Dear Reader,
I’m writing this update in Product | Strategy | Innovation regarding some recent announcements from companies featured here earlier this year. Strategy gets a lot of attention. But Strategy needs leadership and execution to deliver the intended results. Square and its co-founder and CEO Jack Dorsey in particular come to mind with 3 recent announcements:
On March 1, 2021, Square announced the launch of banking services through its industrial bank, Square Financial Services, based in Utah. This is the result of a federal banking license being issued to Square Financial Services.
On July 15, 2021, Jack Dorsey announced Square was creating a new business to build an open developer DeFi platform with a primary focus on Bitcoin [U17].
On August 1, 2021, Square announced plans to acquire Afterpay in an all stock deal estimated at $29 billion based on the closing price for Square’s common stock on July 30, 2021.
These are bold moves for a 12-year old fintech company started with a simple device to scan credit cards with a smart phone and mobile app [E5]. These moves at Square could also be the result of what Jack Dorsey didn’t pursue in the past at his other company Twitter. But all 3 moves at Square could be predicted with the following framework that we shared in [U17].
The initial beachhead market for Square was building out the products and services for Sellers to make more sales with their customers. This became its first Pillar. Cash App was added later to build out products and services for Consumers. This became the second Pillar. There are some synergies between these 2 ecosystems, but they have been built out so far independently.
But a Federal Banking license allows Square Financial Services to offer FDIC-insured checking and savings accounts to both its Seller and Cash App ecosystems.
But Square also learned the value of recording artists as small businesses and their fans as a vehicle during the pandemic to accelerate the adoption of Cash App with a tweet. This likely contributed to Squares acquisition of Tidal for its HiFi audio streaming service for artists like Jay-Z, Madonna and others. Recording artists can also benefit from the Square Seller ecosystem to sell merchandise, manage staff and access capital.
The first and second Pillar form a marketplace where Square Sellers and consumers using Cash App can transact business. These are also very similar to Amazon’s Marketplace Pillar that offers e-commerce and logistics through fulfillment services. This also took an expense for Amazon’s core business and turned it into revenue offering the same services to third parties. And Amazon’s Prime Pillar builds loyalty among consumers for Amazon’s services and drives more e-commerce sales to participating Marketplace businesses. Prime also took the marketing expense for Amazon’s core business and turned it into subscription revenue from close to half of households with broadband service in the US.
Square’s third Pillar results from its announced new business to build an open developer DeFi platform with a primary focus on Bitcoin.
This platform infrastructure will allow developers to build decentralized applications used by both Sellers and Cash App users without the need for traditional banks. Square’s DeFi Pillar is like Amazon’s AWS Pillar, but with a $28 trillion total addressable market by 2025 for global financial services. AWS also took an IT expense for Amazon and turned it into revenue by offering these services to other businesses.
But Square’s boldest move so far is its planned $29 billion acquisition of the Melbourne, Australia “Buy Now Pay Later” company Afterpay.
Square’s common stock is up about 600% since the mid-March 2020 sell-off with the pandemic, so Square was willing to take this price appreciation to buy a feature so its Sellers can make more sales and Cash App consumers can use a popular way to purchase without a credit card. Buy Now Pay Later is popular with young adults who are a key demographic for Cash App. Afterpay services about 16 million consumers and 100 million businesses globally, but more importantly, Buy Now Pay Later drives Afterpay consumers into businesses who offer Afterpay services. This creates more synergies between the Seller and Cash App Pillars that Square wants. And Afterpay business users span small businesses to global enterprise retail customers. Square’s stock price also went up about 14% after the announcement, so if that holds up, Square will basically get a key feature to drive growth for free as an all stock deal.
Financial services will largely consist of 5 key categories in the future:
Banking
Lending
Trading
Crypto
Insurance
Traditional banks use banking services to both attract and retain customers, but also generate revenue with late fees and paying minimum interest on savings and lending that money out with leverage using their federal banking license to generate substantial revenue.
Square and other fintechs will offer banking services for free to attract and retain customers to make revenue off higher margin services on these customers. But to truly compete with traditional banks and scale, fintechs need to lower their cost of capital. That is what Square accomplished when they acquired a federal banking license. Square can take a large percentage of routine banking and also cost-effectively serve the unbanked who need access to more banking services. Cash App is already widely adopted by the unbanked for direct deposit, spending with a linked debit card and trading stocks or Bitcoin without a bank. Square may also serve as a proxy for how to transform healthcare.
Tesla reduced carbon emissions by 5.0 metric tons of CO2 equivalents.
Tesla published its 2020 Impact Report earlier this week. I encourage reading what ESG really looks like across an entire corporation. And true to its mission, Tesla is accelerating the transition to sustainable energy with a global fleet of electric vehicles and solar panels that reduced carbon emissions in 2020 by 5.0 million metric tons of CO2 equivalents. This will scale exponentially as the Tesla global fleet, installed solar panels and other initiatives also scale exponentially.
Demand for Tesla products is very strong. Some vehicle models are sold out through the end of 2021 and Megapack grid-scale battery storage is sold out through the end of 2022. Tesla’s mission, products and direct-to-consumer business model drive this demand. But Tesla’s strategy [E6] will be more apparent when Giga Berlin and Giga Texas open later this year. Giga Shanghai was Tesla’s first opportunity beyond the Fremont factory and Giga Nevada to leverage learned knowledge about manufacturing into a new facility. Giga Berlin and Giga Texas will make abundant use of “Mega Machines” to cast large body parts as one piece to eliminate the need for as many 300 robots for an underbody segment. And the scale of Giga Texas has increased the footprint dramatically. Robotics and automation play a key role across both of these sites, but especially in the state-of-the-art paint zone. And artificial intelligence enabling autonomous navigation, will save lives when Tesla autonomous navigation and robo-taxis are 10 times safer than a human driver.
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research. I’m long AMZN, SQ and TSLA mentioned in this update.