How can Copy give 10x the space of Dropbox and still make money?

Dropbox

Dropbox is a fantastic product. It lets people keep their stuff synchronized among all their devices, and allows easy sharing and collaboration. In addition, it significantly reduces the pain of losing a laptop (e.g., through theft or disk crash), and through a solid API, it makes a myriad of smartphone applications easier to use. Dropbox is also run by very talented individuals who had to overcome the fact that they have a product that people don’t know they need, until they see it in action, and that it was a late-comer in the very crowded market of cloud storage/ backups.

Copy

Enter Copy, a competitor that appears extremely refined, with Dropbox-fast sync speeds (I’m looking at you Google Drive, Skydrive, Sugarsync, et al.), similar “just works” philosophy, solid support by parent company Barracuda Networks, and very well designed iOS and Android apps.

Copy has raised eyebrows by offering 15Gb free space vs. Dropbox’s 2Gb. If people sign up though a referral link, they get 20Gb when they install the desktop app. This raises the question: how can Copy possibly make money, when they offer x10 the amount of space that Dropbox does?

Moore’s law (again)

Dropbox has had a positive gross margin already since 2010, with its free 2Gb option. With a conversion rate of about 2.5% [1], in mid 2010 Dropbox would spend about 11 cents per month per free user (who used on average only one fifth of her 2Gb), and about $3.18 per month per paying user [2]. Dropbox only needed to charge the paying user $7.5 per month, or about $90 per year to make sure it breaks even with its storage costs. Instead Dropbox managed to charge an average of about $120 per year, across its different plans, for a comfortable gross profit.

Dropbox today is very expensive. It can afford to be expensive because of all the first mover advantages that it enjoys.

What does this mean for a Dropbox competitor today? Well, storage costs have been declining rapidly. Enterprise-grade storage declines at about 26% per year since 2005 [3]. Consumer grade storage costs have been declining even faster (thanks again Amazon for Glacier!), as have bandwidth costs.
This means that a Dropbox competitor, like Copy, can probably break even in 2014 by offering 10Gb for free. With its free 20Gb offer, Copy is instead probably looking to break-even in about 2016. Not being a cash-starved start-up certainly helps…

These calculations also mean something else: Dropbox today is very expensive. It can afford to be expensive because of all the first mover advantages that it enjoys (brand recognition, network effects through shared folders, ubiquitous presence in mobile apps, etc.), but it cannot continue with its tiny 2Gb free plan for much longer…