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How Amazon Has Been a Force Behind Dropbox's Success

NEW YORK (TheStreet) -- Dropbox has been guarded about the details of its business, given it's still a private public. However, when it finally files for its highly-anticipated IPO, the filing may well show finances in tip-top shape.

While the market gawked at the soaring costs detailed in competitor Box's S-1, Dropbox in contrast is expected to exhibit even spending, particularly for the higher-cost items. On a day-to-day basis, this is in no small part thanks to its long-standing relationship with Amazon Web Services' (AMZN - Get Report) for its Amazon S3 storage service. The long-term partnership is believed to have given Dropbox the type of storage pricing structure that enables the company to reign in technical expenses.

The cost of storing files for its 275 million and growing number of customer accounts is believed to be the company's most significant technical cost by far. And as a consumer-focused company, Dropbox experiences especially voracious storage demands. Consumers tend to eat up more file capacity with their photos, music and video storage needs than businesses, who typically require just document storage.

That said, Dropbox has, of course, also been a big beneficiary of AWS' price cuts across the board.

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"Dropbox is clearly one of the biggest AWS users and they've been with them right from the beginning -- they work very, very closely with them," says Alan Pelz-Sharpe, research director for social business at 451 Research. "I'd think that they've got one of the sweetest deals going, frankly."

But sticking with AWS isn't just about having to spend less for more. It's also about having more predictable costs. While some might argue that in the long-run it would be cheaper for Dropbox to build out its own datacenters, such heavy, long-term investments could end up being extremely costly to maintain if the subscriber growth doesn't match up.

With AWS, Dropbox is given the ability to adhere to an extremely flexible model that allows it to buy as the number of subscribers grow, rather than having to pay for extra capacity in advance. Similarly, it can reduce costs instantaneously if there's a retraction in the number of subscribers or in storage needs. "That's a huge advantage when you've got global ambitions but you don't want to bet the farm on everything going right," Pelz-Sharpe commented. In remaining loyal to AWS, Dropbox has reduced the risks of weaker margins associated with the higher maintenance and sales costs that could arise from the build-out of a private or hybrid datacenter model. This is in stark contrast to Box, who has much less use for AWS and tries wherever possible to run its own datacenters.

The company is expected to break down the details of its expense numbers in the S-1 filing. Even if the breakdown turned out to be vague, the stability of its quarterly technical expenses should still be easy to figure out with the assumption that the datacenter costs are the company's largest and by separating out all other expenses.

Pelz-Sharpe believes it's unlikely that Dropbox will have to bow to any pressure of increasing its hybrid cloud exposure as its business grows because such calls have been relatively small. The reality is that the public cloud is often more secure for consumers than on-premise systems, and ultimately, what it boils down to when people do raise concerns about security is whether the cloud firm itself is trustworthy enough with customer files, data and information. In Dropbox's case, there's already trustworthy brand in place.

Dropbox's stable day-to-day costs is expected to be matched with the company's ability to demonstrate long-term growth capabilities without the big sales costs Box is experiencing. That's another quality that is likely to be highlighted in the S-1, as much of that long-term growth is expected to be funded by low-cost financing.

Dropbox has had a smooth time securing cheap funding with its easier-to-understand business model and higher-profile brand. Importantly, unlike most of its competitors, the company has been an anomaly in that it's been able to get the freemium model to work. It's been able to pull off getting millions of consumers to convert to an upgrade and buy more storage and services.

The company's reported procurement of a more than $500 million credit facility recently is expected to see the majority of that being used to expand Dropbox's international footprint and ramp up significant acquisitions. That would add to the 11 acquisitions that it's already made since 2007, a high number for a startup. A portion of what's leftover would likely be put aside for extra AWS storage capacity.

"Dropbox, you've got to believe, you've got to expect that their numbers are going to look a lot stronger," says Pelz-Sharpe. "They don't have that cost of sale, they don't have that infrastructure impact -- and they're much bigger than Box, frankly so. I think if Dropbox came out with similar ratios to Box, that would be a shock. That would be a horror show. I mean Dropbox -- I get it that they're building a company, they've got acquisitions to make, they're bringing on people -- but Dropbox should be much closer to profitability."

On Wednesday, Dropbox CEO Drew Houston and his team announced a suite of new products that the company says "will set customers free from the pain and clutter of technology so you can do more with your life."

The announcements included "Carousel," a gallery for photos and videos that combines the photos in a customer's Dropbox with the photos on their phone, and automatically backs up new ones as they're taken. There was also the unveiling for the new Dropbox for Business, which is being made available to all customers. The product was rebuilt to give users one Dropbox for personal items and another for work items, both of which would be easily accessible from any device.

The third was the introduction of Mailbox for Android after thousands of requests for an Android app. The company also unrolled a private beta of Mailbox for Mac, the desktop companion to the mobile inbox.

-- Written by Andrea Tse in New York

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