Indirect
Back in February 2021, Benedict Evans wrote an essay on Shopify, Amazon and the simmering competition between the two.
Shopify had just released its 2020 year-end earnings and everyone was still talking about the step change in ecomm, as well as DTC’s place in it. Evans, though, was talking about something else.
Shopify isn’t doing what Amazon does - it isn’t competing directly and it wouldn’t fit inside a competition lawyer’s market definition (I wrote more about the market definition challenge here). But it challenges Amazon at a very basic point of leverage by doing something different, but relevant. This is very often what competitive threats look like in technology. In markets with strong network effects or winner-takes-most effects, it’s very hard to displace a new incumbent directly, but pretty common to address an underlying customer need in another way.
The interesting question for Shopify is how far it can move from being a tool to becoming a network, and to become part of retail. And so (to close the loop), the idea that all of this will be swallowed by Amazon makes about as much sense as the idea that all physical retail would get swallowed by Walmart, not because of software but because of retail. So perhaps software isn’t eating retail - retail is eating software.
We are, some 33 months later, on the verge of seeing just how serious Shopify is about pushing on this.
On Monday, Shopify’s Shop brand announced it was available on web. No longer do you need to download the app.
It is very MVP from a marketplace perspective, but it is there and it is accessible and it serves a purpose for a company whose founder once said it is “virtually invisible to consumers … by design.”
You get to do these things without much notice when you hit three straight earnings beats, which Shopify announced Thursday.
The numbers, no surprise, are impressive. But something interesting is happening, that no one seems to be talking about, and it feels like the connective tissue between Evans’ 2021 essay and Monday’s Shop announcement.
It’s this: For quite awhile, Shopify has been making noise about pushing into the enterprise, a move that appears to be reaccelerating its GMV growth: 15% YoY in Q1, 18% in Q2 and 22% in Q3. You might think, then, that its enterprise business is driving the growth of the company. It may be. But Shopify Plus—its traditional enterprise solution—has simultaneously had three straight quarters of declining share of recurring revenue. It has posted YoY declines in MRR share of at least 2% each quarter this year.
So, if GMV is growing, and Shopify is wooing larger brands, but Shopify Plus isn’t growing its share of the MRR pie, what’s going on?
Perhaps the answer lies in the corporate narrative.
Tobi’s 2018 letter to shareholders talked about supporting entrepreneurs by making it “significantly easier to start an online store, and keep that store up to date with the latest technology.”
Today, there’s little talk about a store. Most of what you hear is just supporting entrepreneurs; the how isn’t as specific. All the while, its Shop brand is becoming visible to consumers. (We guess this is the way Tobi gets to keep his word.)
Against a challenging background for DTC brands, this is not a mistake. In fact, it may be one of Shopify’s biggest bets: reduce the reliance on the direct channel it enabled to save the brands that Facebook created.
It may be one of the few available lifelines for those who need it.
Also this week: Crunchbase reported that VC funding in DTC is down 97% from 2021. If no one else comes to save the distressed brands, who would mind if Shopify becomes their growth channel?
Shopify certainly wouldn’t.
To be sure, Shopify still has some way to go. But Evans is looking more right by the month. Especially that last part about retail eating software. If he is, perhaps Tobi, Harley and the Shopify crew will be celebrating indirect-to-consumer brands within the next 33 months. It’d certainly be to their benefit.