Cloud Storage and Sync: A Bubble Destined to Burst

If imitation is the sincerest form of flattery, Drew Houston and Arash Ferdowsi, the creators of Dropbox, can be excused for any hubris, like having the moxy to spurn Apple's nine-figure buyout offer. Their useful and clever idea of using online cloud storage as a giant USB stick in the sky for everything from quick-and-dirty backup to ad hoc file sharing is being aped by companies large and small. Hardly a week goes by without another press release extolling the virtues of some new cloud service.

Never mind that most of us already have files strewn across three or four cloud storage accounts with no rationale for what goes where. No, just fill out a Web form, with a credit card number, please, just in case you want to upgrade to the "pro" package. You, too, can have another 5 Gbytes of cloud storage for free, complete with a mobile app (sure to get lost on about screen number six of your smartphone) for anytime, anywhere access. This can only end badly.

Not that any of these services are terrible. Indeed, most of them do address some of Dropbox's shortcomings, whether by offering more capacity (sometimes even all you can eat for a flat rate), built-in encryption, enterprise directory integration, or local/cloud hybrid storage with automated syncing from a local storage appliance. No, the real problems are broader.

From the customer perspective, most of these features just aren't that important, at least not important enough to overcome the inertia of creating a new account and handing out your credit card number to yet another online service with unknown and untested security.

Once you start accumulating cloud accounts, how do you keep track of what's stored where, synchronize each of them across all your different devices, and link up with potential file collaborators that might be on other systems? Factor in the overhead of managing yet another sync folder, and it's just easier for most people to fork over $100 a year to Google or Dropbox for another 100 Gbytes to 200 Gbytes.

Layer on the network effect, which inherently disadvantages these second and third movers, and there's even less impetus to try a new service. To confidentially share files, I need to know my friend or colleague already has an account. Sending them a link which redirects to a sign-up page is sure way to get a "Can you just email me this?" reply. I'm pretty sure most people already have Dropbox and Google accounts. Amazon Cloud Drive or Microsoft Skydrive? Maybe. Bitcasa, Cubby, Druva, FileLocker, YouSendIt? Probably not.

If it's hard to figure out why customers would want another cloud storage account; it's harder still to see how any of them have a sustainable business model. First, Dropbox notwithstanding, as Google, Apple and now Microsoft have demonstrated, cloud storage is not a product, it's a feature--something that's integral to an OS or larger application. Like the ability to access websites, send email or take screenshots, cloud storage is fast becoming table stakes.

By this logic, Dropbox will either get crushed or acquired by one of the big fish, such as Amazon, Apple, Google or Microsoft. If the founders are good poker players, they will play their currently strong hand into a better deal than the one Jobs offered.

Second, unless you're Google or Amazon, which have effective ways of monetizing users' online activity, it's hard to see how the cloud storage Johnny-come-latelies have a sustainable business model. Sure, you might only be giving away 5GB, but still, Amazon's going to charge you about $0.30 a month in bulk for that, which seems like a trifle until you've got 100,000 freeloaders adding $350K a year to your overhead. Of course we all know there's no free lunch and the adage that "if you're not paying for it, you're not the customer; you're the product" is particularly apropos to the free cloud storage bonanza. The game is upselling to the paid service. That or some sort of advertising-cum-data-harvesting model, but here Google has already claimed and mastered the turf.

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Even for paid subscribers, one wonders how these companies make any money. Like Dropbox, most of them are using another cloud service, often AWS, for their infrastructure, but the markup is pretty thin. For example, LogMeIn's Cubby charges $7 per month for a 100GB, which they're probably paying $5.50 to Amazon to deliver (unless they've got some very clever algorithms to use Glacier to offload part of it at a buck a month). That's a 27% gross markup, margins that are sure to dwindle with increased competition.

Finances aside, these new, thinly used storage/sync services seem one incident away from annihilation. For example, what happens when one of the 'unlimited' services attracts a bunch of BitTorrent-istas sharing their entire video libraries via the cloud, and utterly destroy the service's usage model? The result is a bill from AWS that's double what's anticipated. Good luck sustaining your freemium service. Or consider the inevitability of another service slacking on security patches, getting hacked and finding its entire customer database, complete with credit card numbers, posted online. Forget about trying to keep your customers; better start lawyering up.

I don't know what the catalyst will be, but the cloud storage gold rush, with new claims staked weekly, will surely come to a screeching halt. Whether it's sparked by competition from above, mismanagement and poor strategies from within, or a security breach from outside, the plethora of cloud storage services will go the way of free email sites. Caveat emptor.