It wasn't long ago that cloud storage companies such as Box and Dropbox were among the hottest startups in Silicon Valley, blessed with vast amounts of venture capital and poised to go public in blockbuster IPOs.

But now, thanks to a price war launched by Google, Amazon and other tech giants, almost anyone with a laptop or tablet can get cloud storage for less than the price of a latte.

That means Box and Dropbox, which sell software for businesses and consumers to store and use files on the Internet rather than a machine, are confronting a precarious future: They must figure out how to go head-to-head with the world's most powerful tech companies. The jockeying has forced both startups to rethink their plans to go public -- Box filed for an IPO in March, but has delayed trading, and Dropbox, once poised to be one of the biggest tech IPOs of the year, may not have a public offering in its immediate future.

"Right now there is a huge arms race between Apple, Google, Microsoft, and now Amazon has thrown their hat in the ring," said Vineet Jain, co-founder and CEO of Egnyte, a Mountain View company that sells software that allows companies to store data both in the cloud and on premise. "These four guys are capable of making it free or nearly free, and the price points that you're seeing from these vendors such as Box will have to come down, or they will have a shrinking user base. You cannot out-compete Microsoft and Google on price -- you just can't."


Advertisement

For Box and Dropbox -- and the investors who have poured millions of dollars into them -- there's a lot of money on the line. In 2013, cloud storage companies raised $1.2 billion from venture capitalists, compared to $427 million in 2010 and $185 million in 2009, according to the Dow Jones. Silicon Valley cloud storage companies accounted for 14 of the top 20 venture-backed deals, with Box leading with more than $350 million in funds raised; Dropbox raised $250 million.

Cloud storage services allow users to store computer files on the Web and not on a machine. As more consumers put their digital pictures, music files and documents in the cloud, and as businesses, motivated by cost savings, moved huge swaths of data to the cloud, the tech giants caught a whiff of a major business opportunity, too.

The price war started because companies such as Google are hoping to attract customers with cheap or free cloud storage, and then convince them to buy services to share, sort, encrypt and collaborate on files stored in the cloud. Last month, Microsoft began offering 50 GB of storage for free and cut monthly prices for 100 GB by about 70 percent to $1.99; in March, Google lowered the price of 100 GB to $1.99, down from $4.99 and announced this month it is offering 2 terabytes of free storage for a year through a partnership with Panzura, a Campbell-based cloud services company. Amazon this month rolled out 200 GB for $5 per month, and even Apple has lowered the cost of its storage platform iCloud.

"The problem is pricing on storage has just been collapsing," said Randy Chou, CEO and co-founder of Panzura, which sells hardware and software that allows businesses to collaborate on massive documents, and counts Electronic Arts and the U.S. Department of Justice among its customers. "Whatever anyone is paying today, they'll pay half next year, and half the year after that."

Box founder Aaron Levie said he saw the writing on the wall in 2007, just two years after launching the startup, which sells cloud storage and services to businesses: "We knew the cost of storage would decline or drop to zero," Levie said in an interview.

The monthly price of some cloud storage products from Panzura, for instance, is 0.12 percent of what it was just a few years ago. And for the last seven years, Los Altos-based Box has been working to become more than just a cloud storage company: It has built programs to help companies move big files securely in the cloud and make sure they get to the right person; it works with hospitals to encrypt medical files so the patient information can be stored and moved safely.

The price war initiated by Amazon, Google and Microsoft, Levie said, "are already things that we have anticipated in our strategy. That's the standard execute that any startup faces. There are always the incumbents."

Last week, Box announced it would give all businesses unlimited cloud storage.

Still, the company has struggled financially. Last year the company posted a $169 million loss, up from $109 million in 2012 and a $50 million loss in 2011. As of April, Box had accumulated a $400 million deficit. Giving away storage is simply easier for a company the size of Google or Amazon, experts say.

"The more mature companies have a lot of cash, and they do have the ability to wage these price wars," said Mark McCaffrey, a software expert at PricewaterhouseCoopers, a consulting and research firm. "But that doesn't mean the better technology won't win, and oftentimes these smaller companies have the better technology. It's a question of whether they can stand the test of time."

For Box, time is running short. Under the terms Box agreed to as part of a $150 million investment this month, the company must go public by July 2015 at a value of no less than $20 per share or it will be on the hook to pay penalties to investors. The company filed for an IPO in March, but has delayed going public for more than four months -- a month longer than tech companies on average take between filing and trading on a public market, according to research financial firm Ipreo -- and likely will continue waiting until its balance sheet and market conditions improve.

San Francisco-based Dropbox, a cloud storage service that uploads, stores and transfers files, and which has 300 million registered users, may need to clear even bigger hurdles before it can convince investors that it is IPO-ready, some analysts say. The company is more popular with consumers than businesses, and consumers generally don't want to pay for something they can get for free elsewhere. Much of Dropbox's revenue depends on users paying to upgrade the amount of cloud storage they get.

"Dropbox is more challenged," said Ezra Gottheil, principal analyst with Technology Business Research. The likely solution for the company is that "it could be acquired."

Dropbox declined to comment for this article.

Still, some experts say no winners -- or losers -- have been chosen in the cloud war. According to Technology Business Research, the cloud market is expected to reach $19.4 billion this year and exceed $36 billion in 2018. And Box isn't out of the game yet: its revenue is up from $58.8 million in 2012 to $124.2 million last year, and revenue for the first quarter this year is almost twice the same period a year ago. It is also continuing to grow its customers, with 39,000 paying businesses using Box, up from 34,000 in March.

"Google and Microsoft are not going to let this one alone and let Box beat them," Gottheil said. "But this is a battle of invention and design and creativity, and the big guys don't always win."

Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.