How Dropbox's User Base Helps and Hurts It

Dropbox is coming to the public market, and analysts are taking a close look at the company's metrics. In this segment from Industry Focus: Tech , host Dylan Lewis and Motley Fool contributor Evan Niu dive into the user count and what it means for the company.

Tune in to find out what percentage of Dropbox's massive user base are paying users, and how that compares to competitor Box (NYSE: BOX) ; how Dropbox's freemium model presents both opportunities and challenges for the business long term; how Dropbox's grassroots approach and vision affects its user acquisition; and more.

A full transcript follows the video.

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This video was recorded on March 2, 2018.

Dylan Lewis: You look over at some of the core business metrics for this company, 500 million registered users as of the end of 2017. That's up from 400 million in 2016. We talked about that freemium model, though. A very tiny portion of those registered users are actually paid users.

Evan Niu: Right, just about 2%. I think that also speaks to, like we mentioned, their focus on the consumer side, too. 500 million registered users, only 11 million are paying, which shows you how many free consumers there are. And the real challenge for them, the task going forward, is going to be converting those to paid users. Whereas, if you make a comparison to Box, for example, Box has about 60 million registered users and about 10 million paid users. You can see that their penetration of paid users is much higher. Their paying user base is comparable, but the total user base, Dropbox's is massive, 500 versus 60. But both have about this 10-11 million paying users. Which is a result of this focus on enterprise versus consumer.

Lewis: I guess the difference there is, Dropbox has to support a much larger group of people in order to get to that 11 million. The counterargument there, there's two ways to look at that 2% of registered users are paid users. You can say, one, people get enough for free that they don't feel compelled to move up market. Two, the counter is, Dropbox has a huge monetization opportunity in front of it, just with people who are already existing customers, let alone having to go out and acquire more customers and pay for sales marketing to make that happen.

Niu: Exactly, that's a great point. Dropbox spends very little on sales and marketing because they rely heavily on word-of-mouth, referrals, and this grassroots marketing, versus Box, which has these salesforces of enterprise, trying to really target enterprise. To put some numbers to compare, last year, Box's revenue was much smaller, about $500 million vs. Dropbox's $1.1 billion. Of that total, Box spent about 60% of revenue last year on sales and marketing, which is a huge proportion of your revenue to be spending on sales and marketing. For Dropbox, that number is less than 30%.

Lewis: I think the idea of Dropbox really comes down to grassroots. Everything about them is developmentally grassroots, that's the mission. You think about the freemium model getting people using it, that's part of it. But then, they also have this next phase vision for monetization where you get people in the start-up world, or people that are running their own businesses, using Dropbox for business purposes and then slowly growing their business, needing more storage, needing more support as they add people to it. And they move up the service tiers and wind up paying more. That's really the broader vision for this company.

Niu: They mentioned in their filing that, a lot of times that happens is, you have these individuals who are using Dropbox, either for personal use or for work. In some cases, those are paying users. Then, what they'll do is, if they work at a bigger company, they'll basically pitch at their company. So, they have this bottom-up approach of user acquisition because they have this really large, loyal base of users that really like the service.

Lewis: The company is really, as you might imagine, in creating buzz for their business, and hopefully creating a big market for their stocks, championing this approach and talking about the opportunity that's still in front of them. They say that, of the 500 million registered users they currently have, 300 million of them currently have some characteristic that makes them similar to current paying users. Some of those are device and geography-specific. One of the ones they point to, though, is having signed up using a business email. That's not the entire group, but that's a leading indicator for them, to say, someone at an office is using this. They might be able to evangelize and get other people on it, and it might become the enterprise solution for their office.

Dylan Lewis has no position in any of the stocks mentioned. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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