Standing Out in a Sea of Storage Startups

It isn't easy for online storage companies to break through and cash in. Winners will learn to layer storage with more valuable services

by Om Malik

Online storage companies pop up more frequently than mushrooms after a downpour in Southern France. And like the wild-growing fungus, not all of them are easily digested. Case in point: AOL's Xdrive, which despite corporate backing recently joined the likes of Omnidrive and MediaMax on the proverbial technology garbage heap.

That doesn't dissuade entrepreneurs and their backers from joining the fray. At last check, we counted more than two dozen startups trying to carve out a piece of the online storage pie in the hopes that they'll get enough traction to one day make money. Along with clever and colorful names, each one claims a subtle twist—syncing, access from mobile, or whatever—on what is essentially a commodity offering: storage.

Sure there are some services that are clearly superior (SugarSync, for example) or have nifty features such as automatic syncing (DropBox), but when viewed as a group, it's hard to tell which one is going to emerge as the winner over the long term. When you think about it, the online storage business is no different that selling denim jeans that have different shades of blue, rivets, fits, and flares.

Storage startups similarly distinguish themselves with storage capacity, or features such as the ability to sync automatically or share large files. These days many of them have started to use Amazon's S3 wholesale storage to power their services, which makes the differences in some cases largely cosmetic.

A Moneymaker?

I am constantly asking these startups how, exactly, they plan to make money. I typically get one of two standard answers: by selling ads or charging for additional storage. Nice ideas in theory, but clearly out of sync with reality.

In order to make a decent amount of money off advertising, these startups need to generate hundreds of millions of page views, unlikely unless they allow people to share large files, which can often lead to a legal mess.

The presence of a large number of players with no clear leaders means there is little hope of making money in the online storage business from advertising. It also explains why Xdrive, which is owned by AOL, a division of Time Warner (TWX), is getting out of the business.

How about getting consumers to pay for storage? Even that seems to be an uphill task. I have spoken to a few founders of online storage companies and they've admitted that conversion rates to paying customers are abysmally low. Why? It is the same pesky problem of too many players, which allows you and I to spread our files all over the Internet without spending a dime.