this point in its life. Box’s revenue grew 110% in the last twelve months, about 2x the average rate of 53% of a SaaS company in its ninth year.”

I haven’t seen the pool of comparison companies used by Tunguz but I would bet that they represent a mixture of B2B and B2C business models. In Box’s case here, my guess is that the company’s VC investors, and maybe CEO Aaron Levie and his team, have been unable to resist the temptation to chase after the younger but higher-valued Dropbox, possibly without understanding that Dropbox is operating a different business model, with a different customer and revenue growth profile. If so, this provides an example of how VCs, analysts, investors, customers, and others conflate the two models, and thus create misleading conclusions leading in turn to poor decisions by management as well as likely misconceptions among investors about valuation and overall investability. Worse problems than these can ensue from this conflation, including putting the offending company out of business for good.

The case I want to make here is that it is usually a mistake to not recognize the important differences between complex systems business designs and volume operations business designs. Where one type adopts too many of the approaches of the other they generally falter because they are operating outside their sweet spot. Indeed the failing of many companies is that because they aren’t aware of these two business architectures, they conflate the tactics and processes of one with the tactics and processes of the other. Only when they get trapped in their contradictions do they realize that something is awry. For example, a complex systems company that markets completely horizontally to the masses can’t generally compete against companies architected for transacting and delivering high volume offers. In the opposite direction, volume ops companies that try to build relationships can’t follow through because they lack the business model and even resources to field the high-touch sales, services, and support teams that corporate customers demand. Having said this, the new generation of SaaS companies is more able than prior generations of on-premise software companies to serve both ends of the spectrum, due to the more flexible and accessible architecture of cloud products and their consumption business models.

As for whether or not either company will get swallowed up by one of the giants – Google, Microsoft, IBM or Apple – who are now dabbling in, and attempting to co-opt, their value propositions with their add-on offerings, Dropbox may now be too expensive to be acquired in relation to other investment priorities. In contrast, Box may be a dream acquisition for IBM, HP, Oracle, EMC, or even Cisco, companies that are more desperate to beef up their cloud businesses. On a related note, I have seen over time that customers like choice and dislike lock-in, unless they don’t perceive any negatives in being captive to one major vendor or another. While private, Box’s and Dropbox’s CEOs seem to have been determined to steer an independent path. The story will inevitably change to some degree when their stock is publicly owned, obliged as public-company boards are to consider any reasonable buyout offer. Setting aside for the moment the betting as to whether either company will disappear into the belly of a rapacious predator, customers in general like specialists for their superior offerings and generalists for making a good enough equivalent at a cheaper price, preferably free or close to it. The issue is, when does good enough become good enough to marginalize the specialists’ superiority.

As to whether Box and Dropbox can continue to thrive as competitors for many different customers and some of the same ones, I can’t see either company completely trumping the other’s core differentiation. It’s not just a case of Can they or Can’t they do it, but Will they do it. And this is where the business model exerts its restraints. So I believe both of these companies are valuable and have their respective growth paths to follow. As a focus group of one, I not only use both services for different purposes, but I use other file syncing, sharing, and backup services too such as Sugarsync and OneDrive, each of which has their different uses.

Now that you’ve heard my point of view on the models and what they mean for each of these two young companies, let me relay to you the counter-opinion of a friend of mine, Robert Greenhood, a business/technology strategist whose views on topics like this I find both valuable and provocative:

  • Box’s strategy of being THE B2B player will work in the short-term (this assumes DropBox is B2C which is incorrect).

  • In terms of service as a platform, Dropbox is in a far stronger position
    – Box Integrations = 550 (
    – Dropbox Integrations = 300,000 (

  • Just as iOS is controlling mobile by dominating app development, I believe DropBox will close the gap and pass Box in the B2B space because of “ecosystem ubiquity”. If they are purchased by either Apple or Microsoft, this becomes a foregone conclusion.

  • Box is very popular with Businesses who want granular data control but over time DropBox can add this functionality while having a much larger slice of the pie, which makes being the B2B leader nearly impossible to hold onto for Box.

  • On a side note, Apple should just wave the surrender flag, kill iCloud files and buy DropBox. They can then use this acquisition along with their IBM partnership to grab control of B2B in a huge way.

So, what do you think? You be the judge, and let me know your thoughts. I’ll publish feedback in a complementary note next month.