How Square is Building a Two-Market Platform One Market at a Time

The innovation in mobile is really getting exciting, especially as it relates to advertising and payments.  My last post touched on this but I wanted to dig a little deeper.  The experience of paying for things now, particularly face-to-face transactions, leaves a lot to be desired.  When I frequent a local business, I’d like them to know that I’m a repeat customer and to know what I’ve bought in the past.  Local businesses would love to know this stuff, too, so that they could reward loyal customers with targeted offers and provide more personalized service (“How’d you like Factotum?  You might also want to check out Oracle Night if you haven’t read it.”).  There are social opportunities for local businesses as well.  For example, I might want to recommend purchases I’ve made to friends and family members a la Blippy (but perhaps in a more private way).  There is a lot that can be done to make payments more accessible, useful, and rewarding, and I think we’re going to see a lot of innovation targeting these features.

The incumbents in the payment market have historically focused on the transactions themselves: how to process them faster, make them more secure, and convenient.  The incumbents include the card issuers, acquirers, credit card associations (Visa, MasterCard, etc.), POS manufacturers, companies such as PayPal, and related service providers.  Beyond the services offered by companies such as Catalina Marketing, there hasn’t been a lot of innovation around the purchase experience or the data that is generated during the transaction (location, item-level purchase data, an individual’s purchase history, etc.).  And while there has been progress in improving card issuers’ “online billing” sites, those sites are still terrible at presenting information and making that information useful.

It’s conventional wisdom that PayPal is best positioned to lead the next cycle of innovation in payments but I’m skeptical of this.  Following its acquisition by eBay, PayPal’s culture of innovation was subsumed by the far more measured innovation ethic at eBay.  At PlaceVine we are users of PayPal’s APIs – including the recurring billing features – and the experience has been exasperating at best.  Other developers I have spoken with have found the APIs similarly frustrating.  While PayPal has the huge benefit of a large installed base of customers and recently announced its new global payments platform, PayPal X (“X” was also the name of Elon Musk’s payments company which merged with Peter Thiel’s Confinity (PayPal was its flagship brand) to become PayPal), there is opportunity for upstarts with fresh approaches unburdened by legacy platforms and business models.

It is notoriously difficult for payment platforms to achieve ubiquity (how many other PayPal’s do you know of?) but one company is taking an interesting approach to payments: Square.  While Square – the payments company launched by twitter-creator Jack Dorsey – has received a lot of recent buzz, it’s not all hype.  Square enables anyone with an iPhone, iPod Touch, or Blackberry to accept credit card payments via a dongle that plugs into the device’s headphone jack.  The service also bundles in a merchant account that doesn’t require monthly fees (Square’s initial plan will be to make money on transaction fees).

I imagine the dongle will only be one of many ways Square will accept payments (here is a demo of Square running on Apple’s new Linea Pro iPod Touch POS from Infinite Peripherals), but the strategy to focus first on accepting credit cards is a smart one.  The company is making a number of solid strategic moves.

How Square is Building a Two-Market Platform, One Market at a Time
Leveraging the Installed Base of Cardholders
The credit card business is a two-market platform (aka two-sided market) as it requires cardholders (to buy things) and merchants (to accept holders’ payments).  PlaceVine is another example of a two-market platform as it requires both content producers and marketers in order for the platform to create value.  Diners Club was the first charge card company and they started off by mailing a thousand or so cards to affluent New Yorkers while convincing a group of restaurants to accept them.  Simultaneously building a two-market platform is a classic chicken-and-egg problem and it takes brute force and (usually) a lot of capital to get both markets onto the platform.

Square wants to “design” the purchase process and we can assume they would like for people to eventually pay with Square (instead of paying with Amex, MC, etc.).  But it’s too expensive (and slow) for them to try and acquire  payers directly (as Diner’s Club did with cardholders).  So, instead they are focusing on under-served merchants (which will also be expensive to acquire, but less so) and leveraging the enormous installed base of credit cards in the hands of payers.  In other words, Square doesn’t need to build the payer side of the platform in order for Square to be useful.  Payers can buy from Square merchants using credit cards at first and Square can roll out a service for payers later on.  Assuming that Square can gain traction among merchants, Square can begin to short-circuit the major costs and challenges of simultaneously building a two-market platform.  How will they do this?  Receipts!

Receipts Will Help Drive Square Adoption Among Payers
As Dorsey mentioned, receipts offer a huge opportunity for innovation.  Currently, receipts are just little pieces of paper without a whole lot of use.  However, when a payer buys something from a Square merchant, the payer can have the receipt emailed to her.  This feedback loop is critical because the receipt is a perfect touch point to expose the customer to what can be done with this data via Square.  The greater the number of Square merchants, the more receipts, the more services that will be built on top of this data, and thus the more frequently customers will be exposed to Square (this process will take years to gain critical mass, but it’s important).  If customers come to value the payment process provided by Square merchants, payer demand could be a positive factor in helping accelerate adoption among merchants.  The next step will then be to design payment capabilities for the payers (the other “market” in the two-market platform) so that they can ditch their credit cards and begin using Square to buy things.

Removing Friction Points to Gain Merchant Acceptance
So, Square is removing as many friction points as possible in order to build this two-market payment platform.  Leveraging the installed base of credit cards is one move.  The other is providing “free” merchant accounts and dongles to a category of merchants that have been under-served by incumbent technology and service providers.  By making it inexpensive (assuming the transaction-based fee structure is competitive) and easy for merchants to use Square, the company can focus on gaining traction from traditionally under-served merchants without rocking the boats of competitors focused on high-end POS deployments.

Focusing on Design, Social, and Open Systems
Creating a robust and ubiquitous payment utility is an enormous challenge, but Square is being built by a team that understands the benefits of simplicity, the social graph, and open systems.  The incumbents do not have this in their DNA.  Square is a classic disruptive technology but is unique in that it: 1) satisfies a need in the market that older POS technology could not fulfill (at least at Square’s launch; now there are competitors); and 2) as a software utility with (future) open APIs, it has the potential to move upmarket and take share from incumbent POS providers (ie those focused on major retailers) that may have initially discounted Square for its downmarket focus (again, the Apple Linea Pro/Square demo is a good example of where this could go).  #2 is especially powerful because developers will be looking to build on the most flexible and open platform.  When Foursquare begins building payments functionality in so that it can tie FS ads/check-ins to actual purchases (*the* local ad category killer IMO), what API will it implement?  It won’t be PayPal’s (and it’s not just because Crowley and Dorsey have invested in each others’ startups).
To the three people who have read this far, I can only apologize – this was too long!  More to come on this topic, but that’s all for now.

How Blippy Can Help Foursquare Monetize Check-Ins

Foursquare‘s great for a number of reasons.  Like a lot of people, I use it to keep track of my friends when I’m going out, but it’s also a fun way to discover new restaurants and other spots based on friends’ check-ins.  Since I go to great lengths to find awesome Chinese, Indian, Thai, Vietnamese, Korean, etc. food, Foursquare makes it easy for me to share these gems with my close friends.  It’s also a good way to keep a running log of where I’ve been.

While the “check-in” is already becoming a commodity (Yelp recently released check-in functionality and Facebook will, too), Foursquare has focus and timing on its side.  Back in 2006 I might have friended someone on Yelp because I liked a bunch of their reviews, but since I don’t know these people beyond their food rants I don’t want to share my real-time location with them.  FB will have a similar problem since a lot of people have hundreds of “friends”.  Unless FB can make it easy to select what friends you want to share location information with, it’s going to be such a noisy mess that it won’t have any value (let’s all hope FB check-ins will be opt-in).  The point is that people are figuring out the best way to use social networks and Foursquare’s launch happened to coincide with the steeper end of this learning curve.  Most Foursquare users I know are far more selective about who they accept as friends (typically one’s “real” friends) vs. who they friend on “older”, non-native-mobile social networks.

Whether it be mayorships, scavenger hunts, coupons, or other marketing or promotional offers, there seem to be a number of ways that Foursquare can begin to experiment with monetization.  The problem with most of these monetization schemes is that they’re a little klugey and require too much work for either the user and/or the business.  Coupons would be a challenge for Foursquare, because traditionally coupons are distributed by the manufacturer to the consumer and then redeemed at the point of sale with the help of the merchant.  There are three entities in this transaction, all of whom benefit at specific parts of the coupon value chain.  The merchant honors the coupon and gives the customer the discount but then the merchant has to submit the redeemed coupon in order to get repaid.  This works because the consumer has an incentive to use the coupon (to get the discount), and once it’s used, the merchant has an incentive to get repaid.  The manufacturer is happy because it got a sale it might otherwise not have received.

Now, consider what happens when a hypothetical FS coupon is redeemed at a small business (not a Best Buy which has sophisticated POS systems).  You’re at a packed bar and you show the bartender your coupon for a free beer.  The bartender (who is usually not the owner and has less incentive to keep track of these things) will need to somehow process the coupon so that you can’t reuse it.  Let’s say there’s a simple code he types into your phone (that’s awkward and slow) or maybe he just swipes a finger across the screen to process it.  The problem actually isn’t the processing, it’s that unlike in the supermarket example, there is no third party that will repay the business owner for the coupon.  If the bar pays FS directly for each coupon redeemed, the bartender has little incentive to process the coupon.  If the bar is paying for each coupon that gets redeemed, a less-than-honest business is not going to process (and pay for) the coupon once it’s already acquired the customer.  A CPM-based coupon system isn’t a great alternative either since it’s difficult to tie the ad to a specific action and thus to charge much for the coupon.

The point is that check ins don’t necessarily translate into dollars, but sales obviously do.  The real value for businesses (and for FS) is to harness the social and loyalty aspects of Foursquare and tie them to sales.  One way that Foursquare might do this is by partnering with a company such as Blippy that publicly tracks users’ purchases.  Blippy is still early in its development (launched about a month ago) and doesn’t have an API yet, but consider how a Foursquare check-in could be tied to the bar bill you forgot you racked up at Clandestino?  Businesses could begin to tie their mobile advertising spend to specific customer check-ins and related purchases.  You could then begin looking at people’s networks to better understand who the influencers are – the people who by virtue of their check-ins attract high-spending, loyal friends to the business.  If you’re interested in digging deeper into network science, you may want to check out Professor Michael Kearns‘ posts about his incredible class, Networked Life (if you happen to be a student at Penn, I highly recommend it).

The other way to do this would be to integrate a mobile payment API into Foursquare.  A service such as Venmo or Square could be a neat addition and it would solve the problem of tying the check-in and social features to the customer’s purchase.

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Track Changes to Privacy Policies and Any Webpage with Google Reader

The Google Reader team recently announced that Reader now allows you to follow changes to any web page, even if that page doesn’t support RSS.  I am a heavy Google Reader user (particularly on my iPhone) and this is a great tweak that has some interesting applications.  For example, eBay sellers could subscribe to eBay’s User Agreement to keep track of any updates that might impact sellers’ businesses.  Or, Facebook’s most recent privacy dust-up might motivate others to create a subscription to Facebook’s Privacy Policy.  Journalists probably have the greatest use for this feature, enabling them to track everything from TOS changes to new product launches, site redesigns, etc.

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Boxee Payments: Good for Content Owners, Competition for MSO’s and iTunes

Content owners aren’t the ones who need to be worried about Boxee Payments, it’s the MSO (cable), satellite, and fiber networks and online distribution platforms such as iTunes, XBox Live, and Netflix (to the extent that Netflix sees itself as a platform).

The reason for this is scarcity – plain old supply and demand (most business issues can be boiled down to this).  Content (film, TV, games, music, etc.) owners are well-positioned as they have the scarce good in this equation.  Since The Office doesn’t have any close substitutes, it is in higher demand, and people will want to consume that content where and how it is convenient for them.  This creates competition among distribution networks, driving the price of the content up.  Incumbents such as the MSO’s have less and less leverage because the barriers to entry for content distribution are eroding and distribution options are proliferating.  This is why Comcast has been trying to get into the content business (with its failed bid for Disney in 2004), having finally succeeded by acquiring NBC Universal last year.  MSO, fiber, and satellite companies’ massive networks also require lots of capex to install ($2-3k per household to run fiber to the home), maintain, and upgrade.  As a result, these companies are more vulnerable to lower-cost distribution channels such as WiMax ($20-25 per household to install; see Comcast’s investment in high-speed wireless networks in Oregon and elsewhere via Sprint/Clearwire), and online distribution platforms such as Boxee, iTunes and Netflix that disintermediate them (see Comcast’s opposition to net neutrality).

The success of iTunes has proven that people are willing to pay for content if they can legally and conveniently consume it as they wish.  Boxee’s move to provide a payment platform will appeal to those preferences.  It will also pressure iTunes given that Boxee has stated that it will charge less than the 30% that iTunes charges content owners.  Content owners will love this as they are increasingly concerned about Apple‘s growing control of online distribution.  Content owners will be glad to try working with an alternative to iTunes that is eager to share a greater cut of revenues.  The worry for the Boxee’s of the world is that competition for content could drive their margins to commodity levels unless they are able to differentiate and deliver real value to their users and partners.  It’s the same reason why Comcast is now in the content business.  Boxee understands this and that is why they have a focus on design, hiring someone like Zach Klein (the guy behind Vimeo’s beautiful video player), to head product.

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