Technology firms looking to enter a market space and unseat incumbent vendors with strong existing relationships to customers have long adopted a bottom-up freemium approach. Essentially the theory goes that if you make a product that is easy enough to both deploy and use, and you make that product free (at least initially) you’ll see significant numbers of end users adopting the product. The door is then open (or so the theory goes) to use that existing relationship as a lever to paid use of the product. It’s been a reliable strategy for Software as a Service (SaaS) vendors for going-on a decade now. And the strategy has had some notable successes – a case in point being Yammer whose freemium model scored them massive usage and a $1B plus price tag when Microsoft acquired them.
Don't Miss: Find a Nintendo NES Classic in stock
It is also the approach taken by vendors in the ever-noisy file back-up and synchronization space – Dropbox, Google Drive, Microsoft SkyDrive and others offer a free service in the expectation that free users will convert into paid ones. Recently however, the freemium model has lost some of its luster – GigaOm reported on the fact that both SugarSync and DropLr have recently dropped their free file sharing services and are actively trying to convert free users to paid ones. In a blog post announcing their decision, DropLr wrote that:
All current free accounts and new sign ups will be placed on a 30-day trial. At the end of 30 days, you’ll be asked to pay for a Droplr subscription if you’d like to continue using it. If you don’t want to pay, you won’t be able to upload any more files, but none of your existing data will be deleted, and all of your links will continue to work.
So… What’s going on here, and what does it mean for the future of the plethora of vendors trying to compete in the space? The fact is that simple file sharing is rapidly becoming a commoditized service – users have gown far too accustomed to the idea of simple storage being free. They’re storing ever-increasing amounts of digital stuff for free – and that’s fine if you’re an existing large player or a new entrant scaling rapidly, but not so great if you’re a small startup. With the high profile vendors (Microsoft, Google, Apple) pushing customers to their cloud backup services, and the larger disruptors such as Dropbox gaining widespread usage, there is no feasible opportunity for smaller vendors to differentiate based on the price (or lack of price) for their service. Everyone else in the space can beat the little guys on price – which is why people are starting to realize that niche customer sectors, specific functionality or strong ties to an ecosystem are where the value really lies – witness Egnyte (who recently raised around $30M) targeting enterprises with a “cloud or on-premises, the choice is yours” story, or Box with it’s vast ecosystem of third party integrations, or DropBox who, while not yet cracking the enterprise market, has undoubtedly cornered the small and mid-sized business sector for file synch and sharing.
It’s a situation I discussed late last year with Vineet Jain, the CEO of Egnyte. When describing the market space for file sharing and synchronization, he uses the metaphor of the traffic light. Green are the small consumer or SMB customers who he sees having fairly simple file sharing needs and primarily using the public cloud. Yellow customers are larger organizations who are happy to have a copy of the data in the cloud but want the certainty of their primary data access coming from on-premises storage. The red customers are the largest enterprises who have strict requirements around enterprise process and compliance. It strikes me that for all of these customers, raw storage will become a commodity on top of which layers of extra functionality will be built.
For consumers it’s all about ease of use and simplicity – the very reason that Dropxbox has gained massive market share at the lower end of town. The actual file storage is set to the side and Dropbox gains converts by being incredibly easy to use and to understand. Essentially they have built market share by paring away the layers between a user and the cloud.
At the mid level, where SMBs play, it’s all about integration with the other tools they use on a daily basis – both Google and Microsoft are providing value to these customers by tying their storage products deeply into Google Apps and Office 365 respectively – again the storage is commoditized, the service built around it being where the value lies. The further up the food chain you go, the more value is added through add-on functionality. The storage itself is largely commoditized but the options (links to on-premises storage in the case of Egnyte, a massive ecosystem of integrated vendors in the case of Box, niche industry products in the case of Citrix ShareFile).
So what’s a small file-sharing vendor to do? Look outside of the actual file sharing for where value can be added – it might be an encryption layer on the top of third party storage vendors (example, Ncrypted - hoping to prove sufficient value to enterprises by being the “Switzerland of file storage”). It might be a social network integrated deeply into the filesharing experience (although bear in mind the points I raised in a recent post on the subject). But either way, you have to be doing something different.
File sharing isn’t a zero-sum game, but the reality is that with the market split between some very high profile existing vendors, and imminent IPOs to fuel growth of some significant challengers (Box, Dropbox and Egnyte amongst them), now isn’t a good time to launch a me-too product. Even with the alluring (or not so) promise of free service.