Dropbox Archives - Dr. Petri I. Salonen Views on Life, Entrepreneurship, and Software Business

Business Model change will cause many organizations to loose market share

Many organizations are feeling the pain of spinning-out-of-control with their business model. I have spent the last few weeks contemplating on everything that I have learned the past two years in software technology and I have to say that it has even got me off guard how quickly things are changing for companies. Organizations that used to have a solid business model are running into huge difficulties, and mostly not because of bad products, but more or less of not having understood the market correctly. Dallas Morning News wrote about Nintendo’s surprise profit warning today where they say that the game console Wii U has sold 70% less than expected. That is a huge miscalculation from Nintendo, but the issue is not just the console, it is that the market has moved on to games on smart phones and Sony and Microsoft has taken the market with more innovative products that appeal the current gamers. Nintendo is not on their own, we have seen this with many other sectors/players. Who would have thought 3 years ago that BlackBerry market share would drop to be almost non-existent?

What I have also seen happening is the struggle among system integrators and the current business model that is starting to fail them. I have had the luxury to serve not only software vendors and system integrators, but also end user organizations and what I am seeing clearly is an acceleration of interest in providing more cost effective, flexible with full support for mobility with a reluctance to customized and tailored solutions. This has a tremendous impact on system integrators specifically. My guidance to end user organizations is to look at the ecosystem players to identify the best-of-breed solutions, ensure that these solution vendors have defined an API strategy that enables seamless integration between modules without having to do everything from scratch. This is of course not something that many system integrators want to see as many of them have based their survival on selling hours, and doing it with long-lasting projects. The problem with this approach is that many of these long-lasting projects fail as smaller system integrators do not have the skills to manage projects and if the end user organization has negotiated a good contract with penalties, the system integrators ends up “paying for the solution”. I have seen this many times and specifically and this does not have a good impact on any ecosystem in the long run. This is one of the reasons why smaller system integrators have been “swallowed” by the larger ones as system integrators need scale.

Another way to differentiate from the masses is to be very specialized in a given vertical domain (or functional domain) where you can command the pricing for your delivery. This is something that larger SIs have difficulties with as their scalability comes from using offshore and in these scenarios it is not easy to maintain highly skilled vertical experts where the client is prepared to pay a higher price.

The problem that I see in the market does not apply only for system integrators, there is a huge pressure mounting for traditional software vendors that are still making good money, but with new and exciting entrants popping up from different areas such as Silicon Valley, it is evident that many software vendors will have the same path as Nintendo and BlackBerry. I do not want to sound pessimistic or doom organizations to fail, but I have seen the signs of radical transformation and this is based on my numerous hours each week tracking the market, studying software and working with clients. Just look at the valuation of Dropbox from last week where the investment was based on 10 Billion dollar valuation. It is amazing to even think about this, but I think it is logical. It is a sign from the marketplace that things are changing and valuations are based on what people want and see as being the next wave of things.

Vendor ecosystems are also making huge bets on the next wave of computing. Microsoft is adding data centers around the world like recent announcement of Azure data center in Brazil. IBM is betting their farm on IBM Watson that is in the cognitive computing space and IBM’s acquisition of SoftLayer will increase the competition in the cloud space especially now when IBM announced that they will invest 1.2 Billion in data centers around the globe. What this means to me is that the acceleration of software solutions to the marketplace using new modern ways. This means that it is not good enough to “repurpose” what you have, but you have to think about how your solution is going to be consumed and how it will fit into other ecosystem players. Think about Dropbox for example. The concept is very simple what they do and there are a myriad other players doing the same thing. They have understood the role of ecosystem and their technology is embedded in every app that is relevant and that has to include document sharing/distribution of some sort.

photo by: PSParrot

Last week we could read about a security breach at Dropbox file passwords where a bug made passwords optional for a few hours. This break in security led to an outcry in the user community and with reason. What if you had your personal and very private information stored at Dropbox and now suddenly it was open to anybody. Dropbox said that less than 1% of users logged in during this time, but if the company has 25 million users, even one percent is a considerable number specifically if the breach caused users an issue.

A few days later Dropbox was yet again in the news and now by changing the Terms and Conditions of use and the new terms gives Dropbox the authority to use your information by having following statement in their terms

We sometimes need your permission to do what you ask us to do with your stuff (for example, hosting, making public, or sharing your files). By submitting your stuff to the Services, you grant us (and those we work with to provide the Services) worldwide, non-exclusive, royalty-free, sublicenseable rights to use, copy, distribute, prepare derivative works (such as translations or format conversions) of, perform, or publicly display that stuff to the extent reasonably necessary for the Service. This license is solely to enable us to technically administer, display, and operate the Services. You must ensure you have the rights you need to grant us that permission.

The question that I have is now whether Dropbox can sell my content to be used by search engine vendors to index and to do targeted marketing. The timing of this topic is pretty interesting as I was reading last night a book by Eli Pariser called The Filter Bubble: What the Internet Is Hiding from You. The book really opened my eyes concerning personalization of search results based on YOU and your profile. If you assume that the search results are the same for you and I want you to think again…. as you and I will have different search results even if we use the same search terms.

The Dropboxes of the world have a valuation based on the future expectations and according to Cnet News, the company has now more than 25 million users that are using the service for free. According to TechCrunch, the rumored valuation of the company today is as high as $1.5 or 2 billion. But this valuation is based on that people trust the service like TechCrunch concludes in their blog entry.

My question has always been that can we expect anything if we get things for free? If the only idea for your business is to take venture capital to drive the business on huge loss and then capitalize on valuation expectation like many other companies have, then I do get it. But if you build a software business with the idea of being around for a while and having a sustainable and profitable business, I can’t see a free model to work. I am sure that even Dropbox is considering to use the content in the “free accounts” to drive ad revenue as indexing the content will enable targeted marketing for the end user using the “free service”.

Michael Krigsman from ZDnet concludes that Dropbox is unlikely to read your “Stuff” but he suggest to discontinue the use of the product for applications where privacy and confidentially are mission critical. I believe this has nothing to do with the bug or security breach, but more how the terms and conditions are laid out for users. You need to be your own judge when you use the service and whether you feel it is OK to give Dropbox the authority to your data as the terms suggest. Dropbox has responded to the outcry of the change in terms and conditions in their blog so you can all judge based on the response how you want to see the change in conditions.