Dropbox Inc. (DBX) will have to deal with some of the largest tech companies in the world as it ascends to be one of the largest cloud computing companies int the world, a cause for more long-term concern than the recent executive departure.
In the second quarter, Dropbox had 11.9 million paying users, a 16% increase from a year before. Total revenue jumped 27% to $339.2 million.
As the company continues to grow its paying user base and expand a number of products features, it will be increasingly pitted against bigger competitors for market share.
Dropbox started as a project of CEO Drew Houston while he was a student at MIT, as he sought to create a more effective hosting service that could not only replace outdated storage devices such as flash drives, CDs, and floppy disks (which were shockingly still in limited use as recently as 2007), but displace the existing competitors he regarded as inferior.
The company can look longingly at a time when Foldershare, Carbonite, box.net, and Mozy were its biggest competition. As the company outlined in its 2007 slide deck presentation from its seed stage funding round, the company's offering was simple.
Dropbox wanted to help users "work on multiple computers, share files across a team, put photos and videos on the web and protect files from loss."
Their gutsy ambition to become a superior product has panned out so far, as Dropbox has surpassed all of the aforementioned competitors to become the number two file-sharing website in the world by market share behind Google Drive.
In fact, even after the consolidation of Carbonite and Mozy into one company and Foldershare's acquisition by Microsoft (MSFT) , none of the early competitors hold more than one third of the market share that Dropbox holds.
Unsurprisingly, Alphabet Inc.'s Google (GOOGL) also dominates file sharing, holding 36.6% market share against Dropbox's 31.4%.
Analysts have taken notice of the elephant in the room, as the $864 billion Alphabet dwarfs the $12.3 billion Dropbox, which just became public earlier this year.
"Dropbox may find difficulty competing with mega-vendors such as Microsoft and Google, who can afford to heavily discount or give away file sync and share functionality as an add-on to a broader productivity suite," postulated JP Morgan analyst Mark Murphy in his August 10 note.
He noted that "price wars" between Microsoft's Azure product, Google Cloud, and newcomer Amazon Web Services (AMZN) would not bode well for Dropbox.
Jefferies analyst John Difucci concurred in his August 10 note, citing "deep-pocketed incumbents" in the cloud market as a key threat to Dropbox's future.
Increased competition from larger cloud-scale players could add to margin pressure, he wrote.
Rishi N. Jaluria, a research analyst for D.A. Davidson & Co. could face more competition from Microsoft, Google or other tech giants if decide to make a "good enough" substitute for Dropbox, "making it hard for Dropbox to grow at this rate."
Jaluria noted that is a less likely scenario because customers value when products like Google's G Suite and Microsoft's Office 365 integrate Dropbox rather than try to replace it.
"If they can grow those products through a partnership with Dropbox, the users will be happy," Jaluria told Real Money. "They are looking for those core drivers to grow faster and leverage a partnership with companies like Dropbox rather than push their competitive offerings."
Dropbox appears to take competition in stride.
"We don't see these changes (from competitors as) changing the competitive landscape for us," Drew Houston said on the earnings call. "We keep an eye on competition, but we're more focused on our customers and more focused on just improving our core product experience."
Clearly, Dropbox has shown resiliency to competition in the past as it has grown to become a multi-billion-dollar company after completing its IPO earlier this year.
Now is a time for Dropbox management to show the company can evolve into a mature growth company that can successfully expand and compete with the likes of Amazon and Google.
- Martin Cassidy contributed reporting to this story.