Why a startup will probably never compete with Google Apps

It’s hard to imagine starting a company without using Google Apps. I take it back: It’s impossible.

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When we started Scripted.com, I assumed there was no other solution for email and calendaring. I knew there were options for business chat and a lot of competitors in online storage, but the systems to manage internal and external communication and scheduling appear to be completely, utterly, 100 percent dominated by Google. No one else, large or small, even appeared on the horizon.

Here are three reasons why startups aren’t competing with Google Apps — and why they might never be able to:

1. The cost is too high.

Let’s estimate how much it would cost to compete only on email. We’ll use the Amazon Calculator as a pricing benchmark and find the cost for 1,000 users of your email product. Let’s give everyone 1GB of storage because that’s the minimum to stay competitive, and let’s assume an active user moves about 1GB of data into and out of your email server each month.

Plugging in the numbers shows that 1,000GB of storage and transfers, plus load balancers and backups, runs about $500/mo. In other words, every monthly user costs you 50 cents. Now, you need 1 million users before a venture capital firm will even sniff at you. Once you hit the one million active user mark, you’re spending $500,000 PER MONTH just to keep those emails going.

And we haven’t even paid your engineers yet.

2. The revenue opportunity is too hard.

No one else can turn those eyeballs into money like Google. Imagine if Dropbox pitched ads against your documents. I’d freak out, and that’s why I’m happy to spend a few Dropbox for Business dollars every month. Google charges me $5 per user each month, but we don’t get ads on our Google Apps accounts. That $60/year probably just offsets the fully loaded cost per Apps user. When you include Drive, Calendar, Chat, and everything else, five bucks a month seems way too low for the services rendered to us. It must be a loss leader for Google’s real cash cow: their advertising products outside of Google Apps for Business.

Whether it’s overflow to an ad product or an enterprise suite, a startup can’t compete in a loss-leading market. To keep gross margins in the 90% range, a startup would need to charge twice the rate (~$10/mo) for fewer services. That’s a losing offer.

3. They both have us locked.

Let’s say a “startup” like Dropbox releases a Google Apps competitor. Imagine the headache of porting over everyone’s email, contacts, and chat histories, which make Gmail such a powerful search engine for any business. A transfer could be done, but Dropbox’s offering would have to be unbelievably strong to offset the agony. So strong, in fact, that I don’t believe it will ever exist.

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None of the startups I saw at the illustrious Goldman Sachs Private Internet Company Conference are working on this problem. With Yahoo’s recent high-profile journalist hires and focus on content, it doesn’t appear that they will compete in business services any time soon either. Office365 is a start, but my candid assessment is that Microsoft’s business email product won’t catch on in Silicon Valley.

There’s still plenty of room for innovation in business communications. Improvements in inbox sorting, integrations with CRMs and file sharing services, and streamlined social media notifications would all make my business life easier. I want someone, large or small, to give Google Apps some real competition, but it’s just not happening. Maybe it never will.

Ryan Buckley is cofounder and chief operating officer of Scripted.com. Ryan holds an MBA from the MIT Sloan School of Management and an MPP from the Harvard Kennedy School of Government. Still and always a Cal Bear, Ryan graduated from UC Berkeley with degrees in economics and environmental sciences. He likes to dabble in PHP, Python, Ruby, Quickbooks, and whatever else needs to be done at Scripted HQ.

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

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