Podcast Review | Jim McKelvey, Cofounder of Square (Block) on Competing Against Amazon

Jim McKelvey, Cofounder of Square (Block) on Competing Against Amazon by The Synopsis

Jim McKelvey, a glassblower by trade who cofounded Square [now Block Inc.] with Jack Dorsey in 2009, speaks to Speedwell Research’s The Synopsis Podcast. Square faced its very own David vs. Goliath battle in 2014 when Amazon came directly at Square with its own card reader. They undercut Square on price and attached the Amazon brand power and distribution footprint to it. No start-up had ever survived an attack from Amazon before… A year later Amazon withdrew from the market and took the extraordinary step of mailing Square readers to its soon-to-be former customers.

Why did Square win out? McKelvey’s conclusion is that Square never had one advantage, it had a stack of them, assembled out of necessity rather than strategy. Making the sign-up process simple meant finding a bank that would accept a software licence agreement – the twelfth they approached (the previous 11 said no) which meant posting a bond, which meant underwriting businesses the financial system was never built to underwrite, which meant absorbing fraud nobody else would touch. Each solution created the next problem. Amazon looked at Square, saw a processing rate and a piece of hardware, and copied both. As McKelvey puts it, “it didn’t work because they had 12 other things that they ignored”.

Innovation is touched on at length, and something integral to the Square story. As McKelvey describes it, innovation is not a strategy you elect but a survival instinct that engages only once the alternatives are gone. He draws on inspiration from the Wright brothers, who had to become the world’s first pilots without ever being able to train as pilots, for the simple reason that no human had flown a plane before. Southwest Airlines another example where they invented the ten-minute aircraft turnaround that only worked because boarding, ticketing and hiring were rebuilt around it (and was necessitated due to the fact that Southwest Airlines only had 3 planes when it started).

“All progress is made by unqualified people.” – Jim McKelvey

For investors this case study is a useful test of the defensibility of a competitive moat, something we spend a lot of time thinking about at NAOS. Most businesses look defensible on one visible feature, and that feature is usually the very thing a competitor can copy; the very durable companies benefit from the combination of lots of tangible and intangible aspects that interlock and compound on one another, so copying any one of them delivers nothing. Upon reflection this appears to be a great example of the term coined by investing great Charlie Munger known as The Lollapalooza Effect.

Link to Podcast

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