On Monday, Alphabet Inc.'s Google (GOOG, Financial) unveiled its plans to launch a new cloud storage product, Google One. In effect, it’s a rebranding of Google’s existing cloud storage business with cheaper pricing options.
The company is offering expanded storage plan options ranging from 100 gigabytes up to 30 terabytes per month. As a part of the revamp, the company has slashed prices in half for some of the plans. For instance, the two-terabyte plan now costs $9.99 per month, down from its previous price of $19.99. Google One subscriptions can be shared by up to five family members. Although Google isn’t offering a one-terabyte plan, its two-terabyte plan costs the same as the one-terabyte plan of Dropbox (DBX, Financial) and Microsoft (MSFT, Financial). As Google One is a consumer service, rebranding won’t affect G Suite customers.
The motivation behind the rebranding appears to be price-oriented as Google is trying to gain customers in the growing cloud storage market. Microsoft and Apple (AAPL, Financial), as well as Dropbox, could also slash prices in the battle for subscribers. Box Inc. (BOX, Financial) would not be as affected since Google didn’t change its G Suite prices.
In short, the pricing revamp might start a price war, affecting consumer cloud storage players. Dropbox will be among the most affected due to its heavy reliance on the consumer cloud business.
Why Dropbox might be hurt the most
Unlike other consumer cloud storage players, Dropbox completely relies on subscriptions for its revenue. Price cuts will directly impact either the user growth or margins. To sustain user growth, the company will have to slash prices.
- Focus on consumer subscription: The reason Dropbox can potentially fall victim to the price wars is its hybrid – one product across consumers and corporations – storage strategy. The company is trying to compete on the consumer side with subscriptions while making minimal effort on the corporate side, where its subscription-based model might work. The problem is consumers are usually indifferent to the use of their data for marketing purposes, while corporations take their data seriously. That’s why consumers are prone to moving to cheaper services while the corporate sector is willing to pay a premium for secure data storage. With its focus on consumer subscriptions, price cuts by the likes of Google and Microsoft will seriously hurt Dropbox’s prospects going forward.
- Lack of advertisement-driven revenue streams: By avoiding advertisement-related campaigns and charging a subscription, Dropbox is ensuring a high degree of data protection. In contrast, big companies like Microsoft and Google thrive on the data stored by the users on their network. Internet information provides are interested in the data and advertisement-related revenue, rather than subscriptions. That’s why they can cut subscription prices and gain benefits elsewhere. As consumers are relatively less strict about their data protection needs compared to corporations, they will flock toward cheap storage options.
- Indifference to corporate business:Â On the corporate side, Dropbox isn’t spending much to gain customers. Roughly 90% of the company’s revenue comes from self-serve users, who may never talk to a salesperson. Box, on the other hand, is making strides in the corporate arena.
Unless Dropbox makes a serious shift toward corporate cloud and file management solutions, its margins will bleed from price cuts in the consumer space. Since Google lowered its prices, Microsoft and Apple might follow suit. Amazon is already offering storage at a cheaper rate. What’s common among all these companies is they have multiple revenue streams, so they are using the storage business to complement their primary offerings. Dropbox, on the other hand, is a standalone consumer cloud storage business. It must pivot toward corporate cloud storage or be prepared to bleed going forward.
Takeaways
Google is rebranding its consumer cloud business with lower prices, which points toward the prospective growth in the cloud storage arena. Counterparts will come up with some sort of pricing response in order to sustain their own user growth.
Dropbox is expected to be the primary victim of the potential price war as the company doesn’t have alternative revenue streams to support consistent price cuts. Given Dropbox is already trading at more than 12 times 2019 sales, it’s better to stay on the sidelines for now.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
