stratēchery

The Heart of Dropbox

Last Thursday, after waking up to the news of Dropbox’s most recent announcements,1 I couldn’t have been less impressed. To quote myself from a chat I had with a friend: “Dropbox is an unfocused mess.” But then I actually watched the event.

I’ve long been a believer in cloud storage; back in college I experimented with storing files on shared hosting (and accessing them via FTP!), and was a day one subscriber of Amazon S3. I couldn’t have been more excited when Dropbox was launched in 2008, and not only moved my personal files to it but also used it to build a syncing system for a computer-based teaching system I had developed.2 At business school I would conservatively say I was responsible for 50 new Dropbox customers, and I’ve had the 100GB plan ever since it was available. As a consumer, I’m a fan.

The entire premise of this blog, though, is to take off the consumer product-focused hat, and instead look at the larger strategic picture and business fundamentals. On the first point, I’ve long been and remain very bullish about cloud storage as a business. Forgive the stretched analogy, but in a lot of ways cloud storage is to the enterprise as messaging, the other emerging category I’ve followed with interest, is to consumers.

  • Messaging targets what is most important to consumers: their communication with their friends and family (in many ways it is our connections that define us). Corporations, though, are defined by the sum of people, processes, and priorities, represented as data.3 This makes storage of that data equally indispensible.

  • Because they are the locus of what matters to our “real” life, messaging apps are a tremendous platform for all types of value-added services, ranging from stickers to better express ourselves, to shared entertainment (with oh-so-alluring in-app purchases), to an easy way to manage the day-to-day friction of life, from taxis to dining to buying something special.4 Similary, because cloud storage contains the data that for all intents and purposes is a corporation, it too is a fantastic platform opportunity for all types of value-added services, including specialized applications, appliances, and other cloud services.5

  • From a product perspective, both messaging and cloud apps are relatively simple and on their way to being commoditized. There are high double-digit messaging services with more than 10 million users, and all of the major tech players are driving the cost of cloud storage to zero. This means that differentiation will not be achieved through technical acumen alone.

    This final point has, at least until the last few months, led many to dismiss both messaging and cloud services from a business perspective. However, what more and more people are realizing is that both deal in incredible scarce resources: attention, in the case of messaging, and perfectly unique data6 in the case of cloud storage.

You’ll note, of course, that I explicitly talked about storage in the context of the enterprise; the problem for Dropbox is that while they have a fantastic consumer product, they have traditionally not focused on businesses, the main category that has demonstrated a willingness-to-pay. As I wrote in Battle of the Box:

Dropbox’s model makes sense theoretically, but it ignores the messy reality of actually making money. After all, notably absent from my piece on Business Models for 2014 was consumer software-as-a-service. I’m increasingly convinced that, outside of in-app game purchases, consumers are unwilling to spend money on intangible software. That is likely why Dropbox has spent much of the last year pivoting away from consumers to the enterprise.

To that point, Dropbox held an event last November to announce their new Dropbox for Business. Last Thursday I actually watched the video of this event (thinking it was last week’s event), and it couldn’t have been a more dreary affair: Drew Houston interminably telling (again) the story of Dropbox’s founding, followed by an awkward segue into the introduction of basic business features that only scratched the surface of what enterprises truly need in a cloud storage solution.

The beginning part of this week’s event wasn’t much better. An uninspired rehash of Dropbox for Business and a recreation of functionality Sharepoint has had for years were, for the business model side of me, all that mattered, and they were nice, but nice doesn’t get you far. Not helping matters was the Mailbox demo: while Auto Swipe was very cool, Mailbox isn’t even close to being a real enterprise solution (it was telling that Mailbox for Desktop was demoed on a Mac7). Mailbox, at least, fits my initial reaction: a distraction.

But then came Carousel.

First, off, let me clear: Carousel looks amazing. But what was far more impressive, and telling in my mind, was the way in which Houston talked about the problem Carousel was meant to solve. You could feel his angst at the millions of photos we collectively are losing for lack of management, and his giddiness at what they had come up with. And, this is where I take off my business and strategy hat and speak with my heart: it was genuinely touching, and inspirational.

Touching and inspirational, unfortunately, don’t get you far in the enterprise; touching and inspirational, though, matter more than anything in the consumer space. Last week’s event made this eminently clear: Dropbox’s soul is that of a consumer company,8 not an enterprise one. And that matters.

From a purely objective business-minded basis, Dropbox is not only right to pivot to the enterprise, but are in fact wasting their time with products like Carousel. However, as I’ve written previously, it’s better to change your strategy than to try and change your culture. Business is not a game played by robots; it’s about real people building products that they believe in, and this presentation has completely changed my mind: Dropbox should build products for consumers, with just enough business icing to let IT look the other way.

The rub, as I noted, is that it is difficult to see how Dropbox earns its $10 billion valuation while competing head-on with Google and Microsoft, whose business models entail driving the cost of storage to zero. It’s clear Dropbox has long seen photos as a potential lever, going so far as to degrade the user experience of their apps with constant badgering to automatically import your photos (and thus push you past your free 2GB allotment). Carousel is a much better effort in this regard; storage will be free unless it is differentiated, and Carousel does just that.

Product alone, though, does not win in the consumer space; marketing is equally if not more important, and Dropbox does not have the most inspiring history in that regard.9 I actually think this presentation was a good start, although the video promoting Carousel was far more compelling in the context of the presentation than it was when I watched it in isolation. The issue, though, is that marketing takes significant investment, both in talent and in resources, yet Dropbox is funneling most of their money into the aforementioned business product.

My initial worry for Dropbox, then, still stands. I don’t think you can be both an enterprise and a consumer company, particularly in a space as competitive as cloud storage. Dropbox needs to pick a direction and go all out, and, in this case (and in opposition to where I stood a week ago), I think they should go with their heart.

  1. I’m based in Taiwan, 15 hours ahead of San Francisco
  2. Probably not the best idea, considering it was still in beta, but Dropbox, along with a bit of AppleScript, continues to do the job perfectly
  3. The three P’s reference is from Asymco
  4. For more on messaging, see Messaging: Mobile’s Killer App
  5. For more on cloud storage and platforms, see Box, Microsoft, and the Next Enterprise Platform
  6. My data is irreplaceable, even as data in a general sense is a commodity
  7. Not to mention the fact that only Mac’s have a good-enough trackpad for Mailbox’s gestures; I have yet to use a decent trackpad on Windows, and I’ve used a lot of Windows computers
  8. Steve Jobs should have paid whatever it took to acquire Dropbox in 2011; it’s a nearly perfect match. Consumer at the core, like Apple, with expertise in Apple’s biggest product weakness.
  9. Two things about that post:

    • I actually wrote that on another blog, which I imported to Stratechery to flesh it out at the beginning
    • While I stand by my criticism about syncing laptops and desktops, clearly sync is critical when it comes to “computers,” which, of course, includes phones and tablets

Why the Web Still Matters for Writing

Thanks to that Flurry post about the time spent in apps versus the mobile web, Twitter has been abuzz with the idea that the web is dead. In fact, I was quite early on the “apps > mobile web” bandwagon, but in this case, I think people have gone too far, particularly when it comes to writing.

I detailed why in a guest post on Matt Mullenweg’s blog. Key graf:

There is no question that apps are here to stay, and are a superior interaction model for some uses. But the web is like water: it fills in all the gaps between things like gaming and social with exactly what any one particular user wants. And while we all might have a use for Facebook – simply because everyone is there – we all have different things that interest us when it comes to reading.

You can read the whole thing here.

Black Box Strategy

With the announcement of the Amazon Fire TV and the leak of the alleged Android TV, all of the major players have (or soon will have) a TV offering. There’s been a lot of talk about how similar the products are, but those similarities are for good reason; what is more interesting to me are the very different motivations.

Note: The specifics of this article are going to be US-centric

Why TV is So Attractive

As I’ve written multiple times, the scarcest resource for consumer tech companies, especially ad-supported ones, is user attention. There are only so many minutes in the day, and their consumption is zero-sum: a moment spent doing activity A is not spent doing activity B, and then that moment is gone.

Meanwhile, TV continues to monopolize a significant amount of that user attention. Although digital products have overtaken the amount of time spent on TV, primarily due to the accretive time spent on smartphones, the absolute time spent on TV has remained stubbornly persistent at about four-and-a-half hours per day per U.S. adult (source).

That four-and-a-half hours really is the gold at the end of the rainbow for tech companies: just over the next hill/technical hurdle, yet never actually attainable.

Why TV is So Persistent

The primary reason I haven’t written much about TV recently is that I really haven’t had much to add to my series from last year. Everything still applies:

  • The Cord-Cutting Fantasy discussed why unbundling cable is economically unworkable
  • Why TV Has Resisted Disruption was primarily about great content; it’s expensive to make and doesn’t have many substitutes
  • The Jobs TV Does identified the role TV plays in our lives; traditionally it has kept us informed, educated, given a live view of sporting events, delivered enlightenment and story-telling, and provided escapism

While the Internet has unbundled information and education, the final three remain, and they are proving much more of a challenge.

Bunches of Black Boxes

Most of the tech players are coalescing around the little black box strategy Apple pioneered with the Apple TV: an inexpensive add-on with most of the major streaming services built-in. Crucially, none of them live on HDMI1, the primary input on your TV that is usually owned by your cable box. The strategy seems to be centered on chipping away at the time spent on HDMI1, until you finally realize it’s really not worth however much you’re paying. It’s not a particularly inspiring strategy, but like I said, TV has resisted disruption for good reason. The exception to both points is Microsoft: their box (the Xbox One), while black, isn’t little by any means, and they are absolutely gunning for HDMI1.

What is interesting is that while the products (except for Xbox One) are increasingly homogenous, the motivations of the various companies making these little black boxes differ tremendously, and that may give a hint as to who will be successful, and who will simply fade away.

Apple TV

Apple has one of the most differentiated black box offerings: it’s the only one to include iTunes content, and it’s the only one with Airplay. While iTunes has long been a differentiator for Apple’s devices,1 I believe that over time it is Airplay that will be of increasing importance as a way of differentiating and thus selling more iPhones and iPads. This makes sense: while Apple differentiates primarily through software, they make their money through hardware.

To that end I expect a new Apple TV soon with a specific focus on improving the Airplay experience, perhaps by combining the Apple TV with an Airport to reduce Airplay lag, thus enabling more and better iDevice/TV gaming scenarios (with the additional benefit of increasing the Apple TV’s reason-to-buy). It’s a rather elegant solution if you think about it: most people’s Internet comes in through their cable line anyways, so it’s already in the correct physical location.

Amazon Fire TV

I know I don’t spend nearly enough on Amazon, which is a shame: they have a dominant strategy based on superior selection AND superior pricing, and everything they do is primarily focused on driving ease-of-purchase, primarily through Amazon Prime.

Fire TV fits right in: it’s another reason to be an Amazon Prime customer, which isn’t really about streaming video. Instead, the end result is you buying everything from Amazon without thinking twice. The decision to add gaming was a curious one though: on one hand, it’s more stuff to sell, and another reason-to-buy; on the other, it made the device more expensive, which reduces the addressable market. If the end-game is Prime, as I believe it is, then trying to get digital game sales seems shortsighted.

Android TV

Given that attention is the lifeblood of advertising, Google has more motivation to succeed in TV than just about anyone. As I noted when Google acquired Nest, there’s reason to believe that Google’s growth could start to flatten soon, and TV is an obvious place to reverse that trend, particularly with Google’s valuable YouTube asset.

Google’s problem, though, is that their business needs aren’t necessarily aligned with consumer needs: what would an Android TV offer that the other black boxes don’t? YouTube is already available everywhere, befitting its role as a horizontal service. Just as it would make no sense for a vertical company like Apple to share iTunes, it makes no sense for a horizontal company like Google to hoard YouTube. The Android TV, if it exists, seems to be primarily for Google’s benefit, not consumers, and I would expect sales numbers to reflect that. I’m a much bigger fan of the Chromecast, primarily because of its price, and again, sales numbers seem to agree with me.

Roku

The last of the black boxes is a bit of a misfit: Roku is a relatively tiny company for whom the black box is their raison d’être. Unsurprisingly, this means they have many consumer-friendly features like lower prices, innovative designs,2 and the ability to search for shows across services. However, it’s difficult to see how they compete effectively as a standalone company.

In fact, there is an obvious acquirer: Facebook. They are the one technology giant without a TV play, and, like Google, they are advertising based. TV watching is certainly a social activity: it’s thought of as a Twitter stronghold, although Facebook has challenged that assumption. I think the angle for Facebook, though, would be more on the data side: what you watch is likely incredibly valuable information, and better targeting is the most sustainable way to increase ad revenue. Facebook could buy Roku, sell the device at cost, and increase the richness of their profile information, even as they increase their optionality when it comes to the most attractive advertising medium of all.

Microsoft

Once again, Microsoft was early to a category; from day one the strategy for the Xbox has extended far beyond gaming to a dominant presence in the living room. Unfortunately, once again Microsoft erred in the details. The advantage of starting with a console is that there is a built-in market; for all of the little black boxes I discussed the various reasons-to-buy, which aren’t always clear, whereas the reason-to-buy an Xbox is obvious – you can play games on it. However, this reason-to-buy comes at a cost, quite literally. The Xbox One launched at $499, putting it far beyond the reach of non-gamers, and making it wildly uncompetitive with the little black boxes. There is also a cost when it comes to flexibility; Microsoft must focus first-and-foremost on gamers, whose needs are not necessarily aligned with normal consumers, and this is compounded by the long console cycles driven by the massive upfront development costs.

What is most worrisome for Microsoft is that this strategy duality has hurt them with gamers, too. The Xbox cost $100 dollars more at launch than the PS4 despite having slightly less power, primarily because of the built-in Kinect. While this does have a gaming function, the main reason it was included was to enable the Xbox to make a play for HDMI1. Microsoft has certainly made it much further down this road than any of the other players, but close doesn’t cut it; without DVR functionality and full programming guides, it’s simply not a viable competitor for the lowly cable box. This is a truly distressing outcome for Microsoft: they handicapped themselves in gaming in pursuit of their original goal, which they’re not going to realize. It’s another muddle.

I expect the Xbox One to have decent success as a console, due to Microsoft’s dominance of first-person shooters if nothing else, but after three generations it doesn’t seem any closer to fulfilling the original Xbox charter of winning the living room.

So Now What?

All that said, and despite all these new products, nothing substantial has changed on the content front; we have the system we have because, all our kvetching aside, it benefits most of the main players most of the time, including consumers. Whatever finally topples TV will win not because it delivers the same content better, but because it steals more and more user attention.

To that end, I actually ranked these companies in the order I like their chances, and I still give Apple the clear lead. Airplay remains very compelling both from a technical and business model perspective; Amazon has the business model, while it’s more difficult to see the long term upside for Google or Roku, and Microsoft is stuck in its niche.

  1. Seriously people: iTunes is not going to be on Android
  2. I love the headphone jack in the remote

When CEOs Matter

Sometime in 2012, during the runup to Windows 8, I was on a call with a Microsoft Developer & Platform Evangelist (DPE) strategizing how we would approach a particular partner.1 I asked his opinion of a specific feature in this partner’s iPad app, and was shocked at his response:

“I don’t own an iPad, and never will. I’m a Microsoft man.”


When Steve Ballmer resigned, Horace Dediu had one of the sharpest albeit unintuitive takes on his tenure:

The most common, almost universally accepted reason for company failure is “the stupid manager theory”. It’s the corollary to “the smart manager theory” which is used to describe almost all company successes. The only problem with this theory is that it is usually the same managers who run the company while it’s successful as when it’s not. Therefore for the theory to be valid then the smart manager must have turned stupid at a specific moment in time, and as most companies in an industry fail in unison, then the stupidity bit must have been flipped in more than one individual at the same time in some massive conspiracy to fail simultaneously.

So the failures of Microsoft to move beyond the rapidly evaporating Windows business model are attributed to the personal failings of its CEO. The calls for his head have been getting loud and rancorous for years. Taking this theory further, now that he’s leaving, the prosperity of the company depends entirely on the choice of a new (smarter) CEO.

It’s all nonsense of course.

In general, I agree. What has befallen Microsoft over the last half-decade is a fundamental shift from desktop to mobile, and contrary to most commentary, there is no particular reason to think that Microsoft “missed” mobile. As I wrote in Microsoft’s Mobile Muddle:

Saying “Microsoft missed mobile” is a bit unfair; Windows Mobile came out way back in 2000, and the whole reason Google bought Android was the fear that Microsoft would dominate mobile the way they dominated the PC era. It turned out, though, that mobile devices, with their focus on touch, simplified interfaces, and ARM foundation, were nothing like PCs. Everyone had to start from scratch, and if starting from scratch, by definition Microsoft didn’t have any sort of built-in advantage. They were simply out-executed.

You can, of course, pin the lack of execution on Ballmer, but any fair ascription of blame falls not only on him, but on thousands of other employees, not to mention just about every other tech company in the world, including companies like Google and Samsung.

What made Google and Samsung different from Microsoft (and Nokia and Blackberry and many others) was the speed with which they recognized that the world had changed with the launch of the iPhone. Setting aside whatever distaste you may have about features that Android and Galaxy phones borrowed from iOS and the iPhone, the fact remains that Google and Samsung are the only two companies who were relevant in 2007 who are still relevant today. It turns out seeing and accepting reality are powerful differentiators.

Steve Ballmer, on the other hand, “liked his chances”:

I know this clip has been played to death; I was hesitant to even include it for that reason alone. And I also get that a CEO has a certain responsibility to talk up his company’s prospects. But the consequence of statements like this, and the general arrogance endemic of a company that has forgotten why it succeeded in the first place, results in rank-and-file like the evangelist I spoke to – who, to be clear, was very smart and a very hard worker – who wouldn’t even touch an iPad.

This is the power CEOs have. They cannot do all the work, and they cannot impact industry trends beyond their control. But they can choose whether or not to accept reality, and in so doing, impact the worldview of all those they lead.

This is why it matters that the first public event Satya Nadella appeared at was Office for iPad. This is why it matters that Microsoft released it even though the Windows Touch version wasn’t finished. This is why it matters that Microsoft gave up the pretense of Windows Phone license payments that were already effectively zero2 and simply made it free.

Microsoft is by no means in the clear. There is still that whole matter of execution, and an industry that is moving away from the PC. But accepting reality is the necessary first step in fighting back, and it seems Nadella has passed that test with flying colors.

  1. I was a category manager for the Windows Store, dealing with top partners directly, and giving direction to our DPE colleagues who were “boots on the ground” all over the world
  2. Microsoft was paying OEM partners marketing development funds that basically made up for licensing costs

Box, Microsoft, and the Next Enterprise Platform

Let’s get one thing out of the way: there is nothing about Box’s S-1 filing that suggests tech is in a bubble. Indeed, the fact Aaron Levie and company are not yet profitable is a good thing.

To understand why, you must read Should Startups Focus on Profitability or Not by VC Mark Suster:

There are certain topics that even some of the best journalists can’t fully grok. One of them is profitability. I find it amusing when a journalist writes an article about a prominent startup (either privately held or preparing for an IPO) and decries that, “They’re not even profitable!”

I mention journalists here because they perpetuate the myth that focusing on profits is ALWAYS the right answer and then I hear many entrepreneurs (and certainly many “normals”) repeating the same mantra.

There is a healthy tension between profits & growth. To grow faster businesses need resources in today’s financial period to fund growth that may not come for 6 months to a year.

The basic gist is that in situations where costs come before revenue (like, say, a sales force for selling to enterprise), chasing growth over making money increases the amount of long-term profitability. Seriously, read the whole thing.1

Suster’s article was not about Box specifically; for that I refer you to Dave Kellogg’s piece, Burn Baby Burn: A Look at the Box S-1. He concludes that the Box numbers are very reasonable and that the business is scaling well:

In many ways you see a typical “go big or go home” cloud computing firm, burning boatloads of cash but acquiring customers in a reasonably efficient manner and doing a nice job with retention/cross-sell/up-sell as judged by their retention numbers. When you look big picture, I believe they see themselves in a winner-take-all battle vs. DropBox and in this case, the strategy — while amazingly cash consumptive — does make sense.

It’s a great analysis, and I also very much recommend it, but I think he got one thing wrong: Box isn’t (just) focused on beating Dropbox in storage. In fact, they are making a play to be the new Enterprise platform, and that means taking on Microsoft.

Windows: The Old Platform

Back when all computers were PCs, the dominant platform was Windows. Office obviously ran (better) on Windows, but so did an untold number of 3rd-party apps and custom-build line-of-business (LOB) apps. Considering the fact that enterprises bought most PCs, this meant Windows dominated.

Windows was the platform that mattered in the PC era

Windows was the platform that mattered in the PC era

The browser began to break this hegemony apart,2 especially when it came to LOB apps, but the true fracturing has happened in just the last few years with the advent of smartphones and tablets. Now, only a portion of computing devices run Windows:

While this chart covers the entire industry, it’s reflective of what is happening in the enterprise as well. Multiple devices with multiple operating systems are in daily use, but, at the end of the day, they all need to access the same data.

Enter Box.

Data: The New Platform

Pure storage isn’t a great business. The cost is trending towards zero, as noted by Levie himself:

Data, though, is priceless; it can’t be replaced, and it’s the essence of what makes a particular organization unique. For this reason, and for regulatory ones, there are all kinds of specialized controls that IT departments need for data. This is where Box has worked diligently to differentiate themselves from consumer-focused competitors like Dropbox (for more, see my article from January Battle of the Box).

At the same time, Box has embraced smartphones and tablets, building and updating apps on all the platforms, often well before competitors. This results in a service that looks something like this:

By handling the data that needs to be available everywhere, Box is well-placed to be the new platform

By handling the data that needs to be available everywhere, Box is well-placed to be the new platform

This image explains why the arguably more significant news from Box last week was not the unveiling of their S-1, but rather the first Box developer’s conference. Just because the operating system is no longer the platform does not mean that the need – and opportunity – for a platform does not exist. Something needs to tie together all those computing devices, and data, which needs to be everywhere, is the logical place to start.

This ups the stakes considerably. Platforms are multi-sided; in the case of Box, they need to have all the data, serve all the devices, and, most critically, have developers. Developers, though, are very pragmatic: they care about opportunity, and opportunity is a function of market size and ability to monetize. The latter is much less of an issue in the enterprise as compared to the consumer, which leaves scale as the most important differentiator from a developer perspective when they decide which platform to support.

Spending a whole lot of money to scale quickly suddenly doesn’t seem like such a bad idea.

The Microsoft Trump Card

Last week, though, was not all good news for Box; on the same day as their developer conference, Microsoft held its own event to announce Office for iPad. Until now, Microsoft has been largely absent from the iPhone and especially the iPad, leaving some of the most important enterprise data – Office docs – available on basic viewers or 3rd-party editors only. This worked in Box’s favor, as their excellent iPad support made Office docs accessible, if not particularly usable.

Office for iPad, though, is designed to work exclusively with Microsoft’s cloud services. Now, the best solution for dealing with Office docs anywhere is to use Microsoft’s data layer. In this way Apple’s sandboxed approach and lack of inter-app communication is working very much in Microsoft’s favor; you can open files stored in Box or other Cloud services with the Office apps, but the communication is one-way. Any changes you made can only be saved to your iPad or to your Microsoft cloud account (OneDrive, OneDrive Pro, or SharePoint).

To be clear, SharePoint is a pain to use, particularly for end-users, and especially relative to Box. Less-than-full access to some of your most important data, though, is very painful as well, and it’s here that Microsoft just played their trump card. Office still matters for a whole lot of businesses, and the best Office experience is only available in conjunction with the Microsoft cloud/platform.

Does Office Matter?

The opportunity that Box is pursuing is the exact reason I have been so outspoken about Microsoft’s misplaced devices strategy. Steve Ballmer and his Windows obsession missed the fact that operating systems as a whole were increasingly irrelevant; Satya Nadella, whose background is in Microsoft’s cloud business, is actually pursuing the same old Microsoft strategy – use Office to prop up the Microsoft platform – he’s just leveraging it for the platform of the future, not the past.

What is tricky is that future almost certainly includes fewer and fewer Office documents; the degree to which enterprises have transitioned away from ready-to-print documents to constant communication and collaboration will determine if Microsoft’s new strategy is successful – and, by extension, the degree to which Box realizes the growth they have so extravagantly invested in.

  1. James Bright made charts to better illustrate some of the concepts made in Suster’s article
  2. Microsoft killed Netscape for a reason