Business strategy can sometimes look like a game of dark chess, a chess variant in which players have incomplete information. It was invented by Jens Bæk Nielsen and Torben Osted in 1989. In this, a player does not see the entire board – only their own pieces and the squares that they can legally move to. The goal is not to checkmate the king but to capture it. A player is not told if their king is in check. Failing to move out of check can result in a capture and loss of the game. Dark chess has a strong strategic flavor where the king should be carefully protected from very dangerous checks by invisible pieces.

The battlefield for e-commerce dominance is in a precarious situation. An invisible piece has positioned itself strategically to help Facebook and Google launch a strong challenge to Amazon’s supremacy. That invisible piece is Shopify, the second-largest e-commerce enterprise in the US behind Amazon.

Shopify’s Success

Shopify’s platform powers more than one million businesses to host their online store rather than join a marketplace such as Amazon or eBay. It provides merchants with an intuitive user experience that requires no up-front training to implement and use, enabling merchants to set up their shops in less than 15 minutes. Today, this Ottawa-based company has the largest market capitalization of any Canadian public company, over $135 billion US dollars. Shopify shares have almost tripled in value since mid-March 2020, and its Q3 2020 sales doubled year-on-year for the second time in as many quarters.

Related and Unrelated Diversification

The big four- Facebook, Google, Amazon, and Apple have always looked for related and unrelated diversification of services to create new revenue streams and reduce overall risk. Both Facebook & Google have primarily preferred to sell ads that send people to other digital stores rather than selling themselves. But all that is changing with their partnerships with Shopify. Facebook and Google are going for unrelated diversification and don’t want to miss out on the e-commerce boom borne out of the pandemic.

Facebook’s Partnership with Shopify

Facebook announced a long-term collaboration with Shopify in May 2020 to launch ‘Facebook Shops,’ a mobile-first shopping experience where businesses can quickly create an online store on Facebook and Instagram. It aimed to ease the disruption caused by the COVID-19 pandemic, especially for smaller businesses, and was launched first for US sellers. Sellers are liable to pay a selling fee of 5% per transaction to sell products on Facebook shops. It has been an enormous success for Facebook to generate incremental revenue. Its Q3 2020 revenue jumped 22% year-over-year despite the ad boycott campaign in July.

As consumers increasingly shift to online and mobile shopping to find the products they want, a tool like Facebook Shops will help merchants offer more seamless experiences and strengthen relationships with their customers. Consumers can easily find, browse, and buy products through a purpose-built, immersive experience in these apps they use every day.

Google’s Partnership with Shopify

Bloomberg reported[1] recently that Google is testing a new integration with Shopify for selling items through YouTube. The company has described this as an experiment and has declined to share more details. But the ramifications can be huge. Every product we see on a YouTube video can be on sale on YouTube itself. It can turn into a full-fledged e-commerce platform.

It is important to note that today, Amazon is the most popular e-commerce search engine in the world, not Google. Around 66% of product searches start on Amazon[2]. As Google partners with Shopify, it will also hope to recover this lost ground.

Along with Facebook and Google, TikTok also partnered with Shopify in Oct 2020 to allow users to shop as they scroll through short-form videos on its platform. The e-commerce market will continue to boom till the pandemic extends, and there is room for new players. After we go back to normal, in whatever form that is, we will begin to see more jostling for market share and its impact on Amazon. Even now, it is highly likely that Amazon’s market share would have reduced compared to the pre-pandemic numbers.

But what is it with Shopify that allows it to play a key role in the e-commerce market? Let’s understand their business model.

Shopify’s Business Model

More about the legend in Fig.1: Choice represents the set of managerial choices made by Shopify. It includes policy choices, asset choices, and governance choices. Rigid consequences of choices are built over time, difficult to imitate, and are unlikely to disappear quickly even after the underlying choice changes. Flexible consequences respond quickly when the underlying choice changes.[3]

Understanding the Business Model

Shopify has a merchant-first business model and sees merchant success as the key to its success. This model is entirely different from Amazon’s two-sided marketplace. Shopify’s business model is a virtuous cycle. It starts with a need-based pricing plan(starts as low as $29/month). The low complexity and low capital requirements to set up an online store lead to more merchants’ adoption. More merchants lead to more GMV for the platform, which further leads to economies of scale and low cost of services.

More GMV brings more partners to join the platform. Partners are third-party experts (a community of app developers, website designers, and others) who offer Shopify merchants services. The services range from marketing and content writing to store setup and troubleshooting. As of mid-2020, the partner ecosystem included over 4500 apps and over 30,000 agencies and web designers. This is a key competitive advantage for Shopify as this ecosystem of apps and partners cannot be replicated by others. The data from the partner ecosystem also informs it about the new features required to empower the merchants.

Over time, with economies of scale and data from the partner ecosystem, Shopify continually adds more sophisticated tools to its platform. Examples include refund management, abandoned checkout management, fraud detection, and analytics to track sales and inventory. This capability development further improves its quality and brings more merchants to join through the direct network effect. And thus, the virtuous cycle continues.

Shopify has built a powerful e-commerce management software that also allows sellers to integrate multiple sales channels. This means that a business can sell on its website, Facebook, Instagram, Amazon, eBay, and more, all from one dashboard. These sales channels allow Shopify merchants to retain complete control over their business while also getting access to a suite of features designed solely to help them grow. Moreover, Shopify takes a much smaller commission from its sellers than Amazon: 2.9% of sales compared to Amazon’s 15% cut.

Shopify Would Not Want To Compete Directly

Shopify does not carry out the deliveries itself, but it is building a warehouse and logistics network that will take another four years to complete[4]. Even then, it plans to distribute the economies of scale to the small businesses. It wants to stay true to its model of empowering business owners. This approach of bringing the companies in the limelight and staying in the background is quite different from the bargaining power Amazon has over its sellers. Shopify’s model is too different to compete directly with Amazon.

Moreover, the smart merchants sell both on Shopify and Amazon, and now on Facebook & others depending on the customers targeted. It is in Shopify’s interest to stay in its current strategic position. Turning into a two-sided marketplace like Amazon would not be the right way to go; it would be against its core principles.

However, we can say that partnering with Shopify has lowered the entry barrier for Facebook and Google to take part in the e-commerce pie. This will impact Amazon’s market share and continue to pose the threat of new entrants.

Growing Pains 

Shopify’s rapid growth during the pandemic has left it exposed to fraudsters. Thousands of sellers on Shopify are using it to scam consumers and sell counterfeit goods. According to the e-commerce authentication service FakeSpot, which analyzed more than 120,000 Shopify sites, as many as 21% posed a risk to shoppers[5].

On Amazon, negative seller reviews can quickly get them down-ranked or removed. Amazon gets its share of criticism for it sometimes, but it has focused more on protecting customers’ interests. Hopefully, Shopify will address this growing pain quickly with stricter fraud detection policies, especially given its partnership with Google.

Time For Amazon To Launch A Measured Counterattack

The pandemic has also given a boom to streaming services. With Google looking to turn YouTube into a marketplace, the time is right for Amazon to counterattack by bringing the shopping experience on Amazon Prime Video. Imagine sitting on the couch and browsing through product videos on your TV to choose the right one. It’s not so different than trying to select the next thing to watch on Netflix. Such shopping experiences with product videos are bound to generate more engagement. Amazon cannot afford to be behind on this.

The e-commerce market has grown exponentially during the pandemic, and Amazon has benefited massively from at-home shopping. Its year over year net income tripled to $6.3bn in Q3 2020 compared to $2.1bn in Q3 2019. These numbers are enough to cause psychological invisibility of the battle at hand. In this game of dark chess, Shopify sits seemingly unmovable. Google and Facebook, earlier invisible in the e-commerce space, position themselves in threatening positions to grab market share. Can Amazon protect its dominance? The giants are not known to accept defeat, and time will be the best judge of this fascinating game.

Endnotes:

[1] Bergen, Mark and Shaw, Lucas, “ Google Plans to Make YouTube a Major Shopping Destination”, Oct 9, 2020, https://www.bloomberg.com/amp/news/articles/2020-10-09/google-tries-to-turn-youtube-into-a-major-shopping-destination

[2] Magana, Greg, “Amazon rules the product search process”, Mar 20, 2019, https://www.businessinsider.com/online-shoppers-rely-heavily-on-amazon-2019-3

[3] Ramon, Joan (2011), How to Design A Winning Business Model, Harvard Business Review (Jan-Feb 2011)

[4] Bradshaw, Tim, “ Shopify accelerates online shopping services to take advantage of crisis”, May 20, 2020, https://www.ft.com/content/4209aaec-1d31-4d31-b934-600dfc0f18c2

[5] Lee, David., “Thousands of fraudsters are selling via Shopify, analysis finds”, Dec 21, 2020, https://www.ft.com/content/0280592d-0adf-4dcb-a831-4f8a85f414bc

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