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Why Google's price cut made the consumer cloud biz a lot cloudier

After Google drastically slashes prices on its cloud storage monthly plans, it's now a matter of time before the other major players react.

Sarah Mitroff/CNET
If there was any question that the cloud storage business is a high stakes game, Google erased all doubt this week. The search giant shook up the consumer cloud world by drastically slashing its paid plans. Fifteen gigabytes of storage are still free, but 100GB are now $1.99 per month, down from $4.99. Even more impressive is the fact that you can get an entire terabyte of space for $9.99 a month, which used to be $49.99.

The move signals a clear, ruthless investment by Google. And when a giant like Google makes a push like that, it reverberates through the entire ecosystem, and the other players have no choice but to react. This isn't the first time Google has made a change that sent other companies jumping. When it began to re-categorize emails in Gmail, at least one firm that depends on the platform noted the change in an SEC filing, under the section "Risk Factors." The comparison isn't directly analogous, but the fairly obvious point remains. Google's stirrings are a big deal.

Calling out Google's price cut announcement as a turning point might seem a little out of place in a market as bustling as consumer cloud storage. (And yes, I'm aware of the absurdity of that last sentence.) The boring business of storing digital bits used to be etched in old guard tech companies like IBM, but has since been remade in the image of youthful upstarts like Box and Dropbox. Both with respective youthful leaders. Related: Dropbox CEO Drew Houston plays guitar in a 90s cover band called Angry Flannel.

But more importantly, both have multi-billion dollar valuations -- Dropbox at $10 billion and Box at $2 billion. And both have ambitions of becoming big public companies. Box is rumored to make its public market debut this year.

To be clear, as the early movers and shakers in the space, Box and Dropbox still have the upper hand in terms of experience. But Google's aggressiveness does underscore how very cutthroat the fight has become. Since Box came along in 2005 and Dropbox in 2007 -- not to mention a host of other competitors like Carbonite, SugarSync and Hightail (rebranded from Yousendit) -- the giant tech incumbents have also launched services of their own. In addition to Google, which launched Drive in 2012, there's Microsoft's OneDrive (formerly Skydrive), and Amazon Cloud Drive. Sure, Google, with its $400 billion valuation, can throw around the weight of its margins to upend the market's pay structure, but at its core, Google's 80 percent price cut for monthly access to a terabyte of space just validates the business models of the smaller companies.

The upstarts were surely prepared for this. At least Aaron Levie, Box's co-founder and chief executive, was. (Here we should point out that while Box's meat and potatoes business is serving the enterprise, it also has consumer options. Inversely, Dropbox has enterprise options.) Levie was not available for comment, but in April 2012, when Google Drive first launched, he wrote:

Ultimately, we concluded that there would be a dramatic race to the bottom for the price of consumer online storage, and it would be impossible to maintain a competitive offering when elephants like Google, Microsoft and Apple could effectively subsidize their offerings. Because of the potential for user lock-in, each of these players had deep incentive to provide consumers with a drive in the sky, and with storage costs dropping precipitously, we saw a future where storage would be infinite and free. That just doesn't make for a great startup business. [Emphasis his.]

In a space that moves as fast as computing, it's probably not a good idea to rest on one's laurels. But if by "laurels" we mean "existing users," then laurels are at least a decent point of stability. Once users have tied their digital lives -- their photos, documents, videos -- to one service or another, it's very difficult to entice them to go astray, said Paul Hughes, an analyst at the research firm IDC, who covers storage services. The peskiness of migration or learning a new interface will be enough of a deterrent for most. "It's not the barrier of entry, it's the barrier to exit," he said. Where things can get interesting, though, is when a user's yearly contract is up for renewal.

From a purely economic standpoint -- price to sheer storage space ratio -- Google's price slash can be potentially devastating. But there are of course personal flourishes that each individual service has that will keep some customers in the pull of their tractor beams. For example, I'm a Microsoft Word user, and I like how, with Dropbox, I can work on an article I'm writing, and sync the doc to all of my devices. Google Drive doesn't seem to have that Microsoft Word functionality, since it's in direct competition with Google Docs.

So then what will those Google-induced reverberations be? It will likely spur the development and improvement of features -- image documenting, photo uploading -- anything that will keep a user comfortable enough to resist being poached. But the more fascinating side effect will be a greater push in marketing from the smaller companies. Because while existing customers can more or less be guided by loyalty, the new ones are more than ever up for grabs. The companies will focus more on highlighting individual features and more specific plans, said IDC's Hughes. "I certainly could see cloud providers starting to do price comparisons online, on their web sites, and via advertising channels," he said. "Over time, cloud based storage will become more and more commoditized, just like traditional telecom services. Once you reach this point, the price war truly escalates."

Dropbox declined to comment on Google's shift in pricing. But for its part, Dropbox on Friday invited press to an April news announcement, touting "a new chapter" for the company. "Join us for a look at what's next for Dropbox," the invite says. Perhaps it's a scrambled response to Google's pricing bombshell. Or perhaps this is an announcement that has been a long time in the making, and the timing is just coincidental. A Dropbox spokesperson denied that the event has anything to do with what competitors are doing.

Either way, if the event lives up to its billing, there are major changes in store at one of the cloud storage market's most prominent companies.