The unsettling math behind Dropbox Pro.

Dropbox announced this week that it upgraded it’s Pro Plan from 100GB to 1TB of space for either $9.99/month or $99/year. Google Drive has offered 1TB pricing at $9.99/month for a while now and it seems Dropbox has finally matched it’s competition. After all, of the small percentage of users who do pay for cloud storage, why would anyone pay for Dropbox when Google offered significantly more storage for cheaper. However, Dropbox’s increase in cloud storage does not represent a decrease in storage costs.

There are two fundamental differences between Google and Dropbox that enable Google to be able to offer what they do. Google can eat the costs while Dropbox can not. Adwords is Google’s cash cow and the meta-data contained in the photos and videos can help Google provide more relevant advertising. Google also has it’s own private infrastructure to manage and host every part of it’s cloud (giving it slightly reduced costs from Dropbox which relies partially on Amazon Web Services). Dropbox’s primary business is storage and it’s latest decision to increase consumer storage by 10x when storage costs have not gone down is a humongous gamble. Let’s look at the math behind Dropbox’s new offering.

Dropbox, to my knowledge, still uses Amazon S3 as a file store. It also utilizes other AWS services as well as it’s own servers for storing metadata, processing files, api’s, etc. For argument sake, and to not be corrected by these variable other costs, let’s focus simply on what we know: S3 costs.

Because we’re looking at scale, let’s assume the price will converge close to ~ 0.0220 per gb per month and ignore how the first 5000 TB worth of data would affect the pricing. Let’s also assume, Dropbox is getting an additional un-advertised discount on top of this because it is such a high-volume customer as well as assume that it is using reduced redundancy storage. I’ve played around with the numbers and built a super-simple calculator so you can too:

Here is one sample scenario that results: Even if all 300 million current Dropbox users all became paid users at $9.99/month with absolutely no costs other than S3, and an additional 5% discount provided by Amazon off of Reduced Redundancy Storage (they likely use Standard Storage which is even pricier), Dropbox would still not be profitable if each user utilized just more than 53% of his or her allocated 1000GB storage.

You can see now that even if Dropbox increases the percentage of paid users (out of single digit), Dropbox’s profitability is now most significantly affected by the amount of storage each paying customer utilizes as well as potential large-volume discounts from Amazon. We do, however, know that AWS tends to be a low-margin, high-volume business so the discount that Dropbox receives can’t be too high.

Because of Google’s amazing offering, Dropbox has been forced to offer 10x additional storage with no change in margins and take a huge risk that paid users will only utilize a small portion of their available storage. I do think consumer cloud storage suffers from the penny gap and $100/year is high for the end-consumer in both cases; at least, Google has a cheaper option. In any case, Dropbox for Business is still a very sound business considering how difficult it is to fill up large amounts of space without photos and videos (at least ones of cats, kids, and family).

Tl;DR: Google is forcing existing cloud companies to increase storage because it can either eat the cost or has the infrastructure. Dropbox is offering more than it can afford and is hedging a bet that paid users will use a very small portion of what they’re paying for.