Episode 4: My Most Controversial Opinion

One of my favorite scenes from The Godfather is when Vito Corelone asks (i) his son Sonny and (ii) his consigliere Tom about investing in the drug business. The Godfather has been approached by a Turkish gentleman about investing in the heroin business. “Santino,” Vito asks his son before the meeting, “what do you think?” Santino gives his typical gut reaction: “there’s a lot of money in that white powder.” Tom’s response is more sophisticated: “Now we have the unions and the gambling. But narcotics is the thing of the future. If we don’t get a piece of that action, we risk everything we have. Not now, but ten years from now.” 

Shopify is dying. Not now, but ten years from now. That may be my most my most controversial opinion.

Disclosures

First, let me start out by saying that I love Shopify. Over the past decade, it has cemented itself as the hegemon in eCommerce. If you had invested in Warby Parker, Allbirds, Figs, StitchFix, Honest, or Grove Collaborative at their IPO, you would have lost money. That’s not the case with Shopify. The business I started - Native - lives on Shopify. 

Second, let me say that I think Shopify is still on an upward trajectory in many ways. Large eCommerce businesses are switching to Shopify. ButcherBox switched to Shopify. I think if Everlane were to start today, they would start on Shopify.

Third, let me say that I still own millions of dollars of Shopify stock myself. Why am I not selling if I believe what I say? Well, three reasons. One - I’m not even sure I believe it. Two - taxes. Three - timing.

Date The World Changed

Facebook has been playing around with eCommerce since 2012, when they purchased Karma from Lee Linden. They’ve never taken eCommerce seriously. They simply didn’t know how to approach it. Should they sell you gifts that you can send to your friends for their birthday? Should they create a marketplace and replace Craigslist? Sell gift cards? They didn’t know what to do, and frankly, they didn’t care. But that changed when TikTok Shops launched.

On September 12, 2023, TikTok launched TikTok Shop (TTS). It was one of the most incredible launches in my lifetime. TTS made it clear that TikTok wasn’t going to treat ecommerce as an afterthought - it was going to be a core part of TikTok’s strategy. In 2020, if you were a brand looking for an influencer on instagram, you had to message dozens of creators and negotiate rates and send out free products and then create coupon codes to track sales. It was cumbersome, ineffective, and crude. TTS completely changed the script. They made it so that affiliates/creators/influencers could find brands quickly and easily through TikTok, and tracking was done through TTS and not through coupon codes or random links. More importantly, the transaction happened on TTS - not on your Shopify site. TTS took your address and credit card information, and even monitored the shipping of the package to ensure that the brand sent you your products in a reasonable period of time in order to maintain the credibility of the platform. Simply put, they made the platform incredibly effective by: 

• Making it so creators and brands could find each other easily 

• Making it so that creators and brands could track performance of their relationships incredibly easily

• Making it so that the transaction happened inside TikTok and not on Shopify, meaning the data was unimpeachable

• Subsidizing the adoption among consumers by giving them free TTS dollars. 

Facebook immediately understood the existential threat that TTS represented, and created a similar Shop product. After a decade of doing nothing, Facebook started moving, and moving quickly. Now, you can buy products directly inside Facebook Shop or Instagram Shop without ever leaving the social media app. Your shipping information, billing information, and email address are all stored within FB. When you complete the order, you do so inside facebook, and FB handles the processing of the credit card. You never touch Shopify. 

This is a huge departure from the past, and a warranted one based on Facebook and TikTok’s needs.  

In 2020, if you clicked a facebook ad on your iPhone for Native Deodorant, you reached Native’s website on a browser. If you purchased Native, you did so on Native’s Shopify site and Native passed your data back to Facebook. All this data was third party to Facebook, and post iOS 14.5, it became harder for Facebook to get, track, and appreciate this data. 

Now, if you click a facebook ad on your iPhone for Native Deodorant, you may be taken to Native’s Shopify site, or you might be taken to Native’s Facebook store where you can also make a purchase. If you make the purchase on the Facebook store, you will actually never leave the Facebook app. All the data that Facebook collects will be first party, meaning it will be rightfully owned by facebook and uninterrupted by Apple. Facebook will get and store your address and contact information, and process the transaction. It will also get far more data about you than it would if you used Shopify - time on site, SKU level data, etc. 

Facebook also requires brands that make sales through SHOP to upload tracking data, so it will soon understand processing timelines per store, etc. Facebook hasn’t created the affiliate ecosystem that TTS has, but I’m sure it is on its way. 

Why is this so important? 

This may not seem like such a huge deal. After all, Shopify and Facebook are in a symbiotic relationship. FB pumps the orders from your FB Shop into Shopify. So does TTS. FB also “borrows” the reviews on your Shopify site so you can put them onto your FB Shop. On the surface, this seems symbiotic, and not cannibalistic. 

That is true until it isn’t. 

Here is why I’m cautious about how long this relationship lasts. 

First, Facebook has a history of not being kind to people who build on its platform. Remember farmville? 

Second, Shopify needs facebook. It isn’t the other way around. In the aggregate, Shopify knows exactly where traffic is coming from for the brands that are on Shopify. It may seem like it isn’t facebook because Google and emails are such a large source of traffic, but the reality is that FB is the original source of most eCommerce traffic. Virtually every brand above $5M and under $20M in revenue was either built on the back of facebook ads, or is reliant on facebook ads today to continue its growth (or both).

(While Shopify might think that their stores’ primary source of traffic is Google or email, I’d bet that those searches started because someone saw a facebook ad or those email addresses were derived from a facebook ad leading to an email sign up pop up. The ultimate originator of that traffic is still social media.)

Third, while this relationship remains symbiotic today, it only remains so because FB wants it that way. FB Shop is still an incredibly new product. It doesn’t support subscriptions, or product detail pages, or landing pages, etc. FB wants the symbiosis with Shopify while it continues to build out its own ecommerce platform inside FB. Shopify has no other alternative than to continue to support FB because Shopify merchants need FB. Same goes with TTS.  

Fourth, FB needs to move more towards first party data. It is still recovering from weakened performance post-iOS14.5. The data that facebook receives from merchants is still gray, and somewhat inaccurate. You still can’t trust Facebook Ad Manager the way you could five years ago. Armed with first party data, FB will become trustworthy again.  

Finally, not only does owning the transaction allow FB to make more money (enough motivation on its own), but it’s also a self-reinforcing loop for the ads business as owning checkout gives them complete end-to-end data on the customer journey, which in theory should also improve the efficiency of their ads. It just makes complete sense.

Moving Forward. 

It’s hard not to believe that FB and TTS will make their eCommerce shops more powerful. Two years ago, they didn’t support reviews or coupon codes. Now they do. 

It’s also hard not to believe they are focused on this now. They are subsidizing ads that go to your FB Shop or IG Shop already. They can continue this subsidy until they own the market. Lets say you had to pay $40 for a new customer on your FB store, or $100 for a new customer on your Shopify store. Guess where you would drive all your traffic? The truth is that if you were ever given a choice as a brand between using FB ads or Shopify, you would choose FB ads. 

It’s also pretty easy to believe that once the larger social media platforms build out their own shops, other platforms like Google, YouTube, and Pinterest will follow. Imagine if all the transactions that originate through these platforms happen off of Shopify. 

What is Shopify then? 

Well, let's be clear that Shopify will still exist. Where else will television ads, direct mail, and podcast ads drive you towards? But the honest truth is that Shopify will have far less traffic and fewer transactions running through Shopify, as more and more people purchase directly on FB or TTS. And Google and Pinterest Shop. I already know of one business that tries to drive the majority of their traffic to their FB Shop and not their Shopify site. What happens when more stores operate like this? 

Shopify’s destiny is to become the Zapier of eCommerce: they are the central node where the orders placed through all the various platforms are run through to your Shipstation or 3PL. But, there is just a lot less value in that than owning the transaction itself. And that is scary stuff. 

Lets finish this week out by admitting I don’t know much about SaaS or advertising. Shopify could realize everything I’ve written here already and be ready for it. Or maybe I’m just wrong about FB’s focus. Or I don’t understand the ecosystem well enough.

I welcome you thoughts, because I’m not sure I know how to think about this. You can respond here, or tweet at me (@moizali).

Housekeeping

Please note: I am not a financial advisor, nor am I your financial advisor. Only one person should make financial decisions based on my thoughts, and that’s me.

FYI, I’m taking next week off the newsletter. I’ve just got a mix of personal and professional stuff this week that will make writing it difficult. So, if you miss me in your inbox as you’re recovering from the “big game”, don’t despair! I’ll be back soon.