The Economics of Dropbox
w2lessons.com
w2lessons.com
I think Dropbox is approaching to the point when they have to build their own storage. You can't be a storage company without having your own storage solution in backend. It would be similar to Yahoo not having their own search engine while being a search company.
According to them, their storage costs are ~20 times less than those of S3. A bit different use-case for sure. But as wave says, once you become a storage company you will inevitably need to do it in-house to be cost-effective.
"You can't be a storage company without having your own storage solution in backend."
I am not sure that is necessarily true. There are plenty of web hosting resellers who are successful without ever buying a single server or a single line. They've repackaged and re-sold a service. Dropbox can operate in a similar fashion, re-packaging and reselling Amazon's services.
Yes, they can, and apparently have, but they're getting to the size now that they can achieve some significant economies of scale by building out their own storage infrastructure. Their profit margin has to be pretty low with S3.
One big omission from the article - Dropbox probably gets discounts from Amazon. Obviously we can't know how much, but I assume they're paying even less on storage than is calculated there.
I generally wouldn't suggest using back of the envelope calculations for much of anything, by the way. Dropbox has stupidly attractive unit economics and a proven customer acquisition channel which explodes like whoa. There. That is probably accurate and possibly useful. Dropbox has N% margins, as demonstrated by back-of-envelope calculations? That is perhaps not quite so accurate or useful.
Back of the envelope calculations aren't necessarily useful, but they're fun. They let you analyze problems and try and think of all the different moving parts that go into building something - that's why they're so popular in hacker circles. The conclusions are probably useless [1], but the debate and analysis is what you take away.
[1] I can't remember what it's called, but I remember reading a theory (on Wikipedia) that says that people tend to estimate pretty well when they estimate the multiplication of lots of numbers. Mostly because, on average, they make mistakes in both directions (i.e. half the numbers are too high, half are too low).
Did those assumptions seem ridiculously low to anyone else too? My Dropbox is constantly syncing. Every time I save a file, move a file, delete a file, on any of my connected devices, I am making a request. I would estimate that I make nearly 500-1000 requests a day.
That also suggests that the total bytes transferred is a lot more than the author estimates.
I am pretty certain that Dropbox pays more for the requests/transfers than it does for space nominally.
Another thing: Did the author neglect the "30 day versioning" (or forever-backup) feature that Dropbox has? I think each user probably consumes a lot more than the suggested few hundred megs (average), in part because of all the changes.
Given that most users probably convert once they have filled up their Dropbox (which takes time), a cohort analysis done by segmenting users based on how long they have used the service would probably paint a much more accurate (and attractive) picture of Dropbox's business model.
For example, while the global conversion rate might 2%, the average conversion rate for customers who have used the service for 1 month might be .1%, 6 months: .5%, 12 months: 2%, 18 months: 5% etc etc.
If you are only using the global conversion rate to model the business accelerating growth will drag down the average conversion rate, incorrectly making the unit economics appear less attractive. On the other hand, if your model uses cohort analysis you will see accelerating growth accurately translated into future cash flows.
I forget where I read it but I am pretty sure a cohort analysis of this sort was used by Evernote when they raised their round from Sequoia.
Edit: Clarity
Fully loaded (healthcare, office space, payroll taxes, perks, IT, etc) are probably closer to $200k per.
And one 700 MB file will really skew that percentage of deduplication savings.
http://techcrunch.com/2011/04/20/after-a-full-afternoon-at-f...
Dropbox has 25,000,000 users. If 5% are converting at $100/year then they are making $125,000,000 a year in revenue.
You're numbers are nowhere near that mark. And I think Dropbox probably has a much higher conversion rate than 5%. I wouldn't be surprised if they weren't on $200,000,000/year run rate.
That said, they've got a great "long game". Everyone will fill it up EVENTUALLY-- and then you have to choose between nuking files and converting to premium.
Why do you think so?
25,000,000 @ 5% conversion == $125,000,000/year in revenue.
That sounds like a pretty amazing business model to me.
Regardless, it's a great service and if it isn't already a great business I'm sure it will be.
Preferably, they are working at tangential services that leverage the data that is already stored, capitalizing on their assets more than once (i.e. normal Dropbox usage).
Ideas? I for one love the idea of integrating one's repository of files wherever relevant. Say, accessing your Dropbox/Documents in Gmail, your Dropbox/Photos in Flickr etc. If Facebook is the internet of social, Dropbox may very well be the internet of files, removing the barrier between online/offline even further. I'd pay for that.
If that wasn't the case, it might be hard to justify giving them more money, unless they were very close to break-even on that cost. So I'm assuming that they're bringing in enough revenue to cover their storage cost, regardless if their storage cost is 100k / month, 5MM a month, or even higher.