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Paddle, the company that wants to take on Apple in IAP, raises $200M at a $1.4B valuation to supercharge SaaS payments

Software as a service has become the default for how organizations adopt and use apps these days, thanks to advances in cloud computing and networking,…

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Software as a service has become the default for how organizations adopt and use apps these days, thanks to advances in cloud computing and networking, and the flexibility of pay-as-you-use models that adapt to the evolving needs of a business. Today, a company called Paddle, which has built a large business out of providing the billing backend for those SaaS products, is announcing a large funding round of $200 million as it gears up for its own next stage of growth.

The Series D investment — led by KKR with participation from previous backers FTV Capital, 83North, Notion Capital, Kindred Capital, with debt from Silicon Valley Bank — values London-based Paddle at $1.4 billion. With this round, the startup has raised $293 million.

Paddle today works with more than 3,000 software customers in 200 markets, where it provides a platform for them to set up and sell their SaaS products in those regions, primarily in a B2B model. But with so many consumer services also sold these days in SaaS models, its ambitions include a significant expansion of that to areas like in-app payments.

“We’re been growing a lot in the last couple of years. We thought it would tail off [after the Covid-19 peak] but it didn’t,” said Christian Owens, the CEO and co-founder. Indeed that includes more videoconferencing use by everyday people, arranging “Zoom dinner”, but also the explosion of streamed media and other virtual consumer services. “B2C software has over the years blurred with what is thought of as B2B. Suddenly everyone needed our B2B tools.”

Payments has long been a complicated and fragmented business in the digital world: banking practices, preferred payment methods and regulations differ depending on the market in question, and each stage of taking and clearing payments typically involves piecing together a chain of providers. Paddle positions itself as a merchant of record that has built a set of services around the specific needs of businesses that sell software online, covering checkout, payment, subscription management, invoicing, international taxes and financial compliance processes.

Sold as a SaaS itself — basic pricing is 5% + 50 cents per transaction — Paddle’s premise follows the basic principle of so many other business tools: payments is typically not a core competency of, say, a video conferencing or security company (one of its customers is BlueJeans, now owned by Verizon, which used to own TechCrunch; another is Fortinet).

To be fair, there are dozens (maybe hundreds) of “merchants of record” in the market for payments services from PayPal and Stripe through to Amazon and many more — no surprise since it is complicated and just about any businesses selling online will turn to these at some point to handle that flow. However, Paddle believes (and has proven) that there is a business to be made in bringing together the many complicated parts of providing a billing and payments service into a single product specifically tailored to software businesses. It does not disclose actual revenues or specific usage numbers, but notes that revenue growth (not necessarily revenue) has doubled over the last 18 months.

Paddle as a company name doesn’t have a specific meaning.

“It’s not a reference to anything, just a name we liked,” Owens — who himself is a Thiel Fellow — said. And that impulse to make decisions on a hunch that it could be catchy is something that seems to have followed him and the company for a while.

He came to the idea of Paddle with Harrison Rose (currently chief strategy officer and credited with building its sales ethos), after the two tried their hands at a previous software business they founded when they were just 18, an experience that gave them a taste of one of the big challenges for startups of that kind.

“You make your first $1-2 million in revenue with a handful of employees, but gradually those businesses become $2-20 million in sales, and then $300 million, but the basic problems of running them don’t go away,” he said.

Billing and payments present a particularly thorny problem because of the different regulations and compliance requirements, and practices, that scaling software companies face across different jurisdictions. Paddle itself works with some half dozen major payment companies to enable localized transactions, and many more partners, to provide that as a seamless service for its customers (which are not payment companies themselves).

You may recognize the name Paddle for having been in the news last autumn, when it took its observations on the challenges of payments to a new frontier: apps, and specifically in-app payments: it announced last October that it was building an alternative to Apple’s in-app payments service.

This was arrived at through much of the observational logic that started Paddle itself, as Owens describes it. Apple, as is well known, has been locked in a protracted dispute with a number of companies that sell apps through the app store, which have wanted to have more control over their billing (and to give Apple less of a cut of those proceeds). Owens said Paddle felt “encouraged” to build an alternative in the heat of that dispute, before it has even been resolved, based on the response from the market (and specifically developers and app publishers) to that public dispute, and governments’ stance.

Its approach is not unlike Apple’s itself, ironically:

“There is one thing Apple has done right, which is to build a full set of tools around commerce for these businesses,” he said. But, he added, its failing has been in not giving customers a choice of when to use it, and how much to charge for it. “There has to be an alternative to cover all that as well.”

(Paddle plans to charge 10% for transactions under $10, and just 5% on transactions over $10, compared to Apple’s 30%, a spokesperson later told me.)

“The product is built and ready to go,” Owens said, adding that there are already 2,000 developers signed up, representing $2 billion in app store volume, ready to try it out. Due to launch in December, Paddle has held off as Apple’s case with Epic (one of the most outspoken critics of IAP) has dragged on.

And he said, found Paddle’s name included, and not in a good way, in an update to Apple’s complaint.

That bold attitude may indeed keep Paddle in Apple’s bad books, but has made it a hero to third-party developers.

“Paddle is solving a significant pain point for thousands of SaaS companies by reducing the friction and costs associated with managing payments infrastructure and tax compliance,” said Patrick Devine, a director at KKR, in a statement. By simplifying the payments stack, Paddle enables faster, more sustainable growth for SaaS businesses. Christian and the team have done a phenomenal job building a category-defining business in this space, and we are excited to be supporting them as they embark on the next phase of growth.”

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Government

The Fed’s Latest Housing Bubble

Is the current housing market in a bubble that is ready to pop? If so, what is the source and magnitude of the market distortion. The topic of a possible…

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Is the current housing market in a bubble that is ready to pop? If so, what is the source and magnitude of the market distortion. The topic of a possible housing bubble has been a topic of discussion lately, especially before Fed officials went on the warpath against Consumer Price Index (CPI) inflation. I have been asked about this issue and below is a truncated response to all those inquires.

I was asked in 2005 to write a chapter about housing bubbles for a proposed book on housing economics and government intervention. Much of the book would be about matters like government planning, zoning, eminent domain, and various government subsidies. My chapter would be a “macro” topic in contrast to the many “micro” housing topics.

I had been following and writing about the then current housing bubble (HB1) since 2003, having just left a stint in the Alabama Banking Department as the Assistant Superintendent of Banking in Alabama to take a professorship of macroeconomics at Columbus State University in Georgia.

I wrote for LewRockwell.com and Mises.org about the housing bubble and in 2005 I published my article “Skyscrapers and Business Cycles” in the Quarterly Journal of Austrian Economics which made the general theoretical connection between Fed policy and real estate investments and in this case, the connection between Fed policy, record setting skyscrapers, and economic chaos.

While my chapter was submitted in 2006 it was not published in the intended book until 2009 during the aftermath of the bubble.1 Not only did the editors invite me to include material in the final published version that they had originally deleted as too controversial. They also drew attention to my chapter at the beginning of their introduction to the book:

To the extent that the media was aware of my work, especially on the skyscraper curse, the response and level of appreciation was mixed. On the one hand, CNN was positive, if not surprised, that my work was so accurate and specific:

One person who wasn't surprised by the economic woes greeting the dedication of the Burj Khalifa (renamed Monday from Burj Dubai in honor of the sheikh of Abu Dhabi, which recently threw Dubai a $10 billion lifeline) was Auburn University economist Mark Thornton.

He predicted tough times for the emirate two years ago in a blog post entitled "New Record Skyscraper (and Depression?) in the Making." He noted that economic depression or stock market collapse usually occurs prior to completion of such skyscrapers.

On the other hand, The Economist took my “skyscraper curse” model to task because it did not stand up to somebody else’s poor understanding of the data involved. The magazine did not actually use my name in their article, although my academic article is listed in their reference list although my name was missing there too. My letter to their editor was not published and after many months I was extremely surprised to receive an email from them saying that my letter to the editor had been misplaced. Despite its discovery, they did not publish it. Extremely odd?

Review of the Charts

Here I will review the charts that I used in my 2006/2009 chapter and update the charts for the current housing bubble. As you will see, the Fed clearly did not learn its lesson and stuck its fingers back into the cookie jar. Of course, much more could be said about this housing bubble, but I will mention here that the bubble in real estate is cloaked in what my friend Keven Duffy correctly calls the “everything bubble.”2

The first chart is based on the Federal Funds Rate, which is the Fed’s main policy interest rate. They can control it directly and because it is the interest rate that banks charge other banks for very short-term loans, it sets the foundation for most other interest rates in the economy.

My chapter was completed in early 2006, but I had been studying and writing about the first housing bubble since early 2004. The paper was not published until 2009, long after the bubble burst and policy makers at the Fed and elsewhere were busily trying to cover up their mistakes.

What followed was seven years near the zero target rate and multiple rounds of bailouts and quantitative easy. This changed in 2016 as the Fed tried to engineer a return to normalcy and a soft landing. It did not work and under the cloak of the covid-19 crisis, the Fed went into double panic mode with a return to zero rates and quantitative easing combined with the Federal government’s unprecedented fiscal stimulus.

At the far left of the graph, you can see the Fed has once again embarked on a normalcy/tightening phase that has only just begun. The Fed has yet to raise its target rate above 1 percent. Balanced sheet reductions will be small until after the November election. Their response is particularly anemic so far given that CPI inflation is above 8 percent.

The thirty-year fixed-rate mortgage is a primary driver of housing bubbles. The 6 percent rate that caused the previous housing bubble seems high compared to recent years, but 6 percent is lower than at any time since we went off the gold standard in 1971.

The truly remarkable rates occurred only in the last few years when a combination of the Fed driving its policy rate to zero, massive quantitative easing, including massive purchases of mortgage-backed securities (MBS) and a tame CPI inflation led to the lowest rates ever, often less than 3 percent!

The Fed’s verbal war on CPI inflation by its top policy makers threatening large and sustained rate hikes and enormous balance sheet reductions, combined with out-of-control CPI inflation has moved market mortgage rates up sharply, now above 5 percent. The shift in recent years to fixed rate mortgages and away from variable rate mortgages should insulate current holders but could also crush potential home buyers and eventually hurt mortgage investors, banks, the Federal Deposit Insurance Corporation (FDIC) and even the Fed itself, which is the largest investor in mortgages.

If CPI does not soon collapse, the Fed will have to move rates much higher and that would trigger a downturn in housing statistics including prices and new permits—the new housing bubble would go bust. Recently on Bloomberg, a top Fed official was asked if its policy could reduce home prices and make it more affordable for first time buyers. The official quickly coughed and said the Fed would never reduce home prices, only the rate of increase. I’m glad that isn’t my job!

In the twenty years prior to completing my paper the total amount of real estate loans at commercial banks increased from $1 trillion to $3 trillion, a massive $2 trillion increase. That same number increased from $3 to $5 trillion, another $2 trillion increase over the last fifteen years despite a soft or negative overall market from 2009 to 2015.

The personal saving rate was above 10 percent on the gold standard and few people were on the public dole. Since going off gold in 1971 the saving rate has been declining and registered near zero when I completed my chapter in 2006. It has since risen to a higher level but remained below the gold standard percent-of-income level, until the covid-19 crisis hit, and the Fed went into its inflationary panic response in March 2020. The Federal government also ran massive deficits combined with multiple rounds of “stimulus” vote buying sprees. With vast amounts of free money and historic economic uncertainty, the personal saving rate spiked to over 25 percent and has since returned to the prior rate between five and 10 percent.

The money supply as measured by the MZM statistics increased by 50 percent during the first housing bubble and has increased another 50 percent since then, increasing in the last few years from roughly $6 trillion to $9 trillion. Obviously, the Fed is trying to do the impossible, which is to engineer and print the economy to prosperity, or whatever goal they are pursuing.

During the previous housing bubble, the amount of Real Private Residential Fixed Investment increased substantially, nearly doubling in the fifteen years leading up to the bubble’s end. During the second housing bubble, it has nearly doubled again. During the previous housing bubble, I marked the beginning of that bubble by noting that housing investment even increased during the prior recession. Investment also spiked again in the recent short recession during 2020 which might suggest that the current bubble has yet to reach its final stages.

Another good measure of housing is the number of single unit housings starts, measured here with New Privately Owned Housing Units data. That number increased substantially in the fifteen years of the previous bubble, before dropping precipitously to a record low. Housing starts have been on a similar trajectory since the previous bubble-bust ended. Although it has so far not reached the same height of the previous bubble its absolute increase is about the same and the number of multi-unit dwelling has noticeably surpassed the previous bubble. Also, the number of employees in the construction industry has reached back to the previous record levels that occurred during the previous housing bubble.

The amount of household debt increased enormously during the previous housing bubble and continued to increase for two years after my paper was completed, before hitting the crash/recession and tapering off for several years before being reignited and reaching its new highs. Since mid-2013 household debt has increased by over 30 percent despite the covid-19 crisis bout of higher household savings.

There are a number of alternative explanations for the red-hot housing and construction sectors, but I have viewed this market as a bubble in the making for many years. My anticipation is that while it could continue for some time, ultimately, we will see that mistakes were made caused by the Fed.

Prior to the last crash in housing prices Fed officials told us there was no housing bubble, that the Fed had near-omniscience and power, and that they would intervene quickly to prevent a bubble or a bust in housing. They claim that was their own transparency, but it turns out it was really their deception of us.

Then on top of that, the Fed acquired new powers and authority, Congress enacted sweeping regulatory and reporting requirements, while everyone else became much more skeptical about house flipping, multiple home ownership, and the charms of “housing prices never go down,” and “no one ever lost money in real estate” maxims.

Now we hear that people are still desperate to buy a house despite outrageous prices. That prices are bid up higher than asking prices. That homes-for-sale inventories are non-existent in some markets and that available homes are snatched up instantly in other markets. That buyers are in a catch-22 of rising prices and rising mortgage rates. That recent buyers can flip for a profit. To me, these are all echoes from a housing bubble being blow up to its inevitable breaking point.

  • 1. Mark Thornton, “The Economics of Housing Bubbles” in America’s Housing Crisis:  A Case of Government Failure Edited by Benjamin Powell and Randall Holcombe. Independent Institute, 2009.
     
  • 2. Bubbles usually get named after the sector most impacted by the Fed’s monetary inflation and low interest rate policy, but most asset classes have reached bubble proportions in this cycle. NOT SURE IF HE ACTUALLY COINED THE PHRASE.
     

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Spread & Containment

Swiss Watch Shortage Spreads From Rolex To Cartier And Tudor

Swiss Watch Shortage Spreads From Rolex To Cartier And Tudor

A top retailer of Swiss luxury watches warns robust demand and the lack of supply…

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Swiss Watch Shortage Spreads From Rolex To Cartier And Tudor

A top retailer of Swiss luxury watches warns robust demand and the lack of supply have sparked a perfect storm of global Rolex shortages that has spread to other leading brands, including Cartier and Tudor. 

CEO Hugh Brian Duffy of Watches of Switzerland Group Plc, with a network of 171 retail stores between the UK and the US, told Bloomberg on Thursday morning that sales of Rolex, Patek Philippe, and Audemars Piguet had only "modest" increases in the retailer's 2022 fiscal year, primarily because of limited supply. He said this drove demand for other high-end brands. 

"We more than doubled our increases with them," Duffy said, citing Rolex sister brand Tudor, independent Breitling, LVMH's Tag Heuer, Swatch Group's Omega, and Richemont's Cartier. 

He said the Rolex shortage had increased so much demand for certain Cartier and Tudor models, that now those are experiencing supply issues. 

"We can't get enough Santos," he said, referring to the Cartier aviator watch, adding Tudor's chronograph models are in short supply.

Sales of Swiss watches went through the roof during the pandemic as classic high-end timepieces were in high demand as central banks worldwide pumped trillions of dollars into the financial system. Hot money had to end up somewhere, and some wound up in Rolexes and other luxury Swiss brands. 

Duffy concluded the interview by saying retail demand for Rolex, Patek Philippe, and Audemars Piguet watches outweighs supply: "Demand is just off the scale for those brands. We would love to have more of them." 

And when does this Swiss watch bubble end? Will it be when central banks spark the next global recession from aggressive monetary tightening? 

Tyler Durden Sat, 05/21/2022 - 08:45

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Government

Book Bits: 21 May 2022

● Fragile Futures: The Uncertain Economics of Disasters, Pandemics, and Climate Change Vito Tanzi Summary via publisher (Cambridge U. Press) This book…

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Fragile Futures: The Uncertain Economics of Disasters, Pandemics, and Climate Change
Vito Tanzi
Summary via publisher (Cambridge U. Press)
This book revisits a distinction introduced in 1921 by economists Frank Knight and John Maynard Keynes: that between statistically predictable future events (‘risks’) and statistically unpredictable, uncertain events (‘uncertainties’). Governments have generally ignored the latter, perceiving phenomena such as pandemics, natural disasters and climate change as uncontrollable Acts of God. As a result, there has been little if any preparation for future catastrophes. Our modern society is more interconnected and more globalized than ever. Dealing with uncertain future events requires a stronger and more globally coordinated government response. This book suggests a larger, more global government role in dealing with these disasters and keeping economic inequalities low.

The Power of Crisis: How Three Threats – and Our Response – Will Change the World
Ian Bremmer
Interview with author via Harvard Business Review
It feels like a moment of panic for many. While there were some success stories in how public and private sector leaders managed the global pandemic, it isn’t over, and many more crises — from political polarization to climate change to new technological threats — loom. But one leading political scientist is hopeful that countries and corporations can find ways to overcome their divisions and better collaborate on our most pressing issues over next ten years. He points to historic precedents and makes specific recommendations for the future, noting that in areas where political divisions cause roadblocks, it will be up to corporate leaders to ensure progress.

21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19
Ben S. Bernanke
Interview with author via CNBC
Former Federal Reserve Chair Ben Bernanke said the central bank erred in waiting to address an inflation problem that has turned into the worst episode in U.S. financial history since the early 1980s.
Bernanke, who guided the Fed through the financial crisis that exploded in 2008 and presided over unprecedented monetary policy expansion, told CNBC that the issue of when action should have been taken to tame inflation is “complicated.”
“The question is why did they delay that. … Why did they delay their response? I think in retrospect, yes, it was a mistake,” he told CNBC’s Andrew Ross Sorkin in an interview that aired during Monday’s “Squawk Box” show. “And I think they agree it was a mistake.”

The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation, and Undermine Regulation
James Bessen
Summary via publisher (Yale U. Press)
Historically, competition has powered progress under capitalism. Companies with productive new products rise to the top, but sooner or later, competitors come along with better innovations and disrupt the threat of monopoly. Dominant firms like Walmart, Amazon, and Google argue that this process of “creative destruction” prevents them from becoming too powerful or entrenched. But the threat of competition has sharply decreased over the past twenty years, and today’s corporate giants have come to power by using proprietary information technologies to create a tilted playing field. This development has increased economic inequality and social division, slowed innovation, and allowed dominant firms to evade government regulation. In the face of increasing calls to break up the largest companies, James Bessen argues that a better way to restore competitive balance and dynamism is to encourage or compel these companies to share technology, data, and knowledge.

Beyond Self-Interest: Why the Market Rewards Those Who Reject It
Krzysztof Pelc
Summary via publisher (Oxford U. Press)
A provocative retelling of the workings of self-interest in contemporary market society, which claims the world increasingly belongs to passionates, obsessives, and fanatics: those who do things for their own sake, rather than as means to other ends. In our capitalist market society, we have come to accept that the way to get ahead is through strong will, grit, and naked ambition. This belief has served us well: it has contributed to making our affluent societies affluent. But does the premise still hold? As Krzysztof Pelc argues in Beyond Self-Interest, this default assumption no longer captures reality.

The Downfall of the American Order?
Edited by Peter J. Katzenstein and Jonathan Kirshner
Summary via publisher (Cornell U. Press)
For seventy-five years, the basic patterns of world politics and the contours of international economic activity took place in the shadow of American leadership and the institutions it designed—an order designed to avoid the horrors of previous eras, including, most poignantly, two world wars and the Great Depression. But all things must pass. The global financial crisis of 2008, the legacy of two long, losing wars, and the polarizing and tumultuous presidency of Donald Trump all suggest that global affairs have reached a turning point. The implications of this are profound. The contributors to this book cast their eyes back on the order that once was, and look ahead to what might follow. In dialogue with each other’s appraisals and expectations, they differ in their assessments of the probable, ranging from a hollowed-out American primacy muddling through by default, to partial modifications of old institutions and practices at home and abroad, and to wholesale contestations and the search for new orders.

Oil Leaders: An Insider’s Account of Four Decades of Saudi Arabia and OPEC’s Global Energy Policy
Ibrahim AlMuhanna
Summary via publisher (Columbia U. Press)
Oil is an unusual commodity in that individual decisions can have an outsized effect on the market. OPEC+’s choice to increase production, for instance, might send prices falling, affecting both oil producers and consumers worldwide. What do the leading oil market players consider before making a fateful move? Oil Leaders offers an unprecedented glimpse into the strategic thinking of top figures in the energy world from the 1980s through the recent past. Ibrahim AlMuhanna—a close adviser to four different Saudi oil ministers during that period—examines the role of individual and collective decision making in shaping market movements.

Diplomacy and Capitalism: The Political Economy of U.S. Foreign Relations
Christopher R.W. Dietrich
Summary via publisher (U. of Pennsylvania Press)
At the same time as modern capitalism became an engine of progress and a source of inequality, the United States rose to global power. Hence diplomacy and the forces of capitalism have continually evolved together and shaped each other at different levels of international, national, and local transformations. Diplomacy and Capitalism focuses on the crucial questions of wealth and power in the United States and the world in the twentieth century. Through a series of wide-ranging case studies on the history of international political economy and its array of state and non-state actors, the volume’s authors analyze how material interests and foreign relations shaped each other.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

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