It isn't easy for online storage companies to break through and cash in. Winners will learn to layer storage with more valuable services
Online storage companies pop up more frequently than mushrooms after a downpour in Southern France. And like the wild-growing fungus, not all of them are easily digested. Case in point: AOL's Xdrive, which despite corporate backing recently joined the likes of Omnidrive and MediaMax on the proverbial technology garbage heap.
That doesn't dissuade entrepreneurs and their backers from joining the fray. At last check, we counted more than two dozen startups trying to carve out a piece of the online storage pie in the hopes that they'll get enough traction to one day make money. Along with clever and colorful names, each one claims a subtle twist—syncing, access from mobile, or whatever—on what is essentially a commodity offering: storage.
Sure there are some services that are clearly superior (SugarSync, for example) or have nifty features such as automatic syncing (DropBox), but when viewed as a group, it's hard to tell which one is going to emerge as the winner over the long term. When you think about it, the online storage business is no different that selling denim jeans that have different shades of blue, rivets, fits, and flares.
Storage startups similarly distinguish themselves with storage capacity, or features such as the ability to sync automatically or share large files. These days many of them have started to use Amazon's S3 wholesale storage to power their services, which makes the differences in some cases largely cosmetic.
I am constantly asking these startups how, exactly, they plan to make money. I typically get one of two standard answers: by selling ads or charging for additional storage. Nice ideas in theory, but clearly out of sync with reality.
In order to make a decent amount of money off advertising, these startups need to generate hundreds of millions of page views, unlikely unless they allow people to share large files, which can often lead to a legal mess.
The presence of a large number of players with no clear leaders means there is little hope of making money in the online storage business from advertising. It also explains why Xdrive, which is owned by AOL, a division of Time Warner (TWX), is getting out of the business.
How about getting consumers to pay for storage? Even that seems to be an uphill task. I have spoken to a few founders of online storage companies and they've admitted that conversion rates to paying customers are abysmally low. Why? It is the same pesky problem of too many players, which allows you and I to spread our files all over the Internet without spending a dime.
One of the services that seems to be doing quite well is Mozy, which was acquired by EMC (EMC), mostly because it had started to sell to larger companies. Mark Lewis, an EMC executive, was quoted as saying that Mozy may be popular with consumers, but it is a perfect solution for large companies as well. The company hasn't revealed how many people are using the service, but Mozy.com does get about 100,000 people checking it out every month, according to Compete.com, a Web site traffic tracker.
So what are the options for surviving in the online storage business? Actually there are a few tricks that can help startups both stand out and thrive. SmugMug, for instance, has used Amazon's (AMZN) S3 as its back end to offer a for-pay niche service optimized for professionals like photographers and is building features such as watermarking. Of course, these opportunities are few, and folks including SmugMug have already staked out their position.
The other option is to shift focus away from storage to "collaboration." Using online storage as an underpinning to share documents, files, and folders with people in your network (whether consumer or corporate) is the right approach.
Microsoft (MSFT) is doing quite well with its SharePoint service, which is essentially storage layered with other services. Chris Capossela, corporate vice-president in charge of the Redmond (Wash.) giant's business division, described SharePoint as "the Office suite for the next generation." This service is so popular that it's expected to bring in about $1 billion this year for Microsoft. What's working well for Microsoft, and to some extent, Google (GOOG), is that they are treating storage for what it is—a cheap throwaway service—and layering it with more valuable ones.
One company that seems to have gotten the "collaboration memo" is Box.net, a Palo Alto (Calif.) startup that has developed an open-collaboration strategy. Box.net is using its API to interface with other Web services such as Autodesk (ADSK), EchoSign, eFax, Myxer, Picnik, Scribd, Zazzle, ThinkFree, and Zoho, and in the process becoming a major collaboration platform that rivals SharePoint. Box.net calls its strategy OpenBox.
This is an offering that Box.net CEO Aaron Levie can sell to businesses—big and small—as a service for a monthly fee. And perhaps that is one way he can avoid the fate of some of his more prosaic rivals.