Taking a far more ambitious swing here, though I am not predicting declines nor giving stock advice.
Over a recent family dinner, my dad told the story of early Amazon: ordering over the internet was so novel, Amazon had a phone number to process the credit cards. I’ve been writing about payments and eCommerce regularly. Both are beneficiaries of the pandemic and long-running trends. A flurry of recent news left me wondering: are we reaching Peak Visa and Peak Amazon? And to be clear: I mean peak dominance and relevance.
Peak Visa
I found it very odd that VISA is partnering with Circle to launch credit cards based on the USDC Stablecoin – a digital USD token. Indeed, a whole premise of crypto is to remove the payments establishment and its fees. In theory, VISA shouldn’t even value to add if the vision of crypto is achieved. In practice, they do, and that value is in large part reflective of their moat.
In the linked article, a VISA executive describes the company as a “network of networks”, but they are best known for the three-sided credit card network. Consumers have and use credit cards, businesses accept these credit cards, and banks interact via these credit cards. VISA sits in the middle, taking a toll. In the case of Circle, VISA is a valuable partner due to their network of 60 million merchants. Paying for a cup of coffee requires coordination of multiple entities. VISA can instantly enable crypto “everywhere you want to be”.
The phrase “network of networks” implies other payment options could be coming, and indeed they are. My very first article A Key Factor in VISA/Plaid was speculation that the deal was related to the arrival of the Real Time Payments network, an overdue evolution of the archaic ACH banking system. Instantaneous bank transfers could rival debit cards, if not credit cards. Plaid highlights the challenge with disrupting VISA: Banks (maybe excluding Goldman Sachs) are technologically behind and furthermore can make good money in credit cards. This is both a giant coordination problem, as well as a technological challenge.
Stripe made an enormous announcement this week, which Ben Thompson described as becoming a “Platform of Platforms”. To summarize: Stripe currently provides financial services as a service to other technology companies. They are expanding into what could be called “Banking As a Service” – enabling a company like Shopify to spin up bank accounts, process payments and handle the other plumbing for all of the merchants they interact with. Squint and this looks an awful lot like VISA. Consumers interact with merchants (on tech platforms), with Stripe sitting in between them and the banks.
What becomes problematic for VISA is that a giant coordination problem was just solved. Stripe will abstract away dealing with the banks. Stripe can do the fixed work to add a new payment rail once, rolling it out everywhere to merchants, consumers and banks at once. VISA is a lynchpin of Stripe’s platform of platforms, for now. How hard will it be to plug in real-time payments? Cryptocurrency stablecoins?
Perhaps extending credit, not payments, will be the refuge for the credit card business? Look to Peloton to see an alternative future: Affirm is doing enormous volumes of financing without VISA. I don’t predict VISA will collapse, but I can certainly see a future without VISA at the center. Their stock price has been eerily stagnant in 2020 despite a destruction of the cash economy and massive interest in fintech.
Peak Amazon
I regularly shop at Amazon, it is extremely convenient, and the company executes at unbelievable scale. They have countered a long-running criticism by routinely minting profits. But to paraphrase Jeff Bezos, their margin is someone’s opportunity.
Knock one is that the “world’s most customer centric company” is addicted to the dangerously lucrative sponsored search results business. If I search for Apple Watch on a Google Chrome desktop, all the visible results are paid ads. Other examples are easy to find with even worse results. Feels familiar: Google reached this point in mobile ads a few years back. Google is powerful but far from dynamic anymore.
That is but a minor chink in the armor though. Risk one for Amazon is their third-party marketplace and Shopify. One major edge Amazon retains over other retailers is the marketplace – they have the best and longest tail selection. Shopify is increasingly a viable alternative for merchants, and Facebook/Instagram are happy to provide the advertising reach.
The catalyst for this segment is this insane stat from last weekend
Shopify merchants sold $5.1 billion on Black Friday weekend online
Amazon sold $4.8b through “independent businesses”
One read of these numbers is that Shopify’s marketplace outdid Amazon’s, though it is unclear if these equal comparison groups. Amazon also has a healthy business selling goods itself, so overall Amazon certainly did more volume. Shopify is no longer an after thought, and in fact is growing faster than Amazon’s third party business. As someone who follows the tech industry, this is the first time Amazon has looked anything other than untouchable in 5+ years.
The first-party sales are a lesser concern for Amazon, but competition is heating up there as well. I wrote about Instacart previously – you can imagine a world where Instacart/DoorDash/Uber Eats workers stop at Walgreens or Target on the way to deliver dinner. You’ve already paid a delivery fee at that point, might as well add on some shopping. Best Buy and others are experimenting with stores as fulfillment centers. Amazon still has key fundamental advantages. UPS is metering holiday capacity to companies, while Amazon has built its own capacity. Amazon is optimized for eCommerce in a way legacy retail is not. AWS is a behemoth, and yes the advertising business is printing cash. Still, I can’t help but wonder if we will look back at this 9-month pandemic run as the peak of Amazon’s dominance.
Peaks are not troughs
To reiterate, I am not predicting either VISA or Amazon are going under. Amazon in particular has such tailwinds – their Black Friday marketplace sales grew 60%+ even with Shopify surging – it is implausible they are going anywhere. To borrow another Ben Thompson example, IBM peaked a while ago, thrived for decades and still exists. Microsoft peaked in the 1990s and was reborn under Satya Nadella.
Microsoft is actually a great analogy here. Microsoft stock first peaked around the end of 1999, Windows was dominant for at least 10 more years, and revenue continued to grow until 2015 before finally declining in 2016. Both companies likely have decades of profitability ahead of them, but it would require ignoring 40 years of tech history to suggest any of the giants are untouchable. Doing so is ultimately betting against further innovation, to paraphrase Chamath Palihapitiya.