Box Delayed Its IPO To Refocus Strategy, But It Still Lacks A Competitive Moat

By | February 5, 2015

Almost a year after first filing the paperwork, Box IPO’d to much investor interest, up 70% on the first day of trading. The intervening weeks haven’t been so kind as Box now trades off almost 30% from its high that day even as the tech-heavy NASDAQ Composite index is flat. As I wrote in this column, Box’s saga from cash-burning cloud startup to wildly successful IPO has been well chronicled, but the initial reception on Wall Street is actually a testament to savvy leadership, which used the unusually long interregnum between filing and actual IPO, one funded by a much-needed interim round of private funding, to sharpen the company’s mission. The resulting message: Box is more than just another cloud file sharing site.

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Box’s leadership, notably founder and CEO Aaron Levie, were fighting an understandable inclination to lump Box in as just another consumer cloud sync-and-share service. Its appellative similarity to the most popular consumer service, Dropbox, and Box’s embrace of the freemium pricing model made it easy to conflate the two. Even for those of us that have been using cloud storage since day one find it a natural association given that Box, which actually predates Dropbox, initially sold itself as a convenient way for individuals to access files from anywhere on any system. But Box’s pivot from “store” to “manage” is key to its strategy of becoming a premier enterprise content management platform. 

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Box’s enterprise strategy was succinctly articulated by  CEO Aaron Levie moments after the firm’s opening trade on the NYSE:

“The thing that’s largely misunderstood about our business is that we’re not in the consumer space. Box helps manage corporate data and corporate information for the world’s largest companies.”

He then pivots to position Box as a cornerstone service facilitating the move of enterprise IT from in-house, on-premise software to cloud-based services.

“We are participating in a one-in-a-lifetime transition from on-premise computing to cloud computing. That’s a world in which you would invest in storage infrastructure, content management software, search appliances, security technology — all of that in your own data center — and what we do at Box is take all of that technology, put that in our data center and deliver it as a service.”

About Us - Reinventing How the World Uses Business Content - Box.clipular

It’s impossible to argue with Levie’s characterization of the disruptive change resulting from cloud computing. Indeed, as I recently argued, it’s a significant force behind the financial decline at old-line tech firms like IBM and HP. Box’s problem is that it’s service is indistinguishable from many existing SaaS content management systems and far less integrated with the most popular content generation platform, Microsoft Office, than Microsoft’s own cloud offering, Office 365, which includes access to Microsoft’s suite of collaboration software, SharePoint Online, Exchange Online and Lync Online. Indeed, as I pointed out in an earlier column, Box’s own S-1 filing outlines its lack of a competitive moat [emphasis added]Form S-1.clipular (4)

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for cloud-based Enterprise Content Collaboration services is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry for certain applications and services. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do. Our competitors include Citrix, Dropbox, EMC, Google, and Microsoft. With the introduction of new technologies and market entrants, we expect competition to continue to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures on our business. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, lower margins, losses or the failure of our services to achieve or maintain widespread market acceptance, any of which could harm our business.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products or services. In addition, many of our competitors have established marketing relationships and major distribution agreements with channel partners, consultants, system integrators and resellers. Moreover, many software vendors could bundle products or offer them at lower prices as part of a broader product sale or enterprise license arrangement. Some competitors may offer products or services that address one or a number of business execution functions at lower prices or with greater depth than our services. As a result, our competitors may be able to respond more quickly and effectively to new or changing opportunities, technologies, standards or customer requirements. Furthermore, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

I continue to argue that cloud storage and file sharing isn’t a product, it’s a feature. Whether it’s Microsoft’s Office 365, reinvigorated by native iOS apps, Salesforce document management app plugins, or cloud-first productivity suites like Google Apps, Zoho or Quip, online content storage and sharing is now a baseline feature. As I point out in my Forbes column, although Box clearly has features enterprise customers value in a bolt-on file sharing product, what is its value when productivity and collaboration products companies already use, notably Office and SharePoint, but also cloud-native suites like Jive, Slack, Yammer (also owned by Microsoft) and Salesforce Chatter provide similar document sharing and workflow? Why pay Box $15 a month for content management when Microsoft gives you an entire productivity suite plus email and video conferencing for less?

I like Box, although I rarely use it anymore for exactly the reasons cited above: it’s redundant. Levie is certainly correct in his diagnosis of the fundamental shift in application deployment and usage to a utility-based model, however Box has no unique advantages and many shortcomings (like lack of native application support) versus competing services. I continue to believe that it’s viability as an independent company is dubious, however its cloud-savvy developers and IP would have value for another, more vertically integrated company. With a current valuation of about $2 billion, Box would be pocket change for a company like Apple or Google and even digestible by smaller SaaS pure-plays like Salesforce. Box remains an interesting company to watch in the cloud software market, but despite the IPO, I believe Box is still an acquisition target.