Dropbox CEO banks on a viral dynamic to drive profits

Drew Houston of Dropbox sees scale, UXP and viral demand driving the company’s astonishing growth to turn into money

CEO Drew Houston and COO Dennis Woodside of Dropbox met journalists on a visit to the company’s central London office yesterday. The executives of this closely watched and lavishly funded file storage, synchronisation and collaboration startup fielded a range of questions about its future.

Houston is in his early 30s, has the build of a middleweight, is dressed casually and sports a piercing halfway up his left ear. Woodside, whose grey hair testifies to a few more years in the bank, is leaner and wears a suit. But the pair are joined at the hip in their efforts to build the world’s leading platform for sharing work.


Annus mirabilis

Houston says 2016 has been a “pivotal” year for Dropbox with over 500 million registered users now on the service, 200,000 paying organisations and seats within those numbered “in the millions”. That’s rapid growth by anybody’s standards as Dropbox attempts to turn is massive scale into revenues and profits. A billion files are saved on Dropbox every day but a more prosaic fact could outweigh that staggering figure: in April this year the firm turned cash-flow positive. That’s a switch that might silence critics who were sceptical of a startup that has raised over $1bn in VC but needed to show it was more than just a source of freebie consumer accounts.

“We like to say we are funded by our customers these days much more than our investors,” says Houston. “Being free cash-flow positive is an important step on the way to profitability and all the things you do to build a great, enduring business.”

This was also a year of building out infrastructure and products.

Magic Pocket is the name given to building out Dropbox’s US datacentre to reduce reliance on AWS. “We’ve always had a hybrid cloud but we’ve moved many hundreds of petabytes onto our own storage and that’s given us a lot of flexibility to build a great experience and improve performance,” Houston says.

Dropbox also sent Paper, its real-time editing and collaborative platform, into beta and the company is at pains to stress its business credentials.

“Dropbox has found its way into so many people’s lives in so many different ways but a lot of our happiest users are in helping people work together,” Houston says, pointing to sportswear giant Adidas which has about 20,000 users on Dropbox and uses it for “every new shoe from design to production and shipment” with vendors and suppliers globally all incorporated.

Paper and Adidas are emblematic of what Houston wants to pull off on an epic scale at the firm he co-founded in 2007.

“It’s evolving from keeping files in sync to keeping teams in sync. Dropbox is a place where there people talk, get things done. When people buy Dropbox, they’re not just buying space but a more efficient way to get through stuff.”


Global scale

Europe is a surprisingly large part of Dropbox’s success, accounting for 31 per cent of registered users versus 100 million (about 20 per cent) in the US.

“We see Europe and in particular the UK growing at faster rates than the US as cloud becomes popular and people look for different ways of collaborating and getting work done,” says Woodside, a former Motorola CEO and Google senior executive.

The scale of the company is certainly remarkable with about one in 15 people on the planet using Dropbox - and the growth is ongoing. But the long-term success of Dropbox will depend on how many freebie users it can get to pay for the service and how it can extend pockets of activity in enterprises into something resembling ubiquity.

Dropbox is far from alone in spying an opportunity to replace siloes of data with a common means of exchanging and editing files but Houston sees the bottom-up, viral approach to adoption as a font of competitive differentiation. He claims that Dropbox users typically self-serve and the company only sends in its sales teams after adoption has already kicked in.

“It’s very different to traditional enterprise IT,” Houston says. “This is a bigger shift than many people appreciate. Since the dawn of software, you buy it and deploy it … with things like Dropbox it’s actually the reverse. Dropbox arrives in these businesses not just through IT. The result of that is we can grow much more quickly and we don’t have to rely on hiring an army of sales people. In many cases they have thousands of users using Dropbox and the conversation is: OK, half the company is using Dropbox, how do we get the other half up and running?

“The playbook for winning in business software is becoming a lot more like the consumer internet. The end user has a lot more choice … you’re not just stuck with what’s preinstalled [by IT] and building a product people love is much more important.”


A gentle balance

As Houston acknowledges that user-friendly approach that is beloved of Dropbox addicts has to be balanced by the needs of business, however.

“You have to be very careful because what’s different for sure from the consumer internet is security, privacy… that’s critical for everyone but it’s certainly top of mind for an IT buyer. The line between work and personal has blurred [and] you have to be careful you don’t destroy the personal experience.”

The answer is to have a “gentle separation” between consumer and business products to ensure good governance but avoid “the equivalent of carrying two phones around”.

For many of us, Dropbox and fellow Californian company Box are the Tweedledum and Tweedledee of the sync/share/collaborate space and both are chasing the lucrative enterprise market. Houston and Woodside say that volume play of seeding so many accounts, the UXP and self-service factors will be key to winning.

“The vast majority of our revenue is self-serve - we’re very light touch,” Houston says. “In that regard we look a lot more like an Atlassian or a Slack versus Box and other SaaS companies that have a much more conventional go-to-market where you get a bunch of sales people, you lose a bunch of money on a customer for a while and make it back in the ‘out’ years. Our model is much more scalable and efficient.”

Woodside says that while most software companies tend to be “sales heavy” as they mature, about half the team at Dropbox is technical. It’s certainly a bold bet but there’s still plenty of crossover between Dropbox and Box so I ask whether the pair have ever talked about combining efforts. “We don’t comment on that kind of thing,” Houston says when pressed.


The search

Talking to Dropbox’s leaders you get the sense that these are still early days for the company and that a future mission might not be that far from Google’s stated goal of organising the world’s information. Houston, with characteristic humbleness, puts it another, customer-focused, way.

“When you talk to customers they have a lot of problems no-one is solving,” he says. “Twenty years ago, if you wanted to find something at work you just searched your hard drive. Now it’s like 10 different places. We’ve ended up kind of going backwards. It’s easier to search all of human knowledge than corporate knowledge. There are these questions that should be easier to answer but are hard, like ‘what did all my team do today?’”

Houston cites McKinsey research suggesting 60 per cent of our time is spent in managing our work – “the work around our work” – and only 40 per cent doing the work.

“Take your work week and light Tuesday on fire, light Thursday on fire, light Friday on fire… that’s a pretty important problem to solve,” Houston says.

Both Houston and Woodside reference how early we are in the cloud years and Houston hints that Dropbox could make a play in in searching more corporate information: “We can do a lot to tie all these different worlds together. Stay tuned.”

Houston is also bullish on Paper, the document editor that he says at Dropbox offices ends up being a cross between Google Docs and a Wiki. “People put all their knowledge in Paper and that’s really how we run the company.”


Donald J. Trump and Steven P. Jobs

These are, of course, momentous times in geopolitical terms. Woodside says Brexit hasn’t had much impact so far on Dropbox’s UK business while Privacy Shield is helping the company deal with the post-Safe Harbor world.

Having one of the largest repositories of data among cloud service providers meant it “made sense from an economy-of-scale standpoint to invest in our own infrastructure” for Magic Pocket but Dropbox wants to meet the local data residency needs of countries like Germany so public cloud partners will also play a part around the world.

And what of Mr. Trump, given that Houston had endorsed Hillary Clinton?

“Erm,” says Houston pausing for breath, “I’m waiting to see what actually happens… For our part of what we really care about is a lot of fundamental values, of upholding users’ privacy and security, and a lot of basics around rights and equality – the values around which the country was founded. We hope all administrations support this. [But] positions haven’t been exactly consistent… I don’t have a secret window into that.”

An IPO in 2017 has been mooted and Houston does little to deter speculation that’s still on the cards.

One last point. A famous story suggests Dropbox met Steve Jobs several years ago and the great man suggested Apple buy the company even though it had a feature rather than a fully-fledged product. Truth or myth?

“We certainly met with Apple back in 2009, met Steve, [and] a lot of what has been reported is inaccurate. He said something to that effect that we’re a feature not a product. You know, if having a half a billion users is a feature I’m happy.”

Woodside jumps in too, saying that Dropbox’s breadth and depth of data coverage, rather than addressing subset of the problem, buys credibility.

“What Dropbox does at its core is incredibly hard. We support more variants of operating systems, backwards compatibility into Windows, Android, iOS … and the development philosophy is that [these are] equally supported. That’s been technically really hard to do but also a source of advantage. That’s why it is a business not a feature and it earns us the right to solve the next set of problems people are coming to us with.”

It’s likely to be a few years yet before we can call who won the race to become the de facto supplier of services that help us save and share our data. But we know that the prizes for the winner will be glittering – which box are they in?


Also read:
Dropbox trades blows with Box in a fight to the end
Box CEO zones into safe sharing
Dropbox bets on scale, speed and UXP to sync for success
Egnyte CEO bets on hybrid platform to vie with Box, Dropbox