Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future (2017)

APPENDIX 2

WHILE MUSK HAS REFLECTED PUBLICLY ABOUT HIS TIME AT PAYPAL AND THE COUP, he went into far greater detail than ever before during one of our longer interviews. Years had passed since the tumultuous days surrounding his ouster, and Musk had been able to meditate more on what went right, what went wrong, and what might have been. He started by discussing his decision to go out of the country, mixing business with a delayed honeymoon, and ended with an explanation of how the finance industry still hasn’t solved the problems X.com wanted to tackle.

“The problem with me going away was that I was not there to reassure the board on a few things. Like, the brand change, I think it would have been the right move, but it didn’t need to happen right then. At the time it was this weird almost hybrid brand with X.com and PayPal. I think X was the right long-term brand for something that wants to be the central place where all transactions happen. That’s the X. It’s like the X is the transaction. PayPal doesn’t make sense in that context, when we’re talking about something more than a personal payment system. I think X was the more sensible approach but timing-wise it didn’t need to happen then. That should have probably waited longer.

“As for the technology change, that’s not really well understood. On the face of it, it doesn’t sound like it makes much sense for us to be writing our front-end code in Microsoft C++ instead of Linux. But the reason is that the programming tools for Microsoft and a PC are actually extremely powerful. They’re developed for the gaming industry. I mean, this is going to sound like heresy in a sort of Silicon Valley context, but you can program faster, you can get functionality faster in the PC C++ world. All of the games for the Xbox are written in Microsoft C++. The same goes for games on the PC. They’re incredibly sophisticated, hard things to do, and these great tools have been developed thanks to the gaming industry. There were more smart programmers in the gaming industry than anywhere else. I’m not sure the general public understands this. It was also 2000, and there were not the huge software libraries for Linux that you would find today. Microsoft had huge support libraries. So you could get a DLL that could do anything, but you couldn’t get—you couldn’t get Linux libraries that could do anything.

“Two of the guys that left PayPal went off to Blizzard and helped created World of Warcraft. When you look at the complexity of something like that living on PCs and Microsoft C++, it’s pretty incredible. It blows away any website.

“In retrospect, I should have delayed the brand transition, and I should have spent a lot more time with Max getting him comfortable on the technology. I mean, it was a little difficult because like the Linux system Max had created was called Max Code. So Max has had quite a strong affinity for Max Code. This was a bunch of libraries that Max and his friends had done. But it just made it quite hard to develop new features. And if you look at PayPal today, I mean, part of the reason they haven’t developed any new features is because it’s quite difficult to maintain the old system.

“Ultimately, I didn’t disagree with the board’s decision in the PayPal case, in the sense that with the information that the board had I would have made maybe the same decision. I probably would have, whereas in the case of Zip2 I would not have. I thought they just simply made a terrible decision based on information they had. I don’t think the X.com board made a terrible decision based on the information they had. But it did make me want to be careful about who invested in my companies in the future.

“I’ve thought about trying to get PayPal back. I’ve just been too strung out with other things. Almost no one understands how PayPal actually worked or why it took off when other payment systems before and after it didn’t. Most of the people at PayPal don’t understand this. The reason it worked was because the cost of transactions in PayPal was lower than any other system. And the reason the cost of transactions was lower is because we were able to do an increasing percentage of our transactions as ACH, or automated clearinghouse, electronic transactions, and most importantly, internal transactions. Internal transactions were essentially fraud-free and cost us nothing. An ACH transaction costs, I don’t know, like twenty cents or something. But it was slow, so that was the bad thing. It’s dependent on the bank’s batch processing time. And then the credit card transaction was fast, but expensive in terms of the credit card processing fees and very prone to fraud. That’s the problem Square is having now.

“Square is doing the wrong version of PayPal. The critical thing is to achieve internal transactions. This is vital because they are instant, fraud-free, and fee-free. If you’re a seller and have various options, and PayPal has the lowest fees and is the most secure, it’s obviously the right thing to use.

“When you look at like any given business, like say a business is making 10 percent profitability. They’re making 10 percent profit when they may net out all of their costs. You know, revenue minus expenses in a year, they’re 10 percent. If using PayPal means you pay 2 percent for your transactions and using some other systems means you pay 4 percent, that means using PayPal gives you a 20 percent increase in your profitability. You’d have to be brain dead not to do that. Right?

“So because about half of PayPal’s transactions in the summer of 2001 were internal or ACH transactions, then our fundamental costs of transactions were half because we’d have half credit cards, we’d have that and then the other half would be free. The question then is how do you give people a reason to keep money in the system.

“That’s why we created a PayPal debit card. It’s a little counterintuitive, but the easier you make it for people to get money out of PayPal, the less they’ll want to do it. But if the only way for them to spend money or access it in any way is to move it to a traditional bank, that’s what they’ll do instantly. The other thing was the PayPal money market fund. We did that because if you consider the reasons that people might move the money out, well, they’ll move it to either conduct transactions in the physical world or because they’re getting a higher interest rate. So I instituted the highest-return money market fund in the country. Basically, the money market fund was at cost. We didn’t intend to make any money on it, in order to encourage people to keep their money in the system. And then we also had like the ability to pay regular bills like your electricity bill and that kind of thing on PayPal.

“There were a bunch of things that should have been done like checks. Because even though people don’t use a lot of checks they still use some checks. So if you force people to say, ‘Okay, we’re not going to let you use checks ever,’ they’re like, ‘Okay, I guess I have to have a bank account.’ Just give them a few checks, for God’s sake.

“I mean, it’s so ridiculous that PayPal today is worse than PayPal circa end of 2001. That’s insane.

“None of these start-ups understand the objective. The objective should be—what delivers fundamental value. I think it’s important to look at things from a standpoint of what is actually the best thing for the economy. If people can conduct their transactions quickly and securely that’s better for them. If it’s simpler to conduct their financial life it’s better for them. So, if all your financial affairs are seamlessly integrated one place it’s very easy to do transactions and the fees associated with transactions are low. These are all good things. Why aren’t they doing this? It’s mad.”