Published: September 10, 2020

Introduction

Content-centric workflows have dominated a large segment of enterprise knowledge work for quite some time, and the emergence of enterprise file-sync and -share products has provided a demonstrable value of the impact cloud services could have on such work. In the early days of the EFSS market, vendors could differentiate on storage tiers and pricing. However, cloud storage and its purported benefits soon became commodified, forcing vendors to create additional layers of value or more clearly connect the dots between EFSS and the other cloud or content services they provide.

These days, EFSS is still the gateway for cloud-based content strategies, and it's often seen as a foundational piece of digital transformation in content, as well. With 25% of organizations either introducing a digital transformation strategy or accelerating an existing one in response to COVID-19, according to our Voice of the Enterprise: Digital Pulse, Coronavirus Flash Survey from June, we expect an increase in conversations around the value of EFSS, how to approach storage pricing and what that pricing means for the strategies of EFSS vendors.

The 451 Take

For many businesses powered by more traditional knowledge work, EFSS is often their first brush with a cloud service. While the original value proposition was to enable new avenues of storage, access and management, changes in infrastructure and work itself have commodified storage and relegated management and access to second tier value streams. Modern content management differentiates itself on the content services, intelligence and integrations it offers on top of the storage, but those modern offerings cannot be accessed and leveraged until we fully understand the nuance of EFSS, the changing nature of its pricing and how its value changes over time. The concept of unlimited storage provides enterprises with reassurance that users can store what they need without spiraling costs. But ultimately, it is features and functionality that differentiate vendors and provide enterprises with greater value.


More Capacity For Less

451 Research's Cloud Price Index has performed two price evaluations of EFSS in the past few years – the first in 2016, with a follow-up a year later. In 2017, we noted that EFSS providers had shifted their tiers to accommodate greater capacity. In 2016, Dropbox's tiers above the 2GB 'freemium' level used to ratchet up to 100GB, 200GB and 500GB; in 2017, the service jumped from the free tier to a flat rate of $8.25 per user per month for any volume up to 1TB. Similarly, Microsoft's OneDrive collapsed its paid-for tiers from 50GB/100GB/200GB to a single tier going up to 1TB. Rather than cutting prices, EFSS providers were giving more capacity for the same price.

Since then, pricing for EFSS has remained largely similar; the big change has been the introduction of 'unlimited' packages. Rather than having a maximum capacity stored, a user could store terabytes of data on their account without needing to pay more than the fixed monthly price. OneDrive users can pay just $10 to access unlimited storage, just 50% more than a plan with a cap of 1TB. Dropbox's unlimited plan is $20 compared with $15 for its 5TB one. Users storing more than 100GB of data must opt-in to the unlimited plan at $15 from $10. The thick dotted line in Figure 1 shows the average price for that capacity of storage. As you can see, the price understandably increases with capacity – past 5TB of capacity, all providers offer unlimited storage. This figure assumes annual contracts and excludes per-user personal accounts and custom deals for large enterprises.

How does such an unlimited plan make financial sense to the service provider? Has storage become so cheap that it is now irrelevant? If we look at the unit cost in Figure 2 below, the potential problem is revealed. If a user is storing 16TB of data, the provider is bringing in a paltry $0.0008 per GB.

Let's assume the raw cost of infrastructure to the EFSS provider is the same as our CPI object storage benchmark price. This is a pretty fair assumption, considering object storage is the basis upon which most EFSS platforms are built. Dropbox used AWS for years, but has now migrated the vast majority of data back to its own premises. Even with a discount and economies of scale, few providers would operate vastly below this cost, especially considering additional costs related to differentiated content management and sharing features. The CPI object storage benchmark is $0.023, nearly 30x the revenue generated by the provider selling that GB of storage at 16TB. If a client is consuming 16TB on an unlimited plan, there is no way the provider can be making money.

So how do these providers make money with these schemes. Of course, the answer is that hardly any user stores such a large amount. To some degree, the 'unlimited' tagline is a sales pitch. Like an all-you-can-eat buffet, the provider makes a bet that most users will consume an amount small enough that the provider will profit. Some consumers will store so much that the provider makes a loss, but as long as this loss is offset by the revenue brought in by the majority of users, the provider can still make money. By taking a hit on the profitability of users with very high usage, the provider gains the perceived value that the user could – if they wished – consume whatever amount they wanted.

Dropbox's 2019 results reveal a GAAP gross margin of 75%, and Box's 2020 Q2 results show a similar figure of 71%. Therefore, if we assume a gross margin of 73% for EFSS services, and we assume the provider's raw cost of storage is $0.023, we can determine that the provider needs to make $0.031 per GB of revenue to make 27% gross margin. Looking at the figure above, the provider makes this revenue per GB at an average consumption of 384GB. Even though customers have unlimited access to storage, most are probably closer to 384GB of storage than anywhere near 'unlimited.'

More Functionality For Less

Why are some users paying for storage they don't necessarily need? Partly because it provides reassurance to the buyer that costs won't spiral out of control. However, the primary reason is that the EFSS and content managers are shifting their business models toward that of an intelligent workspace or workplace, or are differentiating on their platform and the services and integrations they offer. Enterprises are paying for functionality, not just bulk storage.

In the summer of 2019, for example, Dropbox evolved its identity to that of an intelligent team workspace. As a part of that identity as the 'new Dropbox,' the company doesn't even require Dropbox to be used as the back end for its workspace product. Its deepened integrations with both Microsoft and Google over the past couple of years have made this move easier. With this shift, Dropbox is working to position itself as the plane across which content-centric, team-based work is executed. It relies on its extensive partner network of integrations to help support multi-application workflows happening within its platform, helping to eliminate context-switching and the friction associated with multi-application workflows.

Citrix made a similar move in late 2018, beginning its own realization of intelligent workspaces on the back of its Sapho acquisition earlier that year. Citrix differs from Dropbox in that it uses the micro app functionality of Sapho to support these workflows, and it seems to be more targeted at individual workers rather than teams, but the value shift is comparable.

The focus on workflow personalization and customization adds a level of autonomy for knowledge workers, but the way vendors like Citrix and Dropbox help architect multi-app workflows speaks directly to what we're seeing in our field research. In our Voice of the Enterprise: Workforce Productivity & Collaboration, Work Execution Goals & Challenges survey from 2020, we asked respondents to list the biggest obstacles to success they face in terms of the different applications and tools their teams use. The top two responses were the belief that information is siloed in different applications, making it difficult to search, access and use (25%), and the feeling that applications don't integrate with one another (24%). This shift toward intelligent workspaces could be a way to address both of these challenges.

Other vendors, including Box, have differentiated with the platform and services they offer. While Box does offer workflow automation with Box Relay, it has a more security-forward narrative and has made many strides in automation core security processes, like anomaly detection, in its Box Shield offering. Box also has thousands of integrations, but it really excels at securing, optimizing and organizing content.

Outlook

The fact that some of the biggest vendors in cloud content management are beginning to radically shift their value propositions is evidence that the spotlight of the market is shifting away from how a vendor can help a customer store their content. This is further enforced by the commodification of storage, evidenced by the unlimited pricing models we have detailed in this report. The future of content management success for vendors will be driven more by what they can enable a customer to do with their content and how they can remove any level of friction around the organizing, securing or automation of content processes.

Data has gravity. Over time, the amount stored by a user will creep up through multiple versions of files and adding of documents without removing old ones. And inevitably, the average amount stored will also creep up. The question is, will the providers reduce their costs quicker than users increase their storage. If the average rises above 512GB in our crude analysis, then the provider's costs will exceed its revenue. But if the cost of object storage comes down as a result of economies of scale, better compression and automation, then the provider could potentially absorb users' increased usage.
To sustain gross margins over the long term, EFSS providers may need to increase prices or repackage their plans such that users which consume more, pay more. With more differentiated features, this will be easier to justify.
Owen Rogers
Research Director

Owen Rogers is a Research Director of Cloud & Managed Services Transformation at 451 Research, a part of S&P Global Market Intelligence. He also leads the firm's Digital Economics Unit, and is the architect of the Cloud Price Index, 451 Research's benchmark indicator of the costs of public, private and managed clouds. Owen is head of 451 Research's Center of Excellence for Quantum Technologies.

Conner Forrest
Senior Analyst

Conner Forrest is a Senior Research Analyst with the Workforce Productivity & Collaboration team at 451 Research, a part of S&P Global Market Intelligence. His areas of focus are content management, HR tech and corporate performance management.
William Fellows
Founder & Research Vice President

William Fellows is a cofounder of The 451 Group and VP of Research for the Cloud Transformation Channel at 451 Research. The Channel provides a point of intellectual convergence for 451 Research around cloud computing, in much the same way that the industry is converging on cloud from all points. In addition to keeping tabs on players entering the cloud and IT services space with disruptive business models, new technology and innovations in service delivery, William has also created 451 Research's Digital Economics unit.