Free cloud services: How profitable is the 'freemium' model?

Cloud providers must strike a balance between giving customers the free cloud services they expect while staying profitable.

Many cloud customers -- consumers and business users alike -- have been conditioned by the "if it's free, it's for me" mantra. But some cloud providers are starting to transition away from offering free cloud services that aren't generating any revenue. Providers have to find the middle ground between giving customers the services they expect without giving their core product away.

With so many free cloud storage options to choose from, users have little incentive to become paying customers. Many providers offer enough free memory for consumers to store their data -- which often includes photos and videos – or they offer free cloud storage as part of a freemium service, with the hope that customers will eventually need more storage and will be willing to pay for it. However, customers won't go in that direction as long as some desperate provider offers unlimited storage to attract more users.

"There are too many companies, both on the consumer as well as the business side, that are giving away the store," said Lynda Stadtmueller, program director of cloud computing services for Frost & Sullivan Inc. "It just doesn't make any sense for [a provider] to be handing off a core product or functionality [to] anyone asking, at no charge. Many freemium cloud services are not sustainable."

Can freemium services ever be profitable?

While free cloud storage is a luxury that customers have grown to expect, some providers are recognizing that it doesn't serve their long-term business strategy. SugarSync, a San Mateo, Calif.-based cloud backup and storage provider, started offering free storage packages up to 5 GB in 2010, but recently abandoned its freemium model in favor of paid-only storage services. The company will begin transitioning existing customers to a free, limited-time trial, after which the company will begin charging for its services.

But some providers are seeing success from balancing their paid-only and free cloud services by limiting the amount of storage they offer for free. IDrive, a Calabasas, Calif.-based cloud backup and storage provider for consumers and small business customers, offers up to 5 GB of storage free to customers and unlimited device backup with premium support and value-added services -- such as remote and mobile management capabilities -- for paying customers.

IDrive has been successful with its limited version of freemium services, thanks to its vertical integration with the entire backup service chain, said Raghu Kulkarni, CEO of IDrive. The company owns or leases all of the back-end servers, and it developed all the front-end desktop software involved in its storage and backup services, Kulkarni said. "When a provider can manage everything [itself], economies of scale kick in that allow you to manage your own pricing," he said.

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Another popular method of turning free cloud storage into revenue is offering unlimited free basic storage services, but then charging customers for next-tier or value-added services on top, like security features or increased bandwidth.

While some freemium services may succeed in giving users a taste of a provider's valued-added services, unlimited free storage isn't a viable option for any cloud provider, Kulkarni said. "The unlimited model isn't for the long term," he said. "At the best, it's a market share play, and at the worst, it's just blowing up venture capital money."

Free trials are a comfortable middle ground between giving customers a sample of the product without giving core services away for free, Stadtmueller said. "The free trial is great -- especially for business users -- because it gives the company a chance to kick the tires and figure out what they are going to get in a limited capacity," she said. "It's important for businesses to live with software before they commit to it."

Free cloud services tailored to a specific kind of customer

Many providers offer freemium services to rapidly woo as many customers as possible into their cloud. These providers hope free services will earn them loyalty, which could translate into customers moving more data into the cloud and eventually expanding into paid cloud services and storage options. While this model could work for business customers, it can be even more powerful within the consumer market.

MediaFire -- a Shenandoah, Texas-based file and image hosting provider -- owns its own cloud infrastructure, giving the provider the same price setting advantage over its competition that IDrive has. "The freemium model is a big part of who we are; we offer up to 50 GB of free storage to our users," said Brent Bucci, vice president of MediaFire.

MediaFire caters to a very narrow market, however. Its storage services facilitate sharing between content creators -- like musicians, artists and performers -- and it tries to use its customers as brand ambassadors, Bucci said. "We have musicians that use MediaFire to share and interact with their fans online," he said. "We've made it very easy to use MediaFire to share media on social sites -- like Facebook and Twitter -- which is great for us because we see a lot of third-party conversion that way."

Rather than upsell users on storage, MediaFire includes links to advanced features and tiers of service it can offer paying customers -- such as customizable branding and security logs. "There is a lot of talk about huge amounts of storage, but if [providers] play the commodity storage game, we are all going to lose," he said.

Cloud providers who pander to consumers with free services should assume a large percentage of their customers will never go for an upsell, Stadtmueller said. "Many of these providers will need advertising sales that sustain the business," she said.

Let us know what you think about the story; email: Gina Narcisi, news writer and follow @GeeNarcisi on Twitter.

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