Despite formerly bearish expectations, Square has had a good year. But as competition heats up in the payments space, can Square maintain its success?

That answer depends in large part on how well you think Square can imitate another company whose success is built on a mix of hardware and platform businesses: Apple.

While Apple makes most of its revenue from selling hardware (iPhones), a substantial part of its continued success comes from the success of its development platform, iOS, and the App Store. For Apple, this combination has been a potent one. How does Jack Dorsey's Square compare?

Square has multiple platform businesses in its wheelhouse. It has a payment platform in Square Cash. You can use Square Cash to send money to your friends and use the Square payment app to buy goods from Square merchants. Square also a marketplace with its food-delivery platform Caviar. And finally, it has a development platform with its own Square App Marketplace, which lets merchants download and purchase third-party software to use with their Square software.

The key user group in all of these platforms is merchants. Much like Square's core linear business, all of Square's platforms are dependent mainly on merchants, particularly small or very small merchants.

With this micro to small merchant base, Square has been growing quickly while operating at just below breakeven for about the last year. (Net income was between -$15 to -$16 million for each of the last few quarters).  

Square has proven it has a more convenient payment solution for smaller sellers, but it's also a cheaper solution for sellers that generate less than about $150,000 a year. It's recently had strong success too with midmarket sellers, or merchants who sell more than $500,00 a year. This segment grew by 64% and 61% YOY in the previous two quarters.

But will even bigger merchants be willing to use a more expensive solution, even though it may provide additional convenience? This seems like a tough sell. Square's swipe fees of 2.75% are more than many large sellers are willing to pay, given that they can find cheaper options elsewhere.

Go Big or Go Home

In order to sustain its growth, Square needs to win these bigger and bigger merchants. It has multiple ways to add more value despite its increased cost.

One of these is Square Capital, which has been growing quickly over the last year. It also needs to cement its lead with its app marketplace and continue to juice consumer adoption with Square Cash. Caviar also helps with a segment where Square tends to do very well: restaurants. While Square Capital could be imitated by the competitions, the latter three platforms could give Square a strong, defensible moat.

For comparison, Apple has successfully positioned itself as a premium seller. By combining hardware and software together, Apple is able to deliver a level of convenience and the "it just works" factor that consumers are clearly willing to pay for.

However, a key part of Apple's success has also been its development platform, not just the software it creates itself. It's hard to win on UX alone. A network provides a much more defensible moat. Is Square able to provide a similar value proposition to merchants? Potentially. But business customers are often more price sensitive, and the competition is much fiercer.

There are myriad POS providers competing with Square to sign-up merchants with their solutions. A number of these companies include new startups, like Toast, which raised another $100 million this past summer. So, can Square beat the competition with its hardware and software solution, as well as a growing app store?

Market Perspective

While Square has been successful, it's relative market share is still far from Apple-esque market dominance.

To put it in perspective, Square has yet to break $75 billion in gross payment volume in one year. Visa, MasterCard, American Express and Discover collectively exceed $1.4 trillion processed. And Square's market cap hovers at around only 5-10% of MasterCard or Visa, and only about 15-20% of that of American Express.

in Q1 of 2016, Visa, MasterCard, Amex and Discover processed over $1.4 trillion, in just one quarter. And, Square's market cap is 5-10% of MasterCard or Visa, and only about 15-20% the size of American Express.

Net-net, Square definitely has the opportunity to break through into another tier of the market. But how much of that future expansion is already baked into investors' expectations? While Square has had a great year, increased competition, a difficult to defend position and a quickly growing market could slow its momentum.

If Square can continue to build on its value-added services like Square Capital and grow its multiple platform businesses, it could come out next year looking even stronger. Much like Apple, Square's fate doesn't just depend on selling hardware and software. It depends on how well it can build more defensible platform businesses to sustain them.