InsightaaS: Discussions of cloud storage often revolve around price and the 'race to the bottom'. Yet research shows that file storage and sharing is IT's most common and in-demand collaboration application - and as this new report from 451 Research shows, this expands the pricing discussion from capacity-only to "a factor of user numbers, storage and compliance, integration points, developer support and add-on frameworks like key management and information governance." As a result, "storage capacity is a shrinking piece of the equation, which bodes well for vendors that hope to maintain prices even as the cost of storage continues to fall" - and for the legions of users who have positioned these services at the core of their information (and business) infrastructure.
The threats of commoditization and consolidation have long loomed over the market for enterprise file sync and share (EFSS). In the past four months, we have seen the acquisitions of two longstanding market players, Syncplicity and Intralinks, and as the costs of storage continue to drop, vendors must further abstract customer valuation of the service from storage capacity to maintain prices. Despite these pressures, the providers that define the EFSS landscape continue to meet with success upmarket as they cater to higher-value workloads. EFSS is coming down in price, but the market is certainly not out of ideas.
The 451 Take
In a commoditized space, the lowest-priced service should translate into the greatest market share, which is certainly not the case in the world of EFSS. But collaboration markets like EFSS are unique in that end users are atypically influential in buying decisions and pricing often comes second to user-friendliness in evaluating software. Two things will ultimately protect EFSS prices from declining in parallel with the price of cloud storage. The first is its appeal to end users. The second is advancing support for higher-value workloads. As EFSS suppliers attempt to move upmarket, add-ons like information rights management, key management and admin features – traditional facets of enterprise content management (ECM) – become key opportunities for monetization and public cloud storage becomes a smaller piece of the equation. Alternatively, premium cloud storage is an opportunity for increasing the perception of value as data-sovereignty and -compliance issues come into play.
Since we last surveyed the FSS segment, two obvious changes have occurred: storage and file size limits have gone up, and prices have fallen. Both of these trends are in keeping with an explosion of data being generated (via streaming and other automated processes) and a steep drop in the cost of underlying storage hardware. Some companies have even dispensed with caps on maximum file size and total storage – the sky's the limit (theoretically).
FSS providers have shifted their tiers to accommodate greater capacity. For example, Dropbox's tiers above the 2GB 'freemium' level used to ratchet up to 100GB, 200GB and 500GB – now the service jumps from the free tier to a flat rate of $8.25 per user/month for any volume up to 1TB. Similarly, Microsoft's OneDrive has collapsed its non-free tiers from 50GB/100GB/200GB to a single tier going up to 1TB.
While this has resulted in the average price rising at low consumption levels (beyond free tiers, the largely consumer-oriented FSS services we surveyed in July 2014 now cost 8% more when storing 100GB or less), the cost for larger volumes has fallen dramatically: by 13% for packages up to 200GB and by 44% for storage up to 500GB. Meanwhile, on-demand public cloud storage is also declining: 451 Research's Public Cloud Price Index shows that the average cost of object storage dropped by 14% during the second half of 2016, after being remarkably steady for a couple of years.
With a GB of storage being equal from platform to platform, you would expect pricing to be inelastic, with greater market share going to the lowest bidder. Despite price competition, however, there are barriers to commoditization of this resource. With file sync and share, packaging makes a big difference: customers are charged by tier (with labels like Personal, Business and Advanced) and pay in advance. Each tier comes with a capacity limit, plus there may be restrictions on individual file sizes or a minimum number of users. This forces customers to choose between buying more storage than they need and paying a higher unit price, or buying too little and having to restrict their usage. Providers make greater margins from users that build in extra headroom to accommodate future data, which helps compensate for smaller margins (or even losses) at the other end of scale – users that are pushing the capacity limit of their existing package.
Cloud storage, on the other hand, is charged on a metered basis by volume, but additional costs are incurred when using the network to access or move the data, making it painless to put data into a cloud storage bucket but potentially expensive to take it out. Object storage is also priced by tier: 'cold' or archival storage is relatively cheap but more expensive to access, while 'hot' or highly available storage is more expensive but cheaper (or even free) to access. As with all things cloud, automation also plays a role here – providers and third-party cost optimizers can in some cases automatically move objects into colder, cheaper tiers based on low usage.
The figure below illustrates what this means in terms of monthly costs at today's prices.
Is storage still key to conversion?
For such an analysis, the inherent differences between the consumer, small business team and enterprise use cases must be acknowledged. In the consumer or single-seat-holder use case, the primary need is personal collaboration – access across devices and cloud backup. These accounts do not offer much upside beyond storage increases, and providers bear the costs of free users that may never upgrade. As noted, however, vendors rationalize these costly consumer tiers as prospecting for more profitable enterprise sales. Few providers today remain wholly dedicated to the consumer community because upside is capped and tied to users' valuation of cloud storage, which has been steadily declining.
In very small business group instances, storage is again a fair metric to monetize as usage of the service increases and penalizing on user count would inhibit viral growth. But once team dependency develops and the primary use case becomes collaborative work, vendors move into pricing tiers defined by seat numbers, feature caps and, ultimately, enterprise-level contracts. The main motive for upgrade becomes corporate control rather than capacity. These pricing models should thus be understood not as a reflection of services consumed, but as a way to encourage viral user growth with the right incentives to migrate customers to higher-value tiers.
EFSS moves upmarket
Importantly, the EFSS narrative has shifted from that of a point solution to supplement deficient corporate tools to a platform service that enables collaborative workloads while increasing corporate control over document assets. There is currently no shortage of services to get content from point A to point B – file sharing can be found in virtually any social tool – so the EFSS community has found opportunity in enabling higher-value document workflows with tracking and access management that helps enterprises feel on top of information flows. And because general collaboration firms have more interest in integrating than building proprietary content services, the market has left a gap for providers specializing in collaborative content management.
Enterprise-level pricing is trickier to pinpoint and compare. We know total cost to be a factor of user numbers, storage and compliance, integration points, developer support and add-on frameworks like key management and information governance. To that end, storage capacity is a shrinking piece of the equation, which bodes well for vendors that hope to maintain prices even as the cost of storage continues to fall.
Conversely, the opportunity for premium storage features strengthens. Demand is on the rise for advanced capabilities like information governance and e-discovery, data migration, data sovereignty, archiving and detailed reporting as enterprises move higher-risk workloads into these cloud applications. This offers real potential for players to differentiate. Dropbox, for instance, continues to invest in proprietary infrastructure with its Magic Pocket initiative, through which it moved 90% of customer data to an in-house distributed storage system. The content management skew also offers opportunity for the development of unique workflow automation and content analytics capabilities. Importantly, prices are still low compared with traditional ECM systems.
It's also worth noting that for two of the listed providers, Microsoft and Google, EFSS and content services are only one piece of a larger productivity suite, and storage is often measured across the entire instance, rather than solely the EFSS application. This workspace-as-a-service approach – a function of productivity, collaboration and management – will continue to grow as a market segment. Thus, we anticipate continued M&A activity from vendors trying to round out larger productivity or data management stories. So far this year we have already seen two EFSS deals: Axway's purchase of Syncplicity and Syncrhonoss' reach for Intralinks.