What’s really going on at Dropbox (an insider’s perspective)

Dropbox’s surprise announcement Monday that it was shuttering two of its most popular applications, Mailbox and Carousel, was mostly matter-of-factly reported. Only a few articles even pointed out that Dropbox paid a reported $100 million to acquire Mailbox less than two years ago. As I tweeted, “$100M is a lot to write off – even for a unicorn.” So, the big question is: “Why would Dropbox do this? “

As COO at Hightail, I have a bit of an insider’s perspective on what may have driven this decision. While I have no information from directly inside Dropbox, I do have a deep understanding of the category. Because our business is extremely similar (albeit smaller and more focused on a specific segment), I have some theories on what market trends and internal dynamics motivated this decision.

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The Need to “Focus”

The core reason Dropbox shut down these applications was stated in its public explanation: It wants to “focus” (a word used three times in a 279-word post). “Over the past few months, we’ve increased our team’s focus on collaboration and simplifying the way people work together. … Ultimately, we think this increased focus will help us create even better experiences for you in the months and years to come.”

A quick glance at Mailbox founder Gentry Underwood’s Twitter account shows how unpopular this decision was within the Mailbox team. Indeed, Gentry and cofounder Scott Cannon are leaving Dropbox, so not only is the product dead, but much of the team that developed it is likely headed for the exits as well. The implication of Dropbox’s decision is that it’s doing a complete reversal on its product diversification strategy.

Acquiring offshoot businesses for hundreds of millions of dollars is what you do when your core business is booming (see Facebook/Oculus). Shutting down those acquisitions is what you do when you urgently need to focus and fix your core business. While much of the media coverage has focused on the low user adoption of these products, the real question this move should raise is: What is happening with Dropbox’s core business?

An Underlying Struggle?

Increasingly, the reading of the tea leaves is that Dropbox’s core business is struggling. At Hightail, we have lived through the dynamics in this market first-hand. We rebranded our company, reduced our expenses, and launched a new product in response to these issues. Although Dropbox’s business is larger than ours on most dimensions, it is likely seeing very similar challenges.

First, the market is getting commoditized. The fundamental fact is that Dropbox’s core business of online storage is increasingly free. Big vendors are driving this trend, and customers are increasingly unwilling to pay. In many ways, this is the least interesting market condition, because all tech companies face this at some level. The history of tech is one of continuous innovation, commoditization, and reinvention.

Second, getting traction in the enterprise is difficult. Like it or not, Dropbox is still seen by most enterprise IT departments as a consumer product. Carousel and Mailbox with their consumer-centric use cases reinforced that perception. While the press likes to report on Dropbox fighting Box for enterprise dominance, the real threat is Microsoft. Just as it bundled IE with Windows to decimate Netscape’s traction in the browser market, Microsoft now gives OneDrive away for free with Office 365. OneDrive is fundamentally the same thing as Dropbox, except it’s endorsed by IT. And it’s free.

Third, Dropbox (along with Hightail, Box, and others) is facing a fundamental shift in computing, away from “files” and towards purpose-built applications. Dropbox’s origins as a thumb drive in the cloud came in an age when users spent a lot of time thinking about their files. But, as thoughtfully expressed in this blog post (“Dropbox: the first dead decacorn”), most people don’t think too much about managing their files anymore. Whether it’s text docs with Google Docs or photos and music in iPhoto and Spotify, the idea of files in a file system seems like an increasingly antiquated concept. And this trend robs Dropbox of its core value proposition.

Propping Up the Unicorn

Much respect for what Drew and team have done. Dropbox’s success to-date is truly impressive. That said, Dropbox’s biggest undoing may be its own success. Dropbox rode a wave of user adoption and media hype to a $10 billion valuation. The problem is, when the market puts your valuation at that level, the expectation is insane growth.

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But where is that growth going to come from? What levers can the company pull that will drive growth at the scale it needs?

• More users? With millions of users already, the addressable audience for Dropbox is largely saturated, and publicly available indicators of Dropbox’s traffic suggest it’s flat.
• Better conversion or retention? Getting a larger percentage of users to pay and continue to pay is unlikely given the market trends noted above.
• Higher ARPU (average revenue per user)? Maybe. If it can deliver innovative new features. But it has had limited success on this to-date. (Paper is still vapor.)
• New products? This seemed to be the strategy the past few years, but apparently not now, since the company is shutting down the new product lines it added.

Making matters worse, Dropbox’s valuation makes it difficult for the company to focus on a specific market segment. It is simply too large to not be all things to all people. No doubt, Dropbox’s remaining capital of the $1.1 billion raised gives it some runway to figure things out. But it will need to do so soon, or more changes in the name of “focus” could be on the way.

For more backgrounder:

• CB Insights: The Dropbox Valuation Is Irrational
• Drew Houston interview with Matthew Panzarino at TechCrunch Disrupt
• The Verge: The case against Dropbox looks stronger with each passing day
• VentureBeat: Drew Houston wants everyone to know that Dropbox isn’t worried about all the chatter that says it’s overvalued and is missing the boat

Mike Trigg is COO of Hightail and manages all marketing, lead generation and e-commerce activity. Prior to Hightail, he founded an online gaming company called Spitball Entertainment and was VP of marketing and business development at hi5 (sold to Tagged), where he helped launch the company’s games portal, virtual currency, and original social game titles.

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