Report 1 - Is Dropbox a case of X Factor, Lady Gaga or Madonna?

Case report #1
Dropbox
Cloud storage services
Solvay Brussels School of Economics & Management
GEST-S-484 Technology & Strategy
Professor Manuel Hensmans
Group 4
Andrea Balducci
Axel Forrez
Gabriel Spinnler
Thibaut Van Vracem

GEST-S-484 Technology & Strategy Group 4 – Dropbox
Dropbox is an American cloud storage and online backup services company founded in 2007 and headquartered in San Francisco. Since the launch of its first product in 2008, Dropbox has experienced a tremendous growth, both in terms of profits and number of users. This case report analyzes the sources and types of innovation behind the current success of Dropbox.
Introduction
Case question 1: is your firm a case of X Factor, Lady Gaga or Madonna; Apple with Jobs or without (drifting); R&D funnel victim/Xerox or Pfizer/Edison?
Lady Gaga and Madonna
Dropbox was the first company to offer cloud storage services to consumers and to successfully develop a freemium model generating profits while building an important user base. Given its pioneer role in the cloud storage industry, Dropbox can definitely be associated with Lady Gaga: the company has created the cloud storage business and continues to shape this new industry. The rules of the game have been invented by Dropbox giving the company an initial advantage over its competitors: freemium model, positive network effects, large user base (achieved through the offering of a free yet functional service).
However, in some aspects, Dropbox can be compared to Madonna. So far, the company has been able to adapt itself to changing circumstances and trends. The recent value pools shift from consumers towards businesses has forced Dropbox to reinvent itself by developing tailored business cloud storage solutions1. Nonetheless, the company has been able to adapt itself while remaining differentiated from its competitors and keeping its identity: focus on simplicity and convenience for the user. Moreover, the company is actively collaborating with partners to encourage the development of applications compatible (solely) with Dropbox and adding value to the basic cloud storage services. The company is therefore able to tap into complementary capabilities without deviating from its core business. Finally, Dropbox does not spend a lot of money on advertising but benefits a lot from earned/free media and word-of-mouth. The company has often faced controversy though, in terms of security failures and information leaks.
1 Takahashi, Dean. (Sept. 2013). « Dropbox details its shift from consumer file storage to enterprise data hub ». Venture Beat. Retrieved March 9 2014 from http://venturebeat.com/

Apple with Steve Jobs
Dropbox is clearly the result of a visionary leadership. As a result, the firm is really a case of Apple with Steve Jobs. The company was founded by Drew Houston, computer sciences graduate and serial-entrepreneur. It is important to point out that Houston developed the cloud storage service idea primarily as a solution for his own needs; he wanted to find a convenient and faster alternative to hardware storage than e.g. USB flash drive, easy to lose, forget or misplace. At several occasions, the CEO of Dropbox has shared his clear and long-term vision for the company: Houston wants to make hard drive obsolete and establish cloud storage as the unique way of accessing information2. This is a bold and ambitious statement but Houston is persuaded that Dropbox can be at the center of this Information Technology revolution; users would use Dropbox to store all their personal/business information, where it would be accessible all the time, easily and conveniently from all devices.
The visionary leader took the decision to shift the company’s focus from consumers to businesses in 2013. Drew Houston correctly understood that the environment was changing and that some radical changes were needed, avoiding a dangerous strategic drift. However, rather than simply abandoning its network of consumer-users to solely serve the business segment, Dropbox decided to leverage it to get access and convince the CIOs, decision-makers within the targeted business segment. Indeed, Dropbox was the market leader and preferred cloud-based vendor in terms of individual cloud storage accounts3; employees from a majority of companies were already using dropbox services in a professional environment. All these employees were passive promoters of Dropbox and would benefit a lot from having their personal and professional accounts on the same platform. Moreover, CIOs usually prefer an integrated company-wide cloud storage system than individual professional cloud storage accounts scattered among their employee base.
2 Marcus Wohlsen. (Sept. 2013). “Dropbox has a radical plan: become the portal to your digital world – And join the ranks of Apple, Google, and Facebook”. Retrieved from: http://www.wired.com/business/
3 Spiceworks. (June 2013). “Catching Up to the Cloud: Steady migration into cloud-based file sharing, email, and productivity services”. Retrieved from: http://www.spiceworks.com/

No R&D funnel victim
Finally, we would like to point out that Dropbox is not a R&D funnel victim like Xerox even though it cannot be compared directly to Pfizer. The major difference with Pfizer is the fact that Dropbox relies much more on external partnerships, application developers and acquisitions (e.g. email application Mailbox in 2013) to generate product innovation. However, Dropbox is successful in integrating a large share of these innovations into its service offering, as highlighted by the numerous applications that can be connected with Dropbox, more than 100.000 in total4.
Sources and types of innovation
Case question 2: how does your firm’s use of sources of innovation hamper/benefit it strategically?
Dropbox’s very first source of innovation was a person solving his own needs. This solution was then improved and adapted to fit the needs of other people. The founder was passionate about this solution and has been able to keep customers’ interests and needs in mind since the beginning because he was initially one of them. Moreover, even though the notion of cloud computing has been invented many decades ago, Drew Houston was the first to successfully develop and market it for the consumer segment. Dropbox’s success is not based on the discovery of something totally new but rather on the development of a practical user design (effortless synchronization, multi-device and multi-browser compatibility, etc.). This commercial success is initially based on a successful « tech push » scheme; because of the company’s business model and understanding of consumers’ needs, Dropbox quickly became a standard in the cloud storage industry, with more than 200 million5 people using it.
However, as highlighted before in this report with the switch toward businesses, the commercial success is now becoming a case of « demand pull ». Dropbox will have to be tailored to the companies’ needs and requests in terms of security, access and confidentiality. In order to better understand the environment in which Dropbox is developing and understand where the
4 Company Website. Retrieved March 2014 from: https://www.dropbox.com/business/
5 Vance, Ashlee. (Nov. 2013). « Now Dropbox thinks its worth $8 billion ». Business Week. Retrieved 10 March 2014 from http://www.businessweek.com/articles/

innovation comes from, we will use Porter’s diamond model to assess Dropbox’s place in the US internet innovation cluster.
Factor conditions:
Venture Capitalists have been crucial for the quick development of Dropbox; the accessibility of such sources of funding is due to specific factor conditions, mainly the location of the company in Silicon Valley. More generally, the infrastructure for the development of online start- ups is extremely well developed in California, as highlighted by the numerous awards, publications and conferences received and given by Drew Houston and his company. Attracting good talents is not extremely difficult as the US history and specific regulations have led to an abundant amount of skilled labor and knowledge in the area. Therefore, factor conditions are extremely favorable to Dropbox.
Demand conditions:
The demand is clearly separated in two segments: consumers and businesses. These two segments have different needs and sizes. Consumers want to use a simple, convenient and multi- devices compatible tool. On the other side, big companies are pulled into the Dropbox world by their employees who used Dropbox privately and then began uploading professional files on it. However, IT managers would like to keep an eye on these files and to be able to monitor what the employee makes of it.6 On the whole, the demand is growing in both segments but the value is easier to capture on the business side. The growth and the segmentation of the market are very positive factors for Dropbox as it forces the company to develop solutions, better tailored to customers’ needs than competitors’ ones.
Related and supporting industries:
There are numerous industries whose development and prosperity are affecting Dropbox’s performance. Among them, we will cite the mobile Internet as a whole (4G for example), as well as developers of Internet applications7. Dropbox is trying to become the standard file storing and sharing system for a multi-screen world, and that will only be possible if developers include and
6 Grant, Rebecca. (Nov. 2013). « Dropbox unveils major redesign to simplify separating business and personal data ». Venture Beat. Retrieved March 10 2014 from http://venturebeat.com/
7 Marcus Wohlsen. (Sept. 2013). “Dropbox has a radical plan: become the portal to your digital world – And join the ranks of Apple, Google, and Facebook”. Retrieved from: http://www.wired.com/business/

promote Dropbox with their applications. Finally, of course, the technological OEM industry is vital for Dropbox, as new devices and systems are the base upon which it is built. Given its profile and location, Dropbox is surrounded by developers and other internet companies that can help the company to develop its services and reach.
Firm strategy, structure and rivalry:
Rivalry on the internet industry is often more than domestic, as the internet is global. However, the majority of the competing companies in this industry are US-based; the US were the market with the fastest cloud-storage penetration. This highlights how important it was for Dropbox to capture the US market before becoming a global leader. The competitors can be divided into two groups: the recent start-ups entirely focusing on cloud storage solutions (e.g. Box, SugarSync) and the big internet giants trying to capture this fast-growing market (e.g. iCloud, Google Drive) by levering their current portfolio and position. The level of competition is extremely high, and as the competitors’ profiles are very different, the services offered are somewhat contrasted too. On the whole, we can conclude that the important domestic rivalry is a key source of innovation for Dropbox as the company cannot simply rest on its laurels to stay on top of the market.
Case question 3: is your firm innovative across the entire innovation pyramid?
Dropbox can be defined as a very innovative company, and this almost across the entire innovation pyramid. These innovations will be detailed thereafter.
Starting from the bottom of the pyramid, the main Dropbox’s service innovation is the Cloud Storage. That allows the user to save and access his files in a special folder no matter the device used. Furthermore, Dropbox brought several small innovations such as the “automated photo synchronization” or an easy way to link two accounts (business and personal), to reduce switching time.
From an architectural point of view, it brings a new dimension to the storage industry. There is no more need for a hard disk, as the storage is on a central server (Cloud). As a matter of fact, Dropbox is changing the overall design of the system as it combines three main services in one: storage in the cloud, immediate accessibility to the file from any device and the possibility to share and collaborate.

Dropbox cannot be considered to be a disruptive innovation. Indeed, the technology is not inferior (low-end) to the current technology, the hard disk drive (HDD), in terms of benefits for the users (hardware space, time, convenience, connectivity, etc.). However, it can be considered as a radical innovation for two reasons: it does require a lot of investment in R&D and storage place and users’ acceptance is not guaranteed. Secondly, the service is not a result of incremental innovation on top of an existing service but rather requires totally new capabilities from the incumbent hardware storage developers. Dropbox brought an architectural innovation that is radical in the industry.
The main innovation in Dropbox is obviously its business model. Indeed, it creates, delivers and captures value in a totally new way in the storage industry. Profits are made thanks to a freemium business model, which is very classical in the web business. The real innovation comes from the willingness though, in the long run, to replace the hard drive by cloud storage. In other words, it means that users will buy less hardware storage equipment on the market and instead focus on “cloud server” space, accessible regardless of the used device. Therefore, hard drive sellers will experience erosion in both sales and profits, leading to a necessity to rethink their business model. Moreover, there will be a switch from a retail business model (one shot payment for hardware storage) to an online subscription model (consisting of regular payments to “rent” storage place). It is somehow similar to the shift from Blu-ray to streaming consumption. Finally, there is a considerable change for the equipment manufacturers as there will be less need for storage capacity on all devices and more need for connectivity.
Furthermore, Dropbox recently – in 2013 – launched its application platform, with already 100.000 compatible apps that allow the user to get more value from Dropbox (“replace the hard drive, sync is the new save”8). For example, the user will be able to start a game on his tablet, take a break and continue playing it on his computer. On the other side of the platform, application developers will be able to integrate the Dropbox syncing system into their applications, giving them a large basis of potential customers. The latter, is presumably the subsidized side as the revenue stream comes from the premium subscribers. Though not being the most obvious feature of Dropbox, the application side is clearly an example of platform innovation.
8 Lee, Nicole. (July 2013). « Dropbox announces the Dropbox Platform, syncing with third-party apps, Mailbox integration ». Engadget. Engadget. Retrieved from: http://www.engadget.com/

Finally, Dropbox had the chance to hire young, brilliant and creative talents during the recent years, e.g. the inventor of the python language, the creator of the Facebook “like” button or the engineer responsible for the Google-ad engine. There are more than 200 employees who really believe in the success of the company: a huge basis of users and a substantial growth gives the opportunity to the employees to have a massive impact on the world. They all follow one motto: “simplify your life”9 and the main answer they give when asked about the company culture is “freedom”. In fact, Dropbox’s obsession is to make the employees happy, to allow them to learn and to challenge them continuously while ensuring a fun work life. In short, Dropbox’s management innovation is somehow a mix of the design obsession of Apple, the analytical part of Google and the “go fast and dominant mindset” of Facebook.10
In conclusion, we have shown that Dropbox is an innovative company across the whole pyramid and in particular at the top, which is the most valuable source of sustainable competitive difference.
Case question 4: is your firm investing in the right dominant design at the right time?
Has the dominant design emerged yet?
In order to answer this question, it is crucial to pinpoint the stage of the technology. Typically, the period before the emergence of a dominant design is characterized by intense competition and innovation. When the basic architecture is known and stops changing, we have reached the dominant design. At this stage the level of variety is at its highest. After the emergence of a dominant design, an era of incremental change begins. When observing Dropbox’s competitors, a basic architecture can be highlighted; four main ingredients characterize the dominant design for cloud storage as customers can:
- Back up to the cloud
- Synchronize with multiple devices
- Share and collaborate
- Access their files from any location
9 Openview Staff. (March 2013). « The Best Company Culture in Tech: March Madness Round 2 ». OpenView Labs. Retrieved from: http://labs.openviewpartners.com/
10 Gannes, Liz. (Aug. 2012). « Inside Dropbox’s Reverse-Engineered Company Culture ». Retrieved from: http://allthingsd.com/

It is clear that this industry is currently in a stage of incremental changes; the product architecture is already known and remains stable. Besides cost reduction, component improvement and other elements, customer segmentation becomes an important part of the firm’s efforts. A clear example of Dropbox broaching new segments is Dropbox for Business. The four basic product features, mentioned above, remain, and only new incremental features are added to fulfill this segment’s needs. Some features are: data separation, sharing audit logs, admin console, account transfer, remote wipe, new sharing controls, API apps, web client, centralized billing etc. We can say that the dominant design is in place and that Dropbox has successfully adapted this basic architecture into its product.
How did Dropbox invest in the right dominant design at the right time?
As the (previous) dominant design of file-hosting services (e.g. Megaupload) came to reach its limits, it was clear that a new standard would emerge.
Although Dropbox is considered to be the first to develop a sound file synchronization algorithm, it has adapted Box’s security and Google’s real-time document collaboration. In other words, Dropbox has had a first mover’s advantage, hereby gaining an installed base, but has also managed to adapt competitors’ innovations, thereby staying relevant. Another way to understand why Dropbox was able to jump on the bandwagon can be found by analyzing why a particular dominant design wins and how Dropbox has managed to satisfy these winning conditions.
Tech-value increases through learning: the more the output rises, the more producers will be able to decrease the cost and/or increase the performance of the product. This is indeed the case for Dropbox. As Dropbox uses a freemium-pricing strategy, this element will not be represented by a decrease in cost but by an increase in performance as described above.
Installed base of customers: as one of the key elements of Dropbox’s dominant design is to share and collaborate, we can clearly speak about positive network effects – inherent value. This attribute, together with the freemium-pricing strategy has successfully resulted in customer lock- in. Dropbox more specifically uses a value based freemium strategy. The customer starts off with 2 GB of free space. The more Dropbox gets used, the more value is created for the customer

and the higher the switching costs become; i.e. the customer gets locked in.
Path-Dependence: all incidental or small changes that happened at the emergence of the innovation can have a butterfly-effect upon the dominant design of the final product. Knowing that the service was developed as a solution to the inventor’s own needs, one can understand the relevance of this winning condition in the case of Dropbox.
To conclude we can say that, as the cloud storage industry found itself in a stage of incremental change, a dominant design emerged. Dropbox is widely considered as the first-to market, but has also been successfully adapting competitors’ innovations, thus remaining a relevant player in the industry. Moreover, Dropbox was successful in investing in the right dominant design because of three main reasons; first: tech-value increases through learning, second: an installed base of customers gives added value and has a customer lock-in as an effect and third: an element of path-dependence. As Dropbox finds itself in the stage of incremental change, it now focuses on new customer segments and component improvement.

Bibliography
Escallier, Paul. (Feb. 2012). “File Sharing After Megaupload: 8 Alternatives”. Retrieved from: http://www.tomsguide.com
Gannes, Liz. (Aug. 2012). « Inside Dropbox’s Reverse-Engineered Company Culture ». Retrieved from: http://allthingsd.com/
Grant, Rebecca. (Nov. 2013). « Dropbox unveils major redesign to simplify separating business and personal data ». Venture Beat. Retrieved March 10 2014 from http://venturebeat.com/
Jaegul, Lee and Nicholas Berente. (Jan. 2013). “The Era of Incremental Change in the Technology Innovation Life Cycle: An Analysis of the Automotive Emission Control Industry”. Retrieved from: http://digitalcommons.wayne.edu/
Lee, Nicole. (July 2013). « Dropbox announces the Dropbox Platform, syncing with third-party apps, Mailbox integration ». Engadget. Engadget. Retrieved from: http://www.engadget.com/
Openview Staff. (March 2013). « The Best Company Culture in Tech: March Madness Round 2 ». OpenView Labs. Retrieved from: http://labs.openviewpartners.com/
Rosoff, Matt. (Jan. 2014). “Dropbox: We'll conquer the enterprise by focusing on our 200 million users first”. Retrieved from: http://www.citeworld.com
Shmilovici, Uzi. (Sept. 2014). “The Complete Guide To Freemium Business Models”. Retrieved from: http://techcrunch.com
Spiceworks. (June 2013). “Catching Up to the Cloud: Steady migration into cloud-based file sharing, email, and productivity services”. Retrieved from: http://www.spiceworks.com/
Takahashi, Dean. (Sept. 2013). « Dropbox details its shift from consumer file storage to enterprise data hub ». Venture Beat. Retrieved March 9 2014 from http://venturebeat.com/
Tarantola, Andrew. (Nov. 2013). “Businesses Are Getting a Big Boost from Dropbox”. Retrieved from: http://gizmodo.com
Tiwana, Amrit. (2014). “Platform ecosystems; aligning architecture, governance and strategy”. Morgan Kaufmann.
Vance, Ashlee. (Nov. 2013). « Now Dropbox thinks it’s worth $8 billion ». Business Week. Retrieved 10 March 2014 from http://www.businessweek.com/articles/
Winkler, Rolfe. (Nov. 2013). « Dropbox Seeks Funding at $8 Billion Valuation ». Wall Street Journal. Retrieved 10 March 2014 from http://online.wsj.com/news/articles/
Wohlsen, Marcus. (Sept. 2013). “Dropbox has a radical plan: become the portal to your digital world – And join the ranks of Apple, Google, and Facebook”. Retrieved from: http://www.wired.com/business/

Report 1 - Is Dropbox a case of X Factor, Lady Gaga or Madonna?

Recommended

Recommended

More Related Content

Recently uploaded

Recently uploaded (20)

Featured

Featured (20)

Report 1 - Is Dropbox a case of X Factor, Lady Gaga or Madonna?