NCR has just acquired another one of its Aloha POS resellers, Midwest POS. If you’ve been keeping count this is the third major dealership NCR has acquired in the past year – first was BEC out of Colorado, then Texas POS out of Houston.
These continued moves by NCR provoke a number of thoughts and questions, which you can count on us to lay out as candidly as possible.
How did we get here?
Well, NCR finally realized payments was a lucrative add-on to the POS stack nearly 5 years after the rest of the market. Impregnated with this idea NCR sought to protect as much marketshare as possible. This led to two tactics as far as we’re aware.
The first involved NCR using the ROFR in their reseller agreements. This effectively neutered NCR resellers and made their businesses worth much less than they expected. We wrote on the matter previously and you should read the original piece for the full background.
The second is that NCR paraded out a new, exclusive reseller agreement that sought to protect what marketshare NCR’s resellers had left. Aloha resellers, most of whom were disgusted with the lack of innovation seeping out of the green-logo’d mothership, started picking up competitive POS products to stay alive. NCR realized this meant their channel would not only install fewer Aloha systems going forward, but could also start replacing existing installs with more modern technologies to keep their dealerships afloat. NCR didn’t like either of these options and decided it was best to make their resellers sign their lives away to NCR-only products. In doing so NCR has promised a lot. In our research no strong reseller has yet signed this agreement – acquiescing dealerships seem to be those that are smaller with fewer options.
It’s about the payments, stupid.
Remember that all of this was undoubtedly catalyzed by the spreadsheet math of payments conversion. NCR acquired JetPay and is intending to follow the rest of the POS industry into the bundled payments realm. After glimpsing the payments agreement NCR has rolled out it looks pretty damn atrocious. Multi-year lock-in periods. Rights to increase rates. No bueno for the merchant if you ask us.
But smaller merchants are dumber than larger merchants (generally – although don’t hold your breath in brick and mortar). In fact much of the recent moves in POS and payments have been made explicitly to take advantage of this fact (i.e. the notion that smaller merchants are both too dumb and too lazy to know how to read their processing statements and can thusly be bamboozled). Just thinking about this in the abstract is laughably sad.
Company walks into investor meeting…
Investor: So tell me about the market problem and your solution?
Company: Look, it’s irrelevant. Our entire business is predicated on the idea that we can rape merchants on payments processing because they’re too dumb and too lazy to actually read our contracts. And payments processing is the poster child for free money – your dog is probably already selling payments.
Investor: Genius! Take my capital now!
NCR undoubtedly came to this same conclusion and rationalized that they had their highest chances at bundled payments in the SMB market as larger merchants might actually read their contracts. The problem for NCR is that a large percentage of their SMB merchant base is represented by their reseller network. And many of their resellers either became ISOs or had existing payments referral relationships. Per our discussions this has made JetPay a very hard sell in the channel.
Well, NCR doesn’t have that problem if they flat-out own the channel, do they? We suspect this was yet another, if not the leading catalyst to acquire their resellers. Now many Aloha merchants will probabilistically find themselves staring at the same shitty NCR payments agreement we looked at a few months ago.
“If you like your payments provider you (probably can’t) keep it.”
Obvious conclusion after reading between the lines
Put a nail in a lawsuit:
You may recall that NCR allegedly changed the revenue share arrangement with its resellers (naturally in NCR’s favor). This sparked a class action suit. Midwest was one of the leading plaintiffs in the case. With BEC, Texas POS, and Midwest out of the picture, we’d wager that the lawsuit was altogether dropped as the smaller dealerships probably didn’t have enough heft to carry it much further. At a minimum a condition of the acquisition would surely have been for Midwest to drop their claim on the suit.
Just when you thought NCR couldn’t get any worse…
There are three points to this argument.
First, third parties that have and are integrating to Aloha the old fashioned way (dropping agents locally on the server and parsing the grind files) are worried what happens to their existing relationships. Many of these third parties worked with resellers since it was functionally impossible to work with NCR (we’ve heard current terms for an NCR “partnership” are $10,000 in upfront fees, 30% of ongoing monthly revenues, and an 18-month approval process – as if markets stand still for that long). What happens now that these resellers are owned by NCR? Will the merchants no longer get the products they’ve relied upon? Will the dealer stop getting any revenue share? As in the case of Toast, will the merchant’s price for the same product precipitously increase just because the POS company (NCR) feels it deserves more?
Given NCR’s cultural record we see no positive outcome for anyone in this situation but NCR.
Second, we’ve interviewed merchants who were supported by both dealers and NCR. In 90% of cases the merchants said support was materially better under the dealership. In fairness to NCR when we interviewed NCR’s customer advisory board members NCR scored highest on support relative to all other categories (APIs, hosted solutions, software architecture, hardware, and data were all losers for NCR as far as NPS goes). Will these merchants who are now operating under an NCR-owned dealership see support suffer? There’s a seemingly 90% chance that will be the case.
Lastly, what are you thinking if you’re working for NCR in a channel capacity? NCR is slowly disappearing its own channel. Will you have a job in 2 or 3 years when NCR has either bought or pushed out their resellers? You need to start planning on very realistic contingencies.
Show me the money!
Here’s how we would build the spreadsheet math for buying a reseller. Most resellers have sold perpetual licenses of Aloha. They may have some small recurring monthly revenue from Hosted Solutions but not much. Aloha dealers almost always have a recurring hardware maintenance package that can include software upgrades (which often break Aloha dependencies so few merchants elect to update).
NCR wants their resellers to push what they call Aloha Essentials. As far as we can tell (including conversations with people inside NCR), it’s the same old products NCR has been peddling for ages bundled up in a more attractive SaaS package. Lipstick on the proverbial pig. But it ain’t cheap:
And this doesn’t include NCR’s attachment of JetPay, which given the sample agreement we saw from NCR we’d expect to play out like other locked-in processors and net NCR $300-$500 per month per location in due time. Robbery.
Let’s annualize this per merchant assuming the average Aloha merchant has 3 terminals.
For Aloha Essentials it’s $7,880 per year and for JetPay it’s $3,600 per year. Let’s give recurring software an 8x multiple and payments a 4x multiple. Therefore each Aloha site is now “worth” $77,440.
Funny side note: paying for Aloha Essentials would make Aloha and its suite of outdated products literally the most expensive hospitality POS suite on the market by our estimate. That’s despite the fact that you could get much newer, sexier, and we’d argue way more performant solutions out of a cloud POS company.
Not funny side note: if you sign up for Aloha Essentials you’re a certifiable idiot. Do your homework and see how good solutions outside the NCR walled gardens have become. Demand that NCR provide relevant value for what they charge you.
But back to the math. The below table shows a stepwise conversion of Midwest POS’s 1,000 merchants to NCR Essentials and JetPay, and what that would be worth to NCR in Enterprise Value. This helps us estimate how much arbitrage NCR might be getting off the very resellers whose value we believe they suppressed with their ROFR.
Keep in mind a reseller is getting some recurring revenue from help desk (about $800 a year for a 3-terminal merchant), hardware maintenance (another $800 a year), and software assurance ($300 per year). Across 1,000 merchants that’s $1,900,000 but you’d have to assume a 100% take rate which surely isn’t the case – half that would be a conservative number.
NCR refused comment on all of the above.
NCR loves their dealers, they just forgot to mention they meant with salt and pepper.
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