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Morningstar | Dropbox’s Lack of Bundling Leaves the Company Moat-Less, in Our View

Dropbox’s cloud storage, syncing, and collaboration services were revolutionary when the firm was founded in 2007, but rivals have entered the space, creating a fragmented market and, in our opinion, commoditizing aspects of Dropbox’s core business. The company has used a freemium model to aggressively expand to more than 500 million users, but only 12.3 million are currently paying for Dropbox’s services. We’re skeptical that the firm will be able to significantly monetize its user base in light of the intense competition from larger rivals.We believe inroads must be made into the more lucrative enterprise market for Dropbox to succeed, though such a move would come with significantly higher customer acquisition costs. The firm generates 90% of its sales via self-serve channels, which we believe equates to a consumer-dominated client base compared with rivals such as Box, which reports significantly higher costs to acquire new enterprise customers via sales and marketing. Barring ample market share gains in the enterprise space, we project a heightened degree of competition from well-capitalized rivals and expect Dropbox’s lack of a competitive advantage to weigh on the firm’s operations over the ensuing years.Wide- and narrow-moat competitors such as Microsoft, Google, Apple, and Amazon each offer free storage as well, often bundling in complementary applications. The commoditized nature of cloud storage has made bundling integrable apps paramount to the success of the core business, serving as an avenue of differentiation. However, Dropbox’s proprietary app track record has been middling, with the firm shutting down Mailbox and Carousel. Google offers Google Drive to all Gmail accounts, with integration with Google Docs, Sheets, and Slides, while Microsoft ships OneDrive on all current Windows operating systems, with enterprises and consumers alike having the option to purchase bundled storage and Office 365. We anticipate headwinds as rivals such as Microsoft and Google increasingly bundle their office productivity applications with storage offerings, creating a more enticing value proposition for enterprise clients than Dropbox.