Sorry, Box, but free is not a business model

Free is not a sustainable business model. Everyone knows this, especially those who lived through the dot-com bubble 15 years ago. Everyone, it seems, except for cloud storage investors. Billions of dollars have been poured into cloud storage companies that are giving away their product, with just a tiny sliver of their customer base actually paying for anything.

Offering a free version of your product is nothing new for technology companies, but those who are successful at using this model either give the customer a strong incentive to upgrade to a paid version, or they do as [company]Google[/company] has done and create a massive audience that can then be sold to advertisers. The most popular and heavily-financed cloud storage companies do neither.

Venture capitalists have invested more than $400 million in [company]Box[/company], a cloud storage file sync and share company, and assessed its value at $1.2 billion. Its much delayed IPO ultimately did better than anticipated, pricing above the expected range — even though only about 10 percent of its customers pay anything at all. Unlike Box, Dropbox is not a public company and has never filed for an IPO, so its financials remain private, but it has raised $1.1 billion in financing, $500 million of which is debt, and is valued at around $10 billion. It too has said that most of its customers use the free product.

Mission: Converting users to customers

With Box, a free personal account provides 10 GB of space, plus the ability to sync and share files with other Box users. Similarly, Dropbox offers 2 GB of free space, with the potential to earn up to 16 GB by referring new customers. Just 1 GB of storage will hold more than 15,000 Word documents, on average, and more than 300 images.

Ideally, the free product offers not only enough value to spread virally, but also offers a strong incentive to upgrade so that it sells itself. Unfortunately for Box and Dropbox, the free services more than cover the needs of customers, which is why it should come as no surprise that about 9 in 10 of Box’s customers don’t pay, according to its SEC filings.

What’s more, Box is paying about as much money as it makes to win those paying customers. For the nine month period that ended Oct. 31, 2014, Box brought in $153.8 million in revenues, while spending $152.3 million on sales and marketing alone. Its total net loss for the nine month period was $129 million. If Box has to spend almost everything it makes from current customers to win new ones, what is the use of giving its product away for free, aside from boosting the size of their user base to impress investors? After all, the entire purpose of giving the product away is to introduce people to the product and then entice them to buy. Simply put, Box went public because it had no other choice. It needed another big cash infusion to pay for its losses.

Dropbox’s financial results are not public, but given how similar its model is to Box’s and how much more money Dropbox has raised, there’s little reason to believe that they are significantly different. After all, the more money a company raises, the more of the company the founders have to sell, and no founder enjoys parting ways with equity. The only reason for Dropbox to raise that much money is because the company needs it.

Why pay if you don’t have to?

The marketing value of “free” is minimal in terms of real dollars if very few of those users convert to paying customers. And, more importantly, Dropbox and Box still have to support all those non-paying customers. There is simply no palatable way for them to eliminate free users, and the costs associated with them will continue to rise as the need for storage increases. As more free customers are added into the system, those costs continue to grow, creating a death spiral. Last year, in an effort to increase the number of paid customers, Dropbox reduced the price of a gigabyte of storage by 90 percent. That is a clear indicator that, over time, the price of cloud storage will continue to reduce to zero.

Eventually, these competitive pressures will likely force Dropbox and Box to invest heavily in building their own storage clouds, but that’s a losing game as well, as Nirvanix discovered much to its chagrin last year. Nirvanix had raised $70 million to build a storage cloud to compete with Amazon, Azure and Google. It sealed big partnerships with IBM and Dell, and had won customers like NASA, Fox Sports and National Geographic. But in the end, Nirvanix couldn’t keep up in the ruthless price war between the bigger, commodity cloud storage giants. When Nirvanix abruptly announced it would shut down, customers had mere weeks to move terabytes of data out of their system.

Eventually, investors will cut off the spigot, and, unless they change course, companies like Box and Dropbox will die like Nirvanix.

So, how can these free sync-and-share companies avoid disaster? The most likely scenario is acquisition by a large software or systems vendor who would ultimately integrate this sync and share functionality into their own products as a major feature. To thrive as independents, however, sync and share companies will need to do two things: move beyond a business model built on free and create a more robust and valuable product offering.

It’s not that sync-and-share isn’t valuable — it is! I personally use Dropbox almost every day. But sync-and-share is quickly shrinking from a stand-alone product into just one feature of a much larger integrated workspace. If these companies can create a compelling service that integrates communications, collaboration and project management into a single, intuitive environment, they may have a future. Box is clearly already moving in that direction, but both companies will need to do much, much more if they’re going to win against companies like Slack and their numerous competitors and outpace their own prodigious burn rates.

Finally, these new products will need to provide ample incentives for customers to pay. Having a lot of “customers” that don’t pay you anything is the surest way to repeat a lesson we were all supposed to have learned after the dot-com bubble burst. That lesson was painful enough the first time, and there should be no need to repeat it.

Andres Rodriguez is CEO of Nasuni, a Natick, Massachusetts-based cloud storage-as-a-service company.

March Madness: 4 mobile apps for the NCAA tourney

With each passing March Madness tournament, we’re a more mobile society. So what apps can we best leverage to enjoy all 67 NCAA games? Here are my “final four,” with links for each supported platform so you’re ready for tip-off; most are free or relatively inexpensive.

One Laptop Per Child project looks to off-grid clean power

The latest iteration of the One Laptop Per Child project was unveiled at CES, and it’s fully focused on integrating with off-grid clean power, both solar and human-generated. Many of the kids that could be using the laptop won’t have access to grid power.

Your last task for 2011: Try Any.DO for Android

In half a dozen years, I’ve tried more task manager apps than smartphones — and I’ve tried dozens of phones. But Any.DO, a free app for Android, offers an elegant iOS-like interface and syncs with Google Tasks. If you do one last thing this year, try Any.DO.

Today in Cloud

There’s a lot to be said for the free sample. A free cup of that new coffee variety, given to you in the hope that you’ll buy that brand next time you shop. Free software, given to you in the hope that you’ll use it, like it, and pay to upgrade to the full-featured version. Free hardware trials are trickier to manage at scale, and free test deployments of complexly interacting enterprise infrastructure are still harder unless the vendors concerned are pretty sure you’ll end up paying them an awful lot of money for a very long time. Two pieces of news this week illustrate examples in which vendors are doing what they can to bring aspects of the free sample a bit closer to the enterprise data center. First, Equinix, Dell and Rackspace have teamed up to offer full-featured OpenStack demonstrations running on Dell hardware inside a few Equinix data centers. Second, HP is putting part of their Fort Collins, CO, data center to work as a test-bed for comparing “sustainable data center technologies.” In both cases, the vendors — and their customers — will be able to test specific software and technologies without the expense and time involved in putting all of the pieces in place first. It’s not completely clear, though, how far these testbeds will go in shaping themselves to reflect all aspects of a customer’s existing set-up. So although CIOs will continue to reach that point at which they have to bite the bullet and deploy locally, at least they should have more confidence that they’re headed in a suitable direction before doing so.

Focusing on Backup, Some Econ Technology Programs Now Free

The good folks at Econ Technologies recently began offering some of its software for free, in order to allow it the time to focus on its flagship products. Earlier this week, Portraits & Prints, ImageCaster, and DayChaser specifically, went from paid software to freeware. Recognizing the mounting difficulty in competing with cloud-based services such as Google (s goog) Calendars (which is free to use) was a contributing factor in the early Christmas present that Econ has provided for everyone.

Portraits & Prints is a print shop sort of application allowing you to print off photos in customizable and out-of-the-ordinary ways. From the Econ web site:

Select your photos and they are automatically arranged onto templates and displayed on screen the exact same way they are printed. You don’t waste time arranging photos and you don’t waste paper since you see the printout beforehand.

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How-To: Sync an iPod Using Open-source Software

Tux

It’s hard to deny how handy it is to plug an iPod into a Mac, fire up iTunes, and watch your device sync with your computer automagically. Take the Mac or iTunes out of the equation, though, and syncing gets a little trickier.

If you don’t like iTunes, or you use Linux as your primary operating system, it’s still possible — easy, even — to sync your iPod’s media files. Just grab one of these three free, open-source music managers, and you’ll be up and running in no time. Like most open-source software, these projects have a strong community of users who are eager to jump in and help if you run into any glitches while installing or using these apps, so don’t hesitate to ask for help if you need it. Read More about How-To: Sync an iPod Using Open-source Software