Why one CEO thinks the market Box and Dropbox created will be wiped out in two years

KmL039QhgGEgnyteEgnyte CEO Vineet Jain

Box and Dropbox are the two poster boys of the booming cloud file sharing and storage space. Box is now worth roughly $US2 billion while Dropbox last raised funding at a $US10 billion valuation.

But Vineet Jain, CEO of Egnyte, a competing hybrid cloud storage vendor, believes their services will have a tough time moving forward.

Why?

Because they’re sticking to a cloud-only service. Jain believes cloud-only services won’t be able to survive the onslaught of near-free services offered by bigger cloud vendors like Microsoft, Amazon, and Google.

“Everyone is fighting for the low-end, highly commoditized, low-margin business,” Jain told Business Insider. “When you see Microsoft and Google practically giving [cloud services] away for free, it becomes harder to compete on that end.”

By Jain’s estimate, cloud-only storage will become such a commodity that it will not be a viable standalone business within two years.

Jain may have a point. The cloud industry has long been fighting something called the “race to zero,” where companies continue to drop prices while offering bigger storage limits.

“A cloud-only play can only go so far,” Jain said.

Instead, Jain’s company Egnyte is taking something called a “hybrid” approach, offering both cloud and on-premise services simultaneously. In plain English, Egnyte can store your files both on the web (“cloud”) and in your own data center (“on-premise”), giving customers flexibility and security.

“When you look at a platform, file sharing is just a part of it. There are other business problems that an enterprise needs to solve which a hybrid approach solves,” Jain said.

Jain argues that hybrid services are more secure and faster, and help companies use their storage space more efficiently. That allows Egnyte to target the higher-end enterprise market in more tightly regulated industries like finance and health care — which traditionally have been slow to embrace cloud-only services. On top of that, Egnyte already offers unlimited cloud storage to its customers.

“While the cloud is real, the role of on-premise is not disappearing,” he said, noting that intellectual property and financial material must remain behind a company’s firewall.

Online data storage provider Box Inc. CEO Aaron Levie gives an interview on floor of the New York Stock Exchange, after his company's IPO, in this file photo taken January 23, 2015. REUTERS/Brendan McDermid/FilesThomson ReutersBox CEO Aaron Levie. Box shares have been falling to record-low levels recently.

In fact, this is a point Gartner made in its annual Magic Quadrant Report about Box’s weakness. It said, “Box’s offering is available only in a public cloud model. There is no hybrid model that adds data storage on-premises. The movement or replication of corporate content in Box’s cloud repository is not a viable option for some ITorganisations.”

The comments come as Box’s stock is under pressure, dropping nearly 11% over the past two days. Dropbox’s business solution is also reported to be struggling to reach the higher-end market. Other lesser-known cloud file storage services like Hightail, Syncplicity and Watchdox have all been struggling or sold off to other companies.

Jain says Egnyte has grown at a healthy 80% clip over the past couple years, and is on pace to hit over $US50 million in sales this year. Some of its biggest customers include NASDAQ, Lincoln Financial, and WPP, all deploying it for thousands of seats. All this, while raising “only” raising $US62.5 million, a tiny fraction compared to some of its competitors who’s raised billions of dollars to reach its scale.

“We’re going to be the most capital efficient business in this space,” Jain said.

To be fair, Box and Dropbox are operating at much larger scales than Egnyte, each getting hundreds of millions of dollars in revenue. But Jain believes it’s still early in the game and cloud-only providers will not be able to sustain its growth in the long-term.

“It’s not a popularity game. This is a long game, and we’re barely at half time,” he said.

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