

The Economics of Dropbox - mwbiz
http://www.w2lessons.com/2011/04/economics-of-dropbox.html

======
wave
Using Amazon's S3 is a good idea while your company is still acquiring a lot
of users, but at some point in future if you are a storage company and you are
in it for a long haul, you have to build your own storage solution.

I think Dropbox is approaching to the point when they have to build their own
storage. You can't be a storage company without having your own storage
solution in backend. It would be similar to Yahoo not having their own search
engine while being a search company.

~~~
partisan
First comment, forgive me.

"You can't be a storage company without having your own storage solution in
backend."

I am not sure that is necessarily true. There are plenty of web hosting
resellers who are successful without ever buying a single server or a single
line. They've repackaged and re-sold a service. Dropbox can operate in a
similar fashion, re-packaging and reselling Amazon's services.

~~~
dandelany
> Dropbox can operate in a similar fashion, re-packaging and reselling
> Amazon's services.

Yes, they _can_ , and apparently have, but they're getting to the size now
that they can achieve some significant economies of scale by building out
their own storage infrastructure. Their profit margin has to be pretty low
with S3.

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edanm
Very interesting calculations. I think patio11 also wrote about Dropbox's
numbers a little while ago, but I don't remember where.

One big omission from the article - Dropbox probably gets discounts from
Amazon. Obviously we can't know how much, but I assume they're paying even
less on storage than is calculated there.

~~~
patio11
I made a fairly offhanded comment about them here:
<http://news.ycombinator.com/item?id=2353418>

I generally wouldn't suggest using back of the envelope calculations for much
of anything, by the way. Dropbox has stupidly attractive unit economics and a
proven customer acquisition channel which explodes like whoa. There. That is
probably accurate and possibly useful. Dropbox has N% margins, as demonstrated
by back-of-envelope calculations? That is perhaps not quite so accurate or
useful.

~~~
edanm
Thanks, that's what I was talking about.

Back of the envelope calculations aren't necessarily useful, but they're fun.
They let you analyze problems and try and think of all the different moving
parts that go into building something - that's why they're so popular in
hacker circles. The _conclusions_ are probably useless [1], but the debate and
analysis is what you take away.

[1] I can't remember what it's called, but I remember reading a theory (on
Wikipedia) that says that people tend to estimate pretty well when they
estimate the multiplication of lots of numbers. Mostly because, on average,
they make mistakes in both directions (i.e. half the numbers are too high,
half are too low).

------
orijing
> I assumed that the average user will make 10 put/copy/list requests and 10
> get requests daily

Did those assumptions seem ridiculously low to anyone else too? My Dropbox is
constantly syncing. Every time I save a file, move a file, delete a file, on
any of my connected devices, I am making a request. I would estimate that I
make nearly 500-1000 requests a day.

That also suggests that the total bytes transferred is a lot more than the
author estimates.

I am pretty certain that Dropbox pays more for the requests/transfers than it
does for space nominally.

Another thing: Did the author neglect the "30 day versioning" (or forever-
backup) feature that Dropbox has? I think each user probably consumes a lot
more than the suggested few hundred megs (average), in part because of all the
changes.

~~~
tgriesser
Since the changes/uploads of the files are just diff's of the existing files
rather than full copies for each version, I can't imagine that the versioning
would add too much to the author's rough estimations.

~~~
orijing
But that doesn't change the number of requests. Perhaps it lowers the total
bandwidth consumed, but what about the number of requests?

------
adamtmca
I think the conversion rates used in this analysis are an ineffective way to
examine services like Dropbox.

Given that most users probably convert once they have filled up their Dropbox
(which takes time), a cohort analysis done by segmenting users based on how
long they have used the service would probably paint a much more accurate (and
attractive) picture of Dropbox's business model.

For example, while the global conversion rate might 2%, the average conversion
rate for customers who have used the service for 1 month might be .1%, 6
months: .5%, 12 months: 2%, 18 months: 5% etc etc.

If you are only using the global conversion rate to model the business
accelerating growth will drag down the average conversion rate, incorrectly
making the unit economics appear less attractive. On the other hand, if your
model uses cohort analysis you will see accelerating growth accurately
translated into future cash flows.

I forget where I read it but I am pretty sure a cohort analysis of this sort
was used by Evernote when they raised their round from Sequoia.

Edit: Clarity

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jpadkins
$100k per employee in the valley? That seems low.

Fully loaded (healthcare, office space, payroll taxes, perks, IT, etc) are
probably closer to $200k per.

~~~
pbreit
Probably under 150.

~~~
pbreit
Not sure why the downvotes but average all-in costs of startup employees in
the Bay Area startups is less than $150k.

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hnsmurf
He made a minor mistake. In his high estimate, he used the high end of the
range for de-duplication savings (20%) when he should have used the low end
(5%). Not a big error (something like $4.5m/mo instead of $4m).

~~~
bgentry
I don't think that's a mistake on his part. If you put a single large video or
iso file on there that you downloaded, it's practically guaranteed that
someone else has already uploaded it.

And one 700 MB file will really skew that percentage of deduplication savings.

~~~
pbreit
The point is that 5% de-duping (ie less deduping) would lead to the _high_
number.

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matthiaswh
Dropbox is one service for which I definitely have no problem paying $10 a
month.

------
sreitshamer
Why does he add S3 standard-storage-class cost and S3 reduced-redundancy-
storage-class cost in the second paragraph? Each object in S3 is either one or
the other -- not both.

------
jonknee
Since Drew's hitting up $35k a plate fundraisers, I can only assume they
figured out the economics at scale.

[http://techcrunch.com/2011/04/20/after-a-full-afternoon-
at-f...](http://techcrunch.com/2011/04/20/after-a-full-afternoon-at-facebook-
obama-collects-largesse-from-tech-elite/)

------
davidu
I think your analysis is flawed. While I think your costs are probably on
target (except for compensation costs, which I think you are short by about
50-100%) your revenue guesses I think are grossly off the mark.

Dropbox has 25,000,000 users. If 5% are converting at $100/year then they are
making $125,000,000 a year in revenue.

You're numbers are nowhere near that mark. And I think Dropbox probably has a
much higher conversion rate than 5%. I wouldn't be surprised if they weren't
on $200,000,000/year run rate.

~~~
webwright
I love Dropbox as much as anyone, but unless you're using it for audio, video
or (lots of) photography, the free offering is plenty. I'd be surprised if
they were much north of 5%.

That said, they've got a great "long game". Everyone will fill it up
EVENTUALLY-- and then you have to choose between nuking files and converting
to premium.

~~~
revorad
I don't use Dropbox for audio, video or photos, and I'm already using more
than 3.3G. A lot of my folders are probably things I put in there to quickly
share it with someone or access it from another computer. I could move them
now and free up some space. But, I can't be bothered. That's one reason why
people will convert to premium. The hassle of sorting through folders is
probably not worth $100 to many.

------
dr_
I think at some point the freemium model needs to be abandoned. Dropbox is
getting there - 25 million users (or accounts) and a service that works pretty
well. At this point why not charge a nominal fee for the low end of the
service - even if it's 12 dollars a year (only $1 a month!). Or a few months
free followed by a monthly fee. I'd be willing to pay after having used the
service free for a while - although I personally will have to cause I need
more storage.

~~~
davidu
Show some math.

25,000,000 @ 5% conversion == $125,000,000/year in revenue.

That sounds like a pretty amazing business model to me.

~~~
dr_
You are assuming the high end of conversion at 5%. And you are also assuming
those 25,000,000 accounts are all held by different people, when in reality
there are people who hold multiple accounts under different email addresses
for different purposes or to avoid upgrading. It's not so easy to switch from
one acct to another, probably a good thing on the part of DropBox, but people
still do it.

Regardless, it's a great service and if it isn't already a great business I'm
sure it will be.

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Emore
The interesting question is then: how can Dropbox make more profit? By
wiggling the conversion rate only?

Preferably, they are working at tangential services that leverage the data
that is already stored, capitalizing on their assets more than once (i.e.
normal Dropbox usage).

Ideas? I for one love the idea of integrating one's repository of files
wherever relevant. Say, accessing your Dropbox/Documents in Gmail, your
Dropbox/Photos in Flickr etc. If Facebook is the internet of social, Dropbox
may very well be the internet of files, removing the barrier between
online/offline even further. I'd pay for that.

~~~
espeed
Dropbox is now targeting businesses: <https://www.dropbox.com/teams>

------
ZoFreX
I'm all for napkin calculations but there are so many fudge factors and
guesses in this that to draw conclusions would be meaningless. It's a shame,
because there's some good information in the article, and some intelligent and
reasonable estimation work, but sentences like "I've estimated the average
stored file at 1.6MB based on my own account as well as those of a few people
I've asked" are unignorable.

------
atguy
Very good analysis and impressive that they can survive with a burn rate of
$3.1M - $5.8M per month without additional external funding.

~~~
ssharp
If they are using S3, then their storage cost is close to 100% variable.
Assuming their rate of paying customers stays consistent with their free
customers, regardless of how much they grow, isn't it safe to assume that
their model is tailored to at least cover their cost of storage with their
revenues?

If that wasn't the case, it might be hard to justify giving them more money,
unless they were very close to break-even on that cost. So I'm assuming that
they're bringing in enough revenue to cover their storage cost, regardless if
their storage cost is 100k / month, 5MM a month, or even higher.

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frugalfrank
If more privacy-conscious users start using TrueCrypt after the revelations
made (Dropbox being able to decrypt your data) in their latest blog post,
<http://news.ycombinator.com/item?id=2470074> , that conversion rate will need
to be higher.

~~~
alexmuller
True, though I bet 90% of users don't even realise there's been an "uproar"
over Dropbox's security.

~~~
bdonlan
It's not even an uproar really. The only people who care are privacy freaks
who didn't take the time to think through the implications of Dropbox's
feature set when they first signed up.

------
bakbak
i still wonder why dropbox and zumo drive are still not acquired ...
eventually google, microsoft (may be even apple and amazon) will be offering
the same service... so why invent the whole wheel again? these are the amazing
YC companies ... whoever buys them won't be disappointed for sure...

~~~
dlevine
ZumoDrive was acquired by Motorola.
[http://techcrunch.com/2010/12/22/confirmed-motorola-
mobility...](http://techcrunch.com/2010/12/22/confirmed-motorola-mobility-
acquires-cloud-storage-startup-zecter/)

