The Platform Risk of POS App Stores

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In 2008 Zynga was one of the hottest names in Silicon Valley. In raised $40MM in three rounds over a period of 12 months before raising a further $150MM and going public in 2011, reaching a market capitalization of nearly $10B.

Zynga built it’s business on top of Facebook. Users on Facebook could easily sign up for Zynga games, share games with their friends, and otherwise make use of Facebook’s social data to grow its revenue, which it also shared with Facebook. It might be hard to believe, but Zynga was at one time generating 15% of Facebook’s quarterly revenue.

But that came crashing down in 2012 as Facebook significantly curtailed Zynga’s virality.

The tale of Zynga and Facebook is not a new variety. Company A builds something atop Company B. Company B changes its mind, and Company A is eviscerated.

Look no further than Dataminr or Meerkat and their relationship with twitter. Both services made their money either integrating into or on top of twitter and the host, after learning from these startups, built the products in-house.

This is the inherent danger we see with companies who rely solely on POS company app stores for customers. If what you build has little IP (think staffing tools or loyalty programs) you’re at significant risk.

Many POS app stores require a revenue share that pays more to the third party developer. Though what’s to keep the POS company from acting like NCR and shifting the revenue in their favor? And further, what keeps the POS company from simply copying your application?

POS has never been a high margin business, and probably won’t be until the industry capitalizes on the value of their merchant data. But there are many POS companies that are significantly overfunded (and overvalued), and copying your idea to increase their revenues while cutting you out is a tempting feat… especially as they struggle to find the “rapid” merchant growth they promised investors.

What to do?

  1. Do something that POS companies would have a hard time copying. Data science and analytics, where you need to hire PhD’s, is a good moat
  2. Bring in external value. For instance, if you’re a loyalty provider and you have 5 million consumer members from merchants that are not represented by the POS company in question, you have something the POS company does not
  3. Ask for non-competes. See if the POS company is willing to sign an agreement stating they will not copy your product for a specified period of time. All they can say is “no” and that will give you an idea where they stand anyway

Beware the POS app store… many have marched before you and not lived to tell about it.

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