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A weekly(-ish) newsletter on commerce, media, science, tech, investing, & internet culture by Alex Taussig of Lightspeed.

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A weekly(-ish) newsletter on commerce, media, science, tech, investing, & internet culture by Alex Taussig. I am a partner at Lightspeed in Silicon Valley.

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Drinking from the Firehose #148

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Successful disrupters rarely attack incumbents head-on.

HP and Dell led the growth of the PC market until Apple upended the market in 2007 with the introduction of iPhone, a device that made Microsoft's Steve Ballmer simultaneously guffaw and scoff at the "most expensive phone ever in the market." PC shipments have shrunk every year since 2013, while the iPhone alone sold $63 billion in 2018. Newspaper ad revenue peaked at $50 billion in 2005, the year after Google IPO'd. Google's ad revenue alone exceeded $50 billion just 8 years later, while newspapers sold only $17 billion in ads.

These stories demonstrate how the biggest threat to entire industries is a business model change enabled by a technology platform shift (e.g. desktop to mobile, offline to online ads). A clarifying way to look into the future is to imagine how the most powerful incumbent players, or entire industries, could be toppled in such a manner. 

By many measures, Amazon* is the most formidable incumbent to topple. Wal-Mart has yet to meaningfully chip away at its leading market share in e-commerce. Microsoft and Google* have stolen a point or two of market share from its AWS platform, but the public cloud market is growing so fast it hardly matters. None of these players are well positioned to stop Amazon in its tracks.

That's why I've been following Shopify* closely. Last week, I finally bought some shares in the company, which has seen its LTM revenue multiple fall from 33x in late August to "just" 23x recently. That hardly seems like a bargain, but I continue to be impressed by the company's relentless execution and ambition.

While it began with a simple tool for sellers to set up their own e-commerce stores, Shopify has expanded into a platform with a thriving ecosystem of plug-ins. In addition, it allows merchants to manage and process payments, and recently launched fulfillment services and e-mail marketing software. Shopify is quickly building all the same functionality that Amazon offers its sellers, but with the significant benefit of running their own store and thus controlling their destiny. While I've yet to see data to back this up, I suspect many sellers are starting on Shopify, not Amazon, to begin selling online.

Shopify today has an enterprise value of $34 billion. Its gross merchandise value (GMV) through Q3-2019 was $40 billion, up 50% over the same period in 2018. From this GMV, it collected just over $1 billion in revenues from recurring subscriptions and payments products at 56% blended gross margins. If we assume Q4-19 will be 50% higher than Q4-18 ($14 billion), then the full year of 2019 should come in at $61 billion in GMV, $1.5 billion in revenues, and $840 million in gross profit. 

The last time Amazon was worth $34 billion was in September 2007! Amazon's net revenues that year were $14 billion, with $3.4 billion of gross profit. While most of Amazon's volume at the time was first-party e-commerce, its marketplace business constituted nearly 30% of unit (not dollar) sales. Based on recent filings with more business unit granularity, I estimate that marketplace should constitute around 25% of e-commerce net revenues.

Amazon guards its GMV closely, but we can estimate it using a "sum of parts" approach. We need to make two key assumptions. First, assume that Amazon's return rate for e-commerce sales is 15%, which is high for some categories (books, electronics) and low for others (apparel). That implies an e-commerce GMV of $12 billion [=$14b*0.75/(1-0.15)]. Second, assume that Amazon's marketplace commission is also 15%, although in reality it varies widely by product category. That implies a marketplace GMV of $23 billion [=$14b*0.25/0.15].

In total, Amazon should have transacted $35 billion in GMV in 2007 -- roughly 1x its valuation. At the same valuation, Shopify today is transacting 74% more GMV than Amazon did in 2007. To be fair, Shopify converts far less of that GMV into gross profit dollars (1.4% vs. 9.7%), but it has shown the ability to grow its rake of GMV by offering additional seller services like payments, working capital loans, and (now) fulfillment services.

To grow its take rate significantly from here, Shopify would need to deliver a value it currently lacks: demand gen(-eration). I've written about the powerful combo of free software, marketplace services, and demand gen in my "business in a box" post a few weeks ago. Because 50% of e-commerce searches already start on Amazon, the incumbent has a huge lead. How could Shopify potentially bring new customers to its merchants, for which it could likely charge hefty additional fees?

One idea would be to start networking the 1 million merchants who already sell on Shopify.

Imagine a Shopify app installed on a store page after checkout. It could offer ads for related or similar products. If the shopper clicks through and transacts in another store, Shopify could earn an additional "demand gen" rake for that transaction, net of payment to the sending merchant for hosting the ad inventory. Shopify may even find merchants willing to put these ads on other store pages to entice visitors who are likely to bounce anyway.

Because Shopify runs the websites of these merchants, it may be able to more accurately track users bouncing between sites and build machine learning algorithms to calculate lookalike audiences for its stores. It may also be able to persist a customer's payment info across stores to make the secondary checkout faster. In short, Shopify has the opportunity to build a distributed recommendation engine on top of ad inventory it partially owns and drive more sales to sellers in its network. That opportunity represents potential high margin revenue that could blend its net take rate up towards Amazon's. 

If it executes on demand gen, Shopify would have built the ultimate "business in a box" for online merchants and give them very little incentive to work with Amazon. That's as close to a lights out scenario for the e-commerce giant as we can expect to see.
 

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#commerce

The world according to Ray.

Ray Dalio of Bridgewater believes the capital markets are broken and that "the world is approaching a big paradigm shift." He points to the activities of central banks to explain the growing wealth disparity in developed countries like the US and argues that, when coupled with political game theory, the problem will only grow in urgency and magnitude in coming years.

Everyone wants to be a bank.

A bank is the ultimate bundler. That's why every consumer-facing company wants to get into the banking business. Wired wrote recently about how a number of tech giants are launching payments products, but face numerous headwinds from skeptical regulators. 

Apple may be the best positioned of all to own your wallet. By rejecting an ad-driven business model, it can authentically claim to keep all data on your device and not target you based on purchases.

#media

The future of music is gaming.

DJ Magazine discussed the growing fusion of virtual worlds, synthetic media, and the music industry. Marshmello's groundbreaking performance in Fortnite* this year was just the beginning. I can't wait until there's a product out here that hosts performances like that as a platform, similar to Turntable.fm back in the day, but far more immersive. 

#tech

Code cave.

Ashlee Vance accompanied Github's CEO all the way to Svalbard, Norway to store 6,000 Github repo's in a repurposed coal mine. At best, this will be a time capsule for humankind's technological progress in 1,000 years. At worst, it will be how we reboot the world's computers in a Doomsday scenario.

All eyes on Apple.

The Information reported that Apple held an internal meeting to announce two new devices: a mixed reality headset shipping in 2022, and AR glasses in 2023.

My first reaction to this article is that Apple must have known this internal announcement would leak. It revealed details to over 1,000 employees about projects that are 3+ years away from launching. The only rationale I can think of is that Apple is signaling to its current ARKit devs to keep building stuff for iPhone because soon they'll have another platform to play with.

#science

Hidden in plain sight.

Mathematicians discovered a simple formula relating eigenvectors to eigenvalues in an elegant way. It's a formula simple enough to be taught in most college classrooms, but for some reason it took a couple particle physicists in 2019 to discover it!

#culture

The canyon next door.

Glen Canyon is one of my favorite oddities in San Francisco (a city with plenty of oddities!). This article discusses a bit of its unusual history, which included a dynamite factory, amusement park and zoo, a Moorish castle, and an earthquake recovery community.

Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also own stock directly in AAPL, ADBE, AMZN, CRM, FB, FTCH, GOOG/GOOGL, NFLX, SHOP, SNAP, SPOT, SQ, and TWLO.

Lightspeed Venture Partners, 2200 Sand Hill Rd, Ste 100, Menlo Park, CA 94025 USA Sent to ataussig@gmail.com — Unsubscribe