With IPO Hopes Fading, Square and Box Face Reality Of Commodity Products
techcrunch.com
techcrunch.com
Iron law "might be"?
I don't think I'd ever invest in Box, but I see Square much differently. I think the author arbitrarily pooled them into the same category, and then stumbled over his own argument throughout the article.
Square is in a market where once you have a customer, you have the customer. There's not really a reason to switch your payment processor unless your experience with them is particularly terrible, or processing fees dramatically change in the market (not likely at all). They're building a solid revenue stream, and their numbers back it up. Unlike Box, they're hovering around profitability, not hemorrhaging money. They certainly have some stiff competition, mainly Paypal, entering the market, but Square is offering a more comprehensive experience for business owners, not to mention a much smoother product. I can't tell you how many times I've seen a whole line of customers stumble over how to complete a transaction on Paypal's offering.
Oh by the way, Square's market is limited. The USA still uses primarily the unsafe magnetic stripe for payments, and even Canada is phasing out its use (in Interac at least)
http://www.forbes.com/sites/tomgroenfeldt/2014/01/28/america...
So I bet you'll see very quick adoption, within a couple of years max.
If Square can't even meaningfully make inroads into Canada, I highly doubt they will be able to make inroads into anywhere else. But, we'll see...
Although to be fair it does end on a non-fatalist note that leadership may be able to tweak the business into something less grandiose and more oriented towards grinding out a profit on a better-than-average commodity product.
Portable chip based card readers have been around longer than Square. Hell, I remember using them (pre-chip of course) since around 2000ish. And today they are just ubiquitous. They are straightforward and user-friendly for the user and today the Banks almost give them aways with your merchant account. I'm still trying to understand what problem Square is trying to solve -- other than wanting to use your iPhone for everything. I just don't see a viable business with them.
What you have is an imprint machine, where the merchant sticks your card over a paper with a carbon copy, slides over the top to make an imprint, then hands the piece of paper back to you for signature, then rips out the top page for himself while handing you the carbon copy one.
As you can imagine, this does not go well in food truck environment, where the mode of operation at crunch time might be "process as many customers per minute as you can".
Square has to compete on precisely three factors - First, and by far most importantly, cost. Next, ease of signing up, and third, Ease of use.
Any company that comes up with a cheaper system will almost instantly start winning away square consumers. That, to me, pretty much defines, "commodity"
The price is pretty efficient in this industry, what's really inefficient is the experience for both the businesses and consumers.
Another thing that makes me think "Commodity."
And the square "dongle" is anything but a good experience. I travel a lot, and I dread every time I return to the Bay Area and have to deal with Taxi Drivers and their attempts at getting credit cards to swipe on the dongle - about 5-10% of the time we just have to enter the numbers in, paying usually takes 30-40 seconds all in, and I don't get a paper receipt which adds another hassle when doing expense reports.
Compare to Singapore where my transaction time with comfort cabs is <5 seconds and I get a decent receipt. (Of course, I also end up paying 10% admin fee for using a credit card, so I pay for that convenience)
Part of this is skill - swiping the card through the square dongle takes a lot of skill - I note when I pay at a food truck (100% square in Redwood City) - they seem to be able to do the transaction in about 10 seconds.
Price gouging is when you use a monopolisitic position to charge an unreasonably high amount.
1) Cost. They entered the market at an extremely high price point. Actual interchange rates on swiped cards are 0.05% (for most debit/check cards used as credit, since 2010) to 2%. Square charges 2.75%. Any business that currently takes Square can add 1-2% to its margins by talking to the nearest bank about a merchant account, which they've likely offered since the 1970s.
Now, merchant accounts typically come with some other costs ($20/mo or so in fixed fees, different rates per type of card accepted, more expensive terminals/hardware, etc). But if you're not a food truck or flea market vendor, your processing volume will cover those cost in no time, which is why you don't see Square outside boutique stores.
2) Ease of use. Square's dongles and apps are much more difficult to use than a dedicated card terminal. The customer doesn't get to swipe their own card, the store doesn't get to accept debit at all (which would be MUCH cheaper for them), and they're really finicky to actually get a good swipe on. Their POS software is a toy version of real POS software; it's got maybe 10% of what you need to run a retail outlet, which is why its use is limited to vendors with a catalog that fits on one or two screens and who move little enough product to do their inventory and accounting with an Excel spreadsheet.
3) Ease of signing up. This is the only place Square actually competes (and wins with a certain audience). You pick up a free dongle, install a free app, and you're in business. If you'd like to add 1-2% to your store's margins, you take 3-5 business days to fill out an application and credit check for a merchant account, wait for approval from an underwriting department, then buy POS software and a card terminal. It costs a little more up front, it takes longer, and it's intimidating. That's where Square shines.
Just FYI: https://squareup.com/stand
What in the world is the big deal with handing cards over anyways?
Since a lot of my small-purchase/walk-in shopping is done when I'm walking around a densely-populated area, I've found myself shying away from places that advertise "Pay with Square" or that have an iPad for a terminal. If there's something equivalent nearby, I'll just go there, especially if that store has a PIN pad.
I much prefer LevelUp's system with QR codes than Square's. Everytime I'm at a food truck my card would be swiped about 10+ times before it would go through. Totally agree about the stylus signing, no one reads the signiture anyways unless it's a fraud claim, nevermind that stylus signitures barely resembles an actual signiture (look at driver's license sig).
Transaction fees: These rates are getting pretty bad for credit cards. My parents still uses BoA terminals as a POS/processing and CC rates for AMEX was at 4%+ and about 3.5% for VISA about a year ago.
Edit: Like to point out that I actually checked signitures on back of cards and id'd people. Most people were surprised, but actually extremely happy that I did.
The food truck by our company does about $500/day, or about $10,000/month. There has to be reasons other than the $20/mo that has encouraged them to go with Square instead of a merchant terminal.
I'm wondering if the 2% you are quoting is available to all businesses - sounds like the merchant check might be a bit more challenging for taxis/food trucks.
Totally agree with you on the Ease of Use - Square is vulnerable there. I'm surprised nobody has licensed Apple's lightning connector to connect to a more robust card terminal yet.
If you're ringing up $20+ sales most of the day, Square is much more expensive, especially for debit cards (whether swiped or PIN-authed, which Square doesn't do). Debit is by far the most popular form of in-store payment in the US, used more than twice as often as either credit or cash [1].
A few example fees using my quoted rate above --
For a swiped Visa debit card (interchange is 0.05% + $0.21):
$5: $0.32 (traditional) vs $0.14 (Square)
$20: $0.33 (traditional) vs $0.55 (Square)
$50: $0.36 (traditional) vs $1.38 (Square)
$100: $0.40 (traditional) vs $2.75 (Square)
$5: $0.21 (traditional) vs $0.14 (Square)
$20: $0.40 (traditional) vs $0.55 (Square)
$50: $0.78 (traditional) vs $1.38 (Square)
$100: $1.41 (traditional) vs $2.75 (Square)
1: https://www.firstdata.com/en_us/insights/payments-101-white-...
I'm not a payment industry insider, but I made my best effort to be accurate based on my own experience with several merchant account providers and with Square.
Those were per-transaction cost comparisons using the actual rate my CC processor charges (as I said). That's interchange plus 0.04% plus $0.10, not interchange rates without markup. "Interchange plus" pricing has seemingly become pretty common the past few years, at least in what's advertised to new businesses, and now there's a couple of ISO/MSPs offering interchange plus $0.10 flat to small businesses out there, which would be even less than those costs I quoted.
That "boutique retail" store a relative of mine opened that I mentioned in another comment -- the first MSP to walk through the door to try to sell him credit card processing offered interchange-plus pricing. None of the constantly-shifting "downgrade tiers" stuff anymore. It makes cost comparisons like this possible for once.
There's still some BS costs like "statement fees" and "daily batch fees" with some companies, but that kind of thing gets overshadowed by the per-transaction savings pretty fast. If I'm overlooking something else, I'd love to know, I don't want to be giving bad advice.
> And I suspect the debit card stats are skewed by things like groceries and gas which aren't good proxies for independent retail
The study those stats came from breaks it out by merchant category. Cards were the preferred payment method at all types of retail stores they listed (grocery, department store, drug store, discount/warehouse, etc). Cash was preferred only at fast food restaurants, coffee shops and theaters. Debit was the preference over credit at all but department stores.
Relevant:
Square started off tacking 1% on top of what most stores paid for most transactions. Then processing fees dramatically changed in the market, in 2010, when the "Dodd-Frank Wall Street Reform and Consumer Protection Act" and the "Durbin Amendment" to said act were passed. This capped interchange rates, and interchange on most debit cards when swiped as credit (the way Square works) dropped to 0.05% + $0.21 per transaction.
The free debit/check card you get from your bank is the daily spender card for millions, making Square's fee on a large portion of transactions almost 100% markup at this point. Even among the "dongles for phones with apps" offerings, they're the most expensive. Intuit's dongle is 1% cheaper -- 1.75% -- if you pay $12.95 a month. EMS, which doesn't have name recognition with hackers but has been around for decades, offers a dongle with 2.25% flat rate.
My anecdotal evidence speaks against Intuit's GoPayment. Every. Single. Transaction I tried with Intuit's dongle on day one was classified as fraud and required sending a fax to someone at Intuit with things such as "copy of invoice", "copy of business agreement between two parties", and "copy of physical credit card imprint" (mind you, for a digital dongle). I'm sure most of merchants who have a need for dongle are excited to maintain such extensive documentation per each transaction, but the Intuit dongle is collecting dust for now, even though I'm probably counted as an active user on their platform, as my account is not killed and is active.
Upmarket where the real volume is, it is very hard to convince medium-sized businesses to pay a premium processing rate just to get a slightly enhanced POS, which itself has huge switching costs. For example we now know that the Starbucks deal turned out to be a loss for Square, a discounted fee probably justified as a marketing expense to get mindshare. Starbucks didn't value Square's product enough to actually pay a premium rate.
This is why I think the article is essentially spot-on in calling it a commodity product. Square is often compared to Apple, but Apple successfully decommodifies products through actual fundamental innovation (phones, MP3 players, PCs). They make stuff people actually want to pay premiums for. Square did innovate a cheap card reader, but beyond that it's mostly been beautiful design and attractive but unprofitable terms for the individual and micro business market.
Square Cash for example is pretty simple but it must be a money loser, since they charge no fee it costs at least 21 cents to do a debit transaction. Would it be as compelling if they charged 50 cents to send money? Beautiful design and all, probably not.
The moral to the story is that IPO-aspiring companies need to make products people actually want to pay premiums for, not just cool executions of commodity offerings that don't move the needle much in terms of actual utility.
Disagree 100%. Apple's products are inherently commodities, and their innovations are decidedly only in the PR and marketing spheres. From a technical perspective nothing they do is particularly innovative.
Apple did not invent the mp3 player. Apple built their "seminal" GUI only after Xerox PARC showed them how. Thinkpads have had fingerprint scanners since 2004. Et cetera, et cetera, et cetera.
Apple doesn't innovate so much as take someone else's idea and give it a slick marketing campaign and some anodized aluminum casing.
>They make stuff people actually want to pay premiums for.
This part I agree with. But it's because of the slick marketing, not due to some kind of next-level technical wizardry.
Could not disagree more. While it might look like that on paper if you decompose an Apple product to its parts, there is clear value they are adding as the system integrator. There were very capable Windows Mobile PDAs before the iPhone, and the sensors used existed too, but the particular combination that provided the marvelous user experience never existed before. That is innovation.
The McKinsey article linked to "Grow fast or die" in the Techcrunch article is well worth reading:
http://www.mckinsey.com/insights/high_tech_telecoms_internet...
It's not true. Remember apple maps fiasco? Or antennagate?
Not to deny that their cultural position as status symbols is also a big factor, but it is an objective fact that many people actually have better experiences, and not by accident or because it's easy to make that experience work, but due to deliberate hard work by Apple that many competitors have tried and failed to supplant.
It doesn't really matter how you make your product not-a-commodity. The market repeatedly shows that it doesn't treat Apple product as commodities, therefore they are not commodities, and they can have very different business fundamentals than, say, Dell or HTC.
And it doesn't matter if the escape of commoditization was achieved by R&D, PR, divine intervention or whatever else; There are many possible ways of differentiating your products; and the market behavior for commodity and non-commodity goods/services is objectively different no matter why your product is/isn't a commodity.
From wiki: >In economics, a commodity is a marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services.
Are you suggesting that Apple products are not marketable items, thereby being goods? Or that their cloud products are not services?
Are you suggesting that a Luis Vuitton handbag is not a marketable item produced to satisfy consumer wants?
"The exact definition of the term commodity is specifically used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market."
"marketable item produced to satisfy wants or needs" is a neccessary but not sufficient condition for being called a commodity.
Commodities is a subset of all goods / marketable items - those that have high fungibility and low differentiation. It's not a binary classification, but on "commodity <> not-commodity" scale Luis Vuitton/Gucci/Prada stuff is near the extreme not-commodity end.
Actually, the same wikipedia explains it quite well in the sentences after that first line.
I thought you got unfairly slammed for your Apple comments, but you're really pursuing a barren ground here.
iPod was lightyears away of any other MP3 player in the market that time (in capacity, battery and UI)
iPhone pretty much invented the concept of smartphone and apps. The apps themselves were so breakthrough innovation that Microsoft changed "Windows" to acommodate it. Do you understand how big is Windows and how big of a change is to try to include apps on Windows 8?
iPad was such a new concept that almost no one understood it when they launched. People couldn't even imagine how to use it before it came to life and now tablets are everywhere.
C'mon, I ain't no apple fanboy, and I really do believe Steve Jobs is overrated individually, but Apple as company is innovative as one can be. Or are you going to use the same argument against Elon Musk because he didn't "invent" space flight or electric cars?
Are you making educated guesses or do you actually know that fraud costs Stripe money?
EDIT - Yep, sorry, Square. I'm just in the middle of integrating with Stripe, so it just slipped.
With very easy signup with minimal due diligence, plus next day payout, it's an attractive target for fraudulent sellers. Even with relatively honest but low volume sellers, chargebacks may be hard to collect once the money's paid out, so Square is left holding the bag. With a gross margin of barely more than half a percent of the transaction amount, one bad merchant can erase the revenue from a great many good ones.
Stripe and PayPal face similar issues in the ecommerce world, and you can see how annoying PayPal has had to become to tighten up their fraud controls (lots of bad experiences with funds getting frozen).
[1] http://online.wsj.com/news/articles/SB1000142405270230382560...
My biggest problem with Square is that they have tied payments to point-of-sale. You can't use Square, the payments product, with another POS system, and you can't use Square Register with another payments product. This kind of closed ecosystem neither serves the customer nor moves the industry forward.
A major reason we are prominently shown the amount of the purchase, or handed a ticket to sign is so that we can verify we are being charged the right amount and not being ripped off by a minimum wage (or less) employee. It seems using Square gets away from this.
All in all it makes me more likely to read the next techcrunch article (and some of Danny Crichton back material.)
1. Employees share files via email. 2. Employees start sharing files via Dropbox. 3. Management pitched Box by salesperson. Signs contract. 4. Employees told to use Box instead of Dropbox. Dropbox blocked. 5. Employees share files via email.
Owner have sold almost all his shares just to keep the company alive - I wouldn't be surprised if IPO would see some heavy drop in value as no investor well in the tech market will invest in this bubble.
If Box will miss IPO they will run out of money in what - 1-2 years? And what's then? They will shut their sales and really poor marketing department? Do you see where this is going?
"While its profit margins have never been made public, it’s generally believed that the company is near break even or slightly unprofitable"
That is entirely conjecture - and this is journalism???
Then it frames the narrative with negative leading:
"These high expenses and low revenues lead to obviously high burn rates. Square is believed to have lost more than $100 million in 2013"
But... the whole point of raising funding is to spend it. If you didn't need the capital for plans to grow rapidly, you shouldn't have raised capital in the first place.
When hard facts are not around to be had, reporting the general consensus seems acceptable to me.
You may have been thinking of investigative journalism?
One example: "it's believed that the losses number in the billions", you should say instead, "it is uncertain what squares operating metrics are currently, or have been in the past."
Only report what you know to be facts, the rest, "conjecture", have someone more qualified than you make those conjectures. Maybe interview someone who works at square who is familiar with these things? Then, slightly, you as the writer will have distanced your own feelings about the subject by relying on someone else, who is hopefully in a better position to answer these questions.
My thoughts are basically, as an outsider I don't know the things that are "not fact but pretty much accepted as true". So it is valuable to me to learn about those things in an article.
There are so many questions for me about how their business will work under EMV and it could be that their growth gets curtailed dramatically, meaning that people who bought in before Oct 2015 would be left holding the bag.
The Square's new products are actually designed to increase customers engagement with the company products and increase the price of switching to a competitor. The payments itself is not sticky but the more advanced products (e.g. online stores) are. The broad range of the products Square is trying right now just shows that the company is searching for the new up-scale market with vendor lock-in where Square can capitalize on the existing customers without risking losing their business. From my point of view, it might be hard for them (they already have a big customers base) and a little too late. Square might have become the victim of its own success where hyper-growth in the last few years didn't allow the management to start this process earlier.
Could the same be said about dropbox and its recent moves?
We ended up IPOing later in 2011 when the markets stabilized somewhat, and the company is now valued at $2BB.
This will come to pass.
Did I miss where someone was arguing that Square or Box would become the next $200 billion company? I don't recall ever once seeing that argument made.
So what was the point of this article holding up those straw examples, and then referring to the business dynamics that MSFT / GOOG / FB enjoy?
For every Google, there are hundreds of small to mid size, successful technology companies.
Square doesn't need a monopoly to build a great $10 or $20 billion business in payments, and there's nothing wrong with achieving that scale vs. becoming a juggernaut like the before mentioned.
The platform strategy makes a lot of sense, because that's how you can turn weak product inertia like they have now into strong product inertia: once you have a big ecosystem spring up around your product, you have Microsoft-level staying power. I don't know how realistic that outcome actually is for Box in particular, though.
It's easy to see why having your entire company using the same service is useful. But it's hard to see why "having more users" makes Box a better experience for its other users. Is Box better at a 5000 person company than a 10 person company? Or when 1000 companies use it vs. 10 companies? If not, it's not benefiting from network effects.
A company with 5000 Box users is a single paying customer with zero network effect. It would be a network effect if there was some significant benefit for other companies (other potential customers) to start using Box (and not something else) in order to cooperate, but I'm not seeing that much.
Box is probably similar. It is hard to compete against the big guys.
Square Wallet has been around for years. Aside from the nitpick, is it a bad idea for a company to diversify its revenue streams?
Would this article have faulted Square for having 99% of its revenue in its POS offerings?
I don't mean that they're building commodity products, although that's also true. I mean that the VCs, with this Disney-fied entrepreneurship culture they've created, have managed to commoditize business formation itself. It's built out of commodity ideas, commodity people, commodity founders. It provides disappointing but reliably mediocre returns to investors, and it's great for the VC's career.
For people who got into the game because they actually wanted to build technology, however, it really sucks.