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Stripe’s $53-billion bet reveals a brutal truth about the tech Industry.
One of the oldest ideas in the technology world is that most of the competitive races among new entrepreneurial entrants that are proposing to provide various novel products and services will eventually resolve themselves into markets and verticals dominated by one (or at most two or three) very large and successful players. Meanwhile, the rest of the also-rans and wannabes will share the crumbs left on the table, until they eventually fold up their tents and pack it in.
It’s a cyclical circumstance in the tech industry and we’re seeing it again today in the AI frontier engine competition with the clear dominance of a few major platform players. Technology is a winner-take-all world driven by several practical and structural considerations. Some of the key contributing factors to this recurring outcome: demonstrated economies of scale, market-dictated centralization and standardization requirements, the herd mentality of large technology purchasers who believe you can’t go wrong if you’re buying what everyone else is using, and the power of Metcalfe’s Law, which defines the exponential growth characteristics of networks.
And when you have a passive and forgiving regulatory environment and an utter lack of enforcement of antitrust laws aided, abetted, and actively encouraged (if not directly ordered and demanded) by an easily bribed and corrupt presidential administration, it becomes easier and easier to consolidate even traditional industries into the hands of a few powerful players aiming to crush their competitors, as we see every day now in the broadcast, entertainment, and media sectors. The message to the insiders and the sharks is pretty clear: The gloves are off, join the crooks in the White House in grabbing whatever you can, and worry about the consequences way down the line—if ever.
So, it comes as no great surprise that PayPal, which really started the whole online payments business in 1998, is once again being tossed around and targeted by Stripe. Founded more than a decade later in 2010, Stripe has just made an offer to buy PayPal for about $53 billion, approximately one-third of Stripe’s most recent valuation. More interesting, in the manner of the minnow swallowing the whale, PayPal has handled over $1.8 trillion in payments, which completely dwarfs Stripe’s current operations. But with its stock under tremendous negative pressure, PayPal makes a very attractive target for a business like Stripe, which has been trying to consolidate and control the overall e-commerce processing space since its inception.
PayPal was bought in 2002 by eBay and pretty much moldered in the shadows there until it was spun off as its own entity in 2015. Earlier this year, its CEO was fired, the stock being down more than 25 percent. More recently, PayPal split itself into three divisions—one of which is its rapidly growing Venmo division (it was acquired by PayPal in 2013), which processed about $300 billion in payments last year. Stripe—which, in its own operations, is clearly best of breed—certainly sees the Venmo division as a great add-on.
This would represent a very substantial contraction of the overall consumer payment space, even though Apple Pay is growing quickly and other programs, like Zelle, are also gaining some modest traction. In the pre-Trump days, this kind of a proposed deal—especially on this scale—folding together the two leaders in the space would be highly suspect from a regulatory standpoint. But in today’s laissez-faire environment, if you secure the Orange Monster’s blessing (often under the table), this kind of deal simply becomes business as usual.
In all fairness—and putting aside the fact that this smells like another self-dealing special for Commerce Secretary Howard Lutnick that we’ll only learn about a year from now—the truth is that PayPal may have committed the cardinal Silicon Valley sin of becoming boring and passé. It may seem unduly complicated in a world seeking speed, convenience, and ease of access, and ultimately perceived as behind the times, especially when compared to the simplicity of players like Stripe.
While we might gripe about the concentration issues, the fact is that PayPal largely brought all this attention and grief on itself. It had a diamond in Venmo that should have been exploited, promoted, and accelerated rather than buried within a corporate bureaucracy. Instead, in a final fit of accelerating its own demise, PayPal split itself into distinct parts that highlighted and identified the old news and the new value embedded within. This wasn’t lost on some of the bankers whose earliest analysis promoted the idea that Stripe might very well be able to make more profit and drive more growth for Venmo than PayPal ever could at this point.
Joseph Schumpeter may have died in 1950, but his doctrine of creative destruction lives on. Founders and market leaders aren’t entitled to persist indefinitely, and it’s the regular emergence of new entrepreneurial companies with better technology, ideas, and resources that eventually spurs innovation and growth. Sometimes, it doesn’t hurt in the long run to be the second mover rather than the first.
This post originally appeared at inc.com.
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