January 20, 2015
Let’s Talk Payments was the first to report on the possible buyout of Softcard. As per our analysis, we had predicted that Softcard was holding discussions with potential buyers, probably Google or PayPal. Now it has come to light that Google is leading the talks in the buyout of Softcard. In a recent post, we had cited the looming concerns which have eventually led to this buyout. Now, TechCrunch and VentureBeat have also reported over the matter.
Softcard had to rebrand itself from Isis to avoid possible abridgment with the militant group, ISIS. However, that was the least of its worries. Softcard was already facing a high level of competition from companies such as PayPal, Google and Dwolla etc., with the launch of Apple Pay generating a significant new threat. The company itself has not had any meaningful growth and has been running heavy losses. The subscriber base itself is merely 1 Mn out of the entire 40-50 Mn digital wallet user base.
After massive investments in the early years, mostly in consulting and vendor costs, the company also scaled up it’s employee base rapidly even before there was any traction for its service. Now, the company is going through a consolidation phase with layoffs, cost-cutting, etc. Before the recent layoff, the company had an employee base of over 250 spread in offices across New York, Seattle, Dallas, Atlanta and multiple locations in New Jersey, Texas and Arkansas. With the impending buyout, it’s highly likely that most of the non-technical staff will be laid off. TechCrunch reports that Softcard is already consolidating its operations in Dallas and New York offices. We anticipate that any buyer would actually close down all Isis locations, since no ongoing operations will be expected from the Softcard entity post acquisition.
TechCrunch reports that the price of the buyout will probably be under $100 Mn. We predict it might be around half that number. In fact, any number is hard to justify, but there are some theories:
One possible reason for Google’s interest in Softcard could be the 120 patent applications that the company has filed. But being merely applications, they might be useless after all. The history of patents in the digital wallets space is well-documented with more than decades old patents granted and implemented. In fact, some of the patents have been known to be contentious even with the smaller (yet more experienced) entities who were working with Softcard in good faith.
What’s more attractive for Google could be Softcard’s partnerships with merchants and established agreements with relevant players from the payments industry. Softcard boasts of partnerships with big brands like McDonalds and Subway to enable Softcard payments at their POS terminals. It should be noted that the basic NFC payments function is a payments network (Visa, MC, Amex, Discover) standard, and now refined with Apple Pay, and not unique to Softcard. Softcard acceptance really means that the offers and coupons functionality in the Software wallet is integrated with NFC payments. The Google Wallet feature set is known to be be superior to Softcard’s, so again this it is hard to justify a rich valuation based on incremental acceptance.
There is also a range of vendor relationships that Softcard has put in place, which could be beneficial for Google. For the integration of its SmartTap technology, Softcard has established partnerships with ID TECH, On TRack Innovations (OTI) GLobal, PAX Technology, Uniform Industrial Corporation (UIC), XAC Automation Corporation, Equinox Payments, Gilbarco Veeder-Root, Ingenico, VeriFone and Wayne (A GE Energy Business). Will this long list of partners benefit Google or another acquirer in a sale? There is no evidence to suggest that these integrations are more valuable than what Google Wallet already has in place.
The only meaningful justification for Google spending any money on acquiring Softcard is the opportunity to make nice with the mobile operators. It’s ironic however, that after being spurned by Softcard in multiple partnership discussions multiple times in their early years of existence, Google might now choose to buy peace with an adversary who has no fighting power. So, is this a grand alliance to counter Apple Pay? There is clearly a desire for Softcard’s investors to get rid of this distraction with the appearance of a graceful exit. With the arrival of Apple Pay, there must be a sense of urgency at Google to further grow its digital wallet, and spending even tens of millions to get the mobile operators on their side seems like a no-brainer. The carriers already follow a revenue sharing model with Google for searches on Android phones and the Play Store. This model would further go in sync with the Softcard acquisition. Moreover, Google also has the opportunity of reviving its advertising deals which involved share of ad revenue with the operators. These ad revenues get generated from Google Wallet’s closed-loop advertising system that uses purchases in physical stores to improve targeting of digital ads.
In conclusion, we can’t say just yet whether the acquisition will prove to be a Win for Google but even a $50-$100 Mn buyout of Softcard opens a crack in the door for Google Wallet to try and leverage the operators’ distribution to put up a respectable fight against Apple Pay. It’s also unclear what Winnings will be left behind for Softcard’s investors once they split the proceeds amongst themselves after spending on attrition costs (consulting fees, management packages, etc.). Unfortunately, the real losers will be the employees who joined Isis/Softcard over the years expecting it to be an entrepreneurial and fun place to work and build something valuable.