The Business Case Behind OTT Clouds & Impact on Mobile Operators

Hal Steger : Thinking Out Cloud
Hal Steger
Vice President of Worldwide Marketing at Funambol. 20+ years of marketing & product management experience at high-growth, innovative global software companies.
| This blog is about personal cloud solutions, technology, trends and market developments. Its scope is to comment on and discuss several aspects of personal clouds.

The Business Case Behind OTT Clouds & Impact on Mobile Operators

I recently became a fan of Hamilton, the Broadway musical. From it, I learned that Alexander Hamilton was one of 3 authors of the Federalist Papers, something I vaguely recalled from history class years ago. The musical said three people agreed to write 25 articles about the new U.S. Constitution. One person wrote 6 articles, another 25 articles, and Hamilton wrote 52. As this blog approaches 52 posts (getting close), I feel like this is my personal version of the Federalist Papers, about personal clouds. I am reprising the role of Hamilton and thinking out 'cloud', though I have no intention of dueling anyone anytime soon.

The de facto & prevailing model of personal clouds is freemium i.e. users get some free storage with an option to buy more. This is used by all popular OTT clouds such as Google Drive, Apple iCloud, Dropbox and MS OneDrive. It is easy to believe their business model is to make money from paying users while monetizing free users. A deeper inspection reveals this to be a classic 'loss leader' and trojan horse for other intentions as the true business model is more nuanced.

It can be instructive to understand the real business case behind these services. I recently had the 'pleasure' of helping one of my kids with a college economics class, and it made me think about what was happening, business-wise, in the personal cloud industry. The info presented here is not based on direct knowledge of the inner workings at OTT cloud companies but it is based on extensive knowledge of the personal cloud market and a little economics.

To start, let's dismiss Dropbox and iCloud from critical scrutiny. Unlike other OTT clouds, Dropbox is the purest form of a personal cloud as it does not have other products to subsidize its core. Dropbox must make money from subscriptions. Dropbox now seems more focused on business users, as it is very hard to get consumers to pay for something they view as free. We estimate that Dropbox generates ~$600M in revenue per year, based on assorted comments by Dropbox personnel. We also estimate that Dropbox's costs exceed this. This begs the question of long-term viability. It is not in jeopardy of disappearing but it still needs to figure out how to be profitable and/or it is likely to be acquired.

iCloud is also excused as evidence shows that Apple has done a respectable job of monetizing users. None of these companies report conversion rates but industry reports peg Apple's at ~20%. This is because Apple compels users to pay if they want to upgrade to their latest mobile software and other methods. If 20% of 900M iCloud users pay $25 or more per year, that is ~$800M. This may be off by a few (measly for Apple :) hundred $million but even so, it is unlikely to cover Apple's full iCloud costs. But Apple has done a good job business-wise (not necessarily from their users' perspective) of generating significant cloud revenue, which can be viewed as sort of an upper limit that is gradually growing.

This brings us to Google, which offers the most free cloud storage at 15 Gb that is shared between Drive, Gmail and Photos (and you can store as many photos as you want for free at reduced resolution which is fine for many people). Google is the undisputed low-cost leader and is content to lose money on 'cloud'. How much? Our estimate is less than $1B per year. In exchange, Google provides users with a compelling reason to keep using Google. Google monetizes free users via search ads, their cash cow.

The other benefit, per economics, is economies of scale, as Google invests heavily in cloud computing such that its cost is second to none (or second to Amazon, which does not monetize consumers via cloud storage per se). So Google's real business case is driving traffic for search. The other aspect of scale is building a large global audience for online ads.

Economics says that Google uses predatory pricing to drive (no pun intended) less deep-pocketed providers from the market. Once it has a monopoly, it can derive monopoly benefits which only benefit Google. As a corollary, Apple also has a quasi-monopoly on its user base with iCloud, due to loyal users willing to pay for things that allows Apple to take advantage. But the difference is Apple users willingly pay (more or less), whereas if Google makes it financially infeasible for others to be in the market, this is overt anti-trust behavior.

Microsoft's OneDrive is more of an adjunct to its online Office 365 business than a standalone consumer cloud, despite Microsoft integrating it into Windows. Microsoft is in sort of a no man's land in mobile. In industry analyst jargon, it would be labelled a challenger as it has resources to be much more significant but not until Microsoft overhauls its mobile strategy and products.

What is the upshot for mobile operators? is this just an x-files conspiracy that Dropbox is marginally profitable, Google continues its assault on internet consumers, iCloud remains a niche for Apple users and OneDrive is for Office workers? What is the opportunity for operator clouds in this context and can operators borrow a page from any of these playbooks or economics to their advantage?

This really is a classic case of how to successfully compete against entrenched 800 pound gorillas who have significant advantages and have attained large market stature in a variety of ways (e.g. first mover advantage and leveraging brand recognition with free services for large user bases).

The answer is mobile operators and other companies still have a big opportunity to provide a personal cloud though it must be done with the right vision and good execution. The vision means offering a cloud that differs significantly from OTT clouds, adds major value for users (fortunately, OTT clouds have significant deficiencies that can be exploited) and leverages an organization's unique strengths. Execution is not rocket science but it is not easy. In our experience with 50 operator deployments worldwide, we have seen several compete very successfully with OTT clouds through a vision and execution that differs greatly between markets. This demonstrates that personal cloud opportunity remains high and that a one-size-fits-all cloud approach fails - in economics and strategy speak, differentiation and specialization are key. If you would like to discuss this further, send a note to