Telstra, Box and the Web 2.0 bubble

Telstra’s venture capital arm has reportedly pumped $10 million into US-based online storage service Box. The California-based online storage provider might not be as high profile as its rival Dropbox, but just what’s so enticing about the company that it is now worth in excess of $2 billion?

Box will welcome every dollar it can get as it looks forward to global expansion and an eventual public offering. But the $2 billion tag once again poses an important question – just how big can the Web 2.0 bubble get?

Online storage is big business in the age of mobility and the Cloud but with so many billions touted on paper, it’s certainly worth pondering whether this is one colossal bubble waiting to pop or the signpost of a fundamental business transformation.

Valuation is already dividing opinion. Facebook, Twitter, Instagram, and Box all boast astronomical valuations despite having very little to show in the way of profits. That’s pretty much par for the course when it comes to the current tech boom. It’s less about the books and more about the primacy of these companies on the new customer-centric business narrative.

With no profits in sight, a lot of Web 2.0 companies are being valued at a price-to-sales ratio basis, which in Twitter’s case worked out to around 22 times its expected 2014 sales.

In Box’s case, with end of calendar year revenue set to come in at around $100 million, the price-to-sales metric comes in at 20 times revenue. Lofty metrics like these would entice some daring investors to jump on board, but leave most punters looking for the exit.

But what if Web 2.0 isn’t a repeat of Web 1.0? 

Unlike the dot-com bubble of 1997- 2000, the big difference this time is that Web 2.0 business models are far more realised and far better articulated than those of the dot-com era.

The promise of “web-enabled” has now given way to even more alluring prospects of how cloud, mobile and social is redefining businesses across the board.    

For some the frothy stories are leading to frothy valuations, with investors paying more attention to the hype rather than the fundamentals.

However, Box has its believers and Forrester Research’s Tyler Shields says that the real merit for some Web 2.0 companies lies not just in merely capitalising on the prevailing technology trends but actually building the framework that controls their future.

The high multiples and expectation of success, according to Shields, are based on the fact that the likes of Twitter and Box have a high potential to turn into an Internet enabling protocol.

“Box, and some of the other competitors in this space, are well positioned to capitalise on the mobile, cloud, and consumer transformation that is occurring. By providing application programming interfaces (APIs) and software development kits (SDKs) to developers world wide,” Shields says.

“Box is enabling the mobile application ecosystem to be built on top of the Box "protocol". Box is making a play at becoming the de facto business and personal storage cloud for any application looking to store data.”

In the case of Box, the business provides a fundamental element of the overall data storage in the cloud equation, which dictates that the concept of file storage must shift away from the traditional systems to storage as a data object in the cloud. Outfits like Box and Dropbox are the one that enable this transition and Shields says a better metric of success for companies looking to become an internet enabling protocol isn't the price to revenue multiple, “it's the price-to-usage ratio of the API and SDK they provide to others.”

“If this ratio improves dramatically, the company is really beginning to see the lock in network effects that will drive revenue for a very long time.”

Telstra, which will on-sell Box’s offering to its corporate clients, presumably finds that argument compelling enough to invest in the company. And the strategic relationship with Telstra is crucial for Box to cement the transition to cloud narrative in place.   

Box’s CEO and co-founder Aaron Levie, who knocked back a $550 million offer for the company in 2011, says that the combination of the cloud and post-PC devices is “fundamentally changing the IT services” and Box is undoubtedly set to play a role in that process.

It’s latest round of strategic relationship building could be just the ticket Levie needs to ensure that Box is still alive and kicking, if and when the Web 2.0 tech bubble finally bursts.