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Dropbox is pivoting into an IPO. Will that work?

A few recent events for Dropbox that suggest the company is headed for a difficult transition.

In today’s Wall Street Journal, a team of reporters (Rolfe Winkler, Douglas MacMillan, Telis Demos, and Monica Langley) explore the difficult financial terrain that confronts Dropbox. One of the 124 private companies that have been valued at over $1 billion, Dropbox find itself in increasingly hostile territory, as investors are now starting to believe that many of these unicorns are overvalued. One indication is that many companies are said to be lowering their valuations to raise new money: so-called ‘down rounds’. The general situation might be simply a downdraft that Dropbox finds itself in, a cooling climate for clay-footed investors.

But the more specific issue for Dropbox is the viability of a pure-play file sink-and-share company in a world where the Internet giants are competing for the same customers, and making their largest profits elsewhere. How can Dropbox — and Box, it’s closest competitor — contend with offerings from Apple, Microsoft, Google, and Amazon?

Just over a year ago, I reviewed this sector in a Gigaom Research report (see Sector Roadmap: file sync-and-share platforms), and forecast that the giants were likely to drive the price of file sync-and-share toward zero, and the price compression has continued. I conjectured that a market consolidation was likely to occur in the near term of 18-24 months from the time of publishing. Regarding Dropbox and Box, I wrote

The other vendors that have large customer bases — like Box and Dropbox — will be put into a difficult position, since the majors are treating file sync-and-share as one element of larger strategies. The majors can afford to treat file sync-and-share as a loss leader, and make their money from other parts of their stack.

Despite their huge funding history — which is a proxy for the impact of file sync-and-share on computing, not necessarily a proof of future profits — Dropbox and Box remain best-positioned after consolidation, but in the long may become niche players, or attractive acquisition targets.

The fall in Box’s stock price and the difficulties Dropbox may be having in its push toward a $10 billion IPO are strong indicators of that consolidation.

Note that the nature of file sync-and-share makes it relatively trivial to transition from one vendors offerings to another: you simply drag your folders from one to the other, and a few hours later, you’ve transitioned. So even relatively small reasons to switch can lead to defection.

Dropbox has been aggressively trying to reposition itself as more than file sync-and-share, and to rebrand as a more general productivity solution vendor, specifically with the beta release of Paper, a new coediting application. I haven’t used the app yet, but there is a test document accessible here, for Product Hunt users. Here’s a screen shot, showing the identities of coeditors who have added items in a list and an image to the document canvas:

Screen Shot 2015-10-20 at 7.03.04 AM

(More than anything else, it reminds me of Mammoth, but a fuller review will have to wait until I get access or a full demo.)

It’s clear from recent statements that the company is trying a significant pivot to productivity and away from the financial cul-de-sac that file sync-and-share is becoming. Dropbox might just be suffering bad timing — pivoting at exactly the time that the investment market is getting the jitters — but that one-two punch could lead to a dangerous set of cross tides for the firm.