Cloud Profit Lags Older Software, Box CEO Levie Says

Cloud software companies can’t expect as much profit as traditional vendors because customers increasingly have more choices, Box Inc. Chief Executive Officer Aaron Levie said today.

Levie, speaking on a cloud-computing discussion panel at the Bloomberg Next Big Thing Summit in Half Moon Bay, California, said that Oracle Corp. (ORCL) and International Business Machines Corp. (IBM) had fewer competitors and could control pricing. Emerging companies like Box don’t have the same luxury, he said.

“I don’t know that we should expect the same kind of economics as you saw from Oracle in its heyday and IBM in its heyday,” Levie said. “The upside remains the same. The unit economics and how profitable you’re going to be is going to be a little different.”

Levie was joined on stage by Rackspace Hosting Inc. (RAX) CEO Lanham Napier, YouSendIt Inc. CEO Brad Garlinghouse and Akamai Technologies Inc. (AKAM) CEO Tom Leighton. Their companies are all delivering software and services via the Web, rather than in packages and on dedicated servers. Salesforce.com Inc. (CRM) pioneered the software-as-a-service model with its customer-management software that competes with Oracle.

Box, based in Los Altos, California, provides software for Web storage and document collaboration. The company is increasingly competing with Campbell, California-based YouSendIt, whose software lets users send and collaborate on files.

Vendor Advantages

While the cloud-software market is in its early stages, one advantage for vendors is they shouldn’t have to invest as heavily in their sales team because more communication and transactions can take place electronically. Still, startups have to offer unique services “to make end users smarter,” said YouSendIt’s Garlinghouse.

Rackspace, based in San Antonio, and Akamai, in Cambridge, Massachusetts, are publicly traded and more established than Box and YouSendIt. Rackspace competes with Amazon.com Inc., the online retailer that also offers cloud storage and servers. While Amazon offers cheaper services, Rackspace is focused on providing “fanatical support” for customers that need more help, Napier said.

“We’re trying to help businesses thrive,” Napier said. His company is assisting “customers that want help around workloads,” he said.

Stock Slide

Lower prices from Amazon have contributed to a stock slide at Rackspace. The company has lost more than half its market value this year and last month provided a revenue forecast for the current quarter that trailed analysts’ estimates.

Akamai, which provides technology that helps speed the delivery of Web content, has rallied in the past year, gaining 38 percent through today. For Akamai and other emerging cloud companies, there are plenty of opportunities to make money as older businesses shift to the Web and mobile, said Leighton.

“Everything is moving to mobile devices,” Leighton said. “There are major challenges to be solved and there’s lot of profit there for that.”

Akamai rose less than 1 percent to $42.94 at the close in New York. Rackspace rose 2.8 percent to $35.60.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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