By Brandes Elitch
CrossCheck Inc.
The late 1990s marked a pinnacle in the U.S. economy. For many Americans, owning a home was still an attainable dream, the federal government actually had budget surpluses and dot.com businesses were sitting on the cusp of a stratospheric boom.
Things have changed, and more change is in the works. Sometime over the next few years, the hardware and software your merchants currently use to process card and card-not-present transactions will be transformed. Historically, merchants have looked to the ISO community, not their banks, for guidance on which equipment to choose and how to buy, program, install and train end users.
Right now many talented people are working on next-generation offerings. There is plenty of talk about the consumer "paradigm shift," and how merchants will be affected. Many new products will be introduced in this space, but not all of them will succeed. As an ISO or merchant level salesperson, you want to be very careful about which of these new products you introduce to your merchants because you will have to support them for years to come.
Just today, Hewlett Packard announced it will discontinue its tablet computer and smart phone products and may even sell or spin off its PC division. Make no mistake - this is a big deal. Remember that just 10 years ago, HP spent more than $24 billion to acquire Compaq Computer Corp. with the goal of dominating the PC market. Moreover, the company then spent almost $2 billion on Palm Computing for its WebOS software.
Unfortunately, consumers preferred Apple Inc. iPads, iPhones and smart phones running Google Inc.'s Android software. It looks like the only companies that seem to be getting it right are Google and Apple, but are they? In this article, I would like to add a bit of perspective to this unfolding scenario.
One of my favorite writers is Jack Baruth, who writes for an e-zine called The Truth About Cars. He has observed that it is not unusual to hear that some company "wants to be just like Apple." Baruth reminds us of what Apple was like in the early 1980s: "a navel-gazing maze of slightly insane people who had been isolated from the real world by a tidal wave of cash, success and public acclaim," he wrote.
The company's "moon shot" was called the Apple Lisa, and Apple likes its moon shots. (Coming up with a true paradigm shift is risky but if successful can have a big payoff - the iPhone, for example.) Baruth reported that with the Lisa, "feature creep, wild enthusiasm and a desire to leapfrog the competition rather than merely beat it" resulted in a technological dead end.
Apple emerged from the Lisa fiasco by diverting resources to less ambitious but more effective projects, like the Macintosh, which had a good 10-year run. "Ironically, what saved Apple in 1998 (the arrival of Steve Jobs and his crazy ideas) was what almost killed Apple in 1983," Baruth said, adding that the lesson learned from Apple is this: "Sometimes, you can't learn anything from history or competitive comparisons, at all!" Confusing, isn't it?
Apple looks invincible today, but if you look more closely, Apple didn't always get it right. The Apple III (1981) lost the business computer market to IBM. The NeXT computer (1989) was too expensive. The round USB puck mouse (1998) was impossible to use. The Cube (2000) failed because it was too expensive. The iTower (2005) had too little storage and was too slow. The Apple TV (2007) was expensive and complicated and had low resolution. In Evan Schuman's excellent blog StorefrontBacktalk, writer Frank Hayes wrote, "Will any retailer ever use a non-Apple device for mobile POS again?" In mid-August, both Lowe's and Urban Outfitters reported they will finish rolling out in-store mobile devices to their associates by the end of 2011 (iPhones at Lowe's and iPod Touches at Urban Outfitters). Nordstrom, JCPenney and Gucci are also piloting iPads for in-store use.
Urban Outfitters attaches sleds for swiping payment cards, and this might be enough to keep in-store mobile devices out of the dreaded PCI scope - if card data is immediately encrypted after swiping and before it actually enters the phone or tablet. Apple's trump card here is less expensive hardware and software, a wider selection of peripherals and a bigger base of developers to create custom software. And as of mid-August, no major retailer has indicated it will use the Google Android phone as an in-store POS.
But technology is changing quickly. Mobility is the heart of the matter, since it is about the cloud, credit card-sized tablets and phones. Google's recent acquisition of Motorola Mobility fits this category. Does Google want to stay in the manufacturing industry? Google, essentially an online advertising business, paid $12 billion for Motorola patents the company thinks it needs to make the Android operating system work better. Some analysts see this as a purely defensive move.
There are risks here. Google risks antagonizing its partners: companies like LG and Samsung that now may look at Google as a competitor, rather than a partner. There is also a regulatory risk. It could take a year to get this deal approved. Cost is another risk. Google paid $3 billion for DoubleClick in 2006, $1.7 billion for AdMob in 2010 and the Motorola acquisition consumed a third of its cash position. Clearly, the stakes are very high in the payments game. There is more to innovation than a paradigm shift. Price is one consideration, profit another. And then there is the sales process. If you have ever been to an Apple Retail Store, you'll understand. Apple has made the buying experience easy for both the customer and the salesperson and, as someone pointed out, "as choreographed as a Disney ride." Can we really say that your sales call on a merchant to explain why they need to buy new equipment is this seamless and easy for both parties?
We cannot assume merchants will be enthusiastic about replacing their POS hardware just because of a consumer paradigm shift. If the merchant has a 2 percent net profit as a percentage of sales, he or she has to generate $5,000 in sales to recover a $100 expense. As an ISO, would you dare to ask your merchant, "How do you plan to generate $5,000 in sales to cover this new expense?"
Everybody gets excited about a paradigm shift, but few business leaders and product managers project accurately. That's because they tend to make decisions about future products based on what happened in the past. They use straight-line assumptions, forecasting directly from a spreadsheet without considering the business cycle. They focus on the business, not on the science of forecasting, hence the write-offs that HP and its ilk will experience.
Change is an ongoing process, not a one-time event. Many observers have pointed out that during times of change, the economy does not revert to the "old normal," but moves to a "new normal," which has different marginal costs and benefits.
If you look at three companies that used to be part of the Dow Jones Index - General Motors, Bethlehem Steel and Woolworth - you will see these firms declined not because of any single event, but because each increasingly lost touch with its core market, or what should be its core business. The underlying framework and customer dynamics changed, but the companies did not. They weren't paying attention, or they just didn't want to pay attention.
The pace of change has accelerated since then. When you talk to your merchants about the changes in card processing coming down the pike, it might be worthwhile to keep this perspective in mind. Apple succeeded by learning from its past mistakes and modifying its products accordingly. On the other hand, there is an old saying, "Microsoft always gets it right - the third time." You will not have that chance with your merchants, so pay attention.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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