Dropbox Is Struggling and Competitors Are Catching Up

A plan to make big profits is coming along slowly

Dropbox CEO: We Have 400 Million Users and Growing

Dropbox made itself a household name by giving away cloud storage. The eight-year-old company, valued at $10 billion, had 300 million registered users a year ago; now it’s got 400 million. Its two-year-old effort to make money from business users has been less impressive. While Dropbox led the $904 million global market for business file-sharing last year with about a 24 percent share, No. 2 Box and No. 3 Microsoft each took about 21 percent and doubled their slice of the pie, growing almost twice as fast, according to researcher IDC.

Dropbox’s paid business version lets users distinguish between personal and business documents and gives IT staff more control over the latter. But the company has been slow to add the level of security now common in office cloud software; Chief Executive Officer Drew Houston acknowledges that Dropbox has yet to figure out some basic elements of its sales strategy, including whether to focus on direct sales or partnerships. “We’re trying a lot of different things,” he says.

Dennis Woodside, Dropbox’s first chief operating officer, is leading those efforts. A year ago, Houston hired Woodside, then the CEO of Motorola Mobility, to craft a more detailed business plan that could turn a company with more than $400 million in annualized revenue into one that makes billions. Both men say much of that process has required an adjustment period among Dropbox staffers, including the coders who thought in terms of products and rarely spared a thought for selling them. “One of the things Dennis did early on was establish a belief system around revenue as the oxygen that allows this company to continue breathing, to continue to see another day,” says Marc Leibowitz, a Woodside lieutenant who heads partnerships.

Dennis Woodside, chief operating officer of Dropbox, left, and Drew Houston, chief executive officer and co-founder of Dropbox.
Dennis Woodside, chief operating officer of Dropbox, left, and Drew Houston, chief executive officer and co-founder of Dropbox.
Photographer: Victor J. Blue/Bloomberg

Woodside, who jumped to Dropbox while Google was selling Motorola to Lenovo, made his name running Google’s foreign sales divisions. In the past year one of his biggest achievements has been to accelerate a hiring process that Houston says had been “ponderous.” He filled empty senior positions (head of marketing, head of HR), opened five offices abroad to serve the 70 percent of Dropbox customers who aren’t in the U.S., and doubled the company’s head count to 1,200, mostly by beefing up the sales team. “My view is: Speed is what is going to win,” Woodside says, and having a bunch of empty chairs in the conference room means you’re losing. “That creates some tension now and then” with Houston, he adds.

Under Woodside, Dropbox has struck partnerships with telecommunications companies Vodafone and SoftBank to help distribute its software. Meanwhile, Microsoft has hedged its bets on its own service by making Dropbox compatible with online and mobile versions of Office. Google Executive Chairman Eric Schmidt, who’s previously worked closely with Woodside, says he’s interested in making Dropbox compatible with Google’s business software, too, even though his company is, like Microsoft, one of Dropbox’s primary rivals. “The ideal scenario is that Dropbox is an integrated partner with Google in a whole bunch of areas,” Schmidt says. “We’re all growing a large cloud-computing platform together.”

More than 100,000 companies have signed contracts to use Dropbox for Business, which costs $150 a year per employee. That’s up from 50,000 a year ago, the company says, but it wouldn’t provide more details of its sales during Woodside’s tenure. Woodside says sales have been too volatile, and he’s trying to add a degree of stability.

Stability may be in short supply in the company’s executive ranks. Ilya Fushman, the head of product for Dropbox for Business, became a venture capitalist in June. The company’s head of design, Gentry Underwood, has stepped down, too, though he remains with Dropbox in an unspecified capacity. Woodside hasn’t been able to hire an overall head of product management, the person who’d be trying to match the security and other features in place at Microsoft and Box.

Box, which went public in January, is something of a cautionary tale for Houston and Woodside. Its total 2014 revenue was about 60 percent of Dropbox’s, according to IDC, but its market value is now only one-fifth of Dropbox’s private valuation, suggesting that the office cloud market may not grow fast enough to bridge the gap between investor fantasy and reality.

Like Box, “Dropbox has been around a long time now,” and it’s past due to figure out a business model, says Ben Thompson, an analyst at consultant Stratechery. Still, Houston remains cautiously optimistic—after all, Dropbox’s revenue grew more than 50 percent last year. “We’re kind of in the phase where, like, we’ve put our pick in the ground, and all this oil is coming up, and we’ve got to get it together here,” he says.

The bottom line: Fast-growing Dropbox has seen its rivals gain ground as it struggles to come up with a clear business strategy.