2020 Ecommerce Customer Base and the Strategic Technologies to Support Them

Currently, the world has 1.8 billion internet users. By 2020, Zdnet forecasts that there will be 5 billion worldwide internet users. The first thing we should take from this is that there will be 3 billion more internet users who are not from the United States. The international opportunity is seemingly tremendous.

This is by no means supposed to discount the U.S. market. In fact, the U.S. market is the steady core that provide retailers with unyielding growth through 2020 (and most likely beyond). It is a necessity for retailers. But as an e-commerce strategist, one must always think "beyond the core" (to quote Chris Zook). Indeed, it would be unwise to miss out on the significant international opportunity - especially the 2020 international opportunity.

Briefly, let's review some more data. In 2009, 6% of the $135 billion in U.S. e-commerce came from international buyers. With such explosive growth in overseas internet usage and e-commerce growth, this "international sales ratio" will double to 12-14% of U.S. e-commerce sales. This means that 1 in 7 buyers at your e-commerce site isn't from the U.S. And this is just an average! Some retailers already have 30-50% of total web sales from international buyers. These cases will only multiply over time.

A lot has been written about U.S. domestic customers (and who knows U.S. consumers better than the retailers that sell to them?). Therefore, I won't re-invent the wheel with domestic consumers. I'll focus on the international audience.

In order to win the international market in 2015 and 2020, retailers have to begin thinking strategically about technology spending about now. Research has shown that the ramp up time for international customers to crowd into your web retail store is a 2-3 years. So if you begin in 2014, you won't be ready to capitalize by 2015.

In-house IT groups always have dozens of "high-priority" projects to attend to - but this needs to be at the top of their list. So now the question becomes: what aspects of the international experience should in-house IT groups focus on?

Should retailers or their e-commerce platforms be preparing for technologies that support multi-currency transactions? Back-end financial reconciliation? Language translation? International shipping? International marketing?

What technology aspects should be outsourced to 3rd parties? And what should be in-house?

Read next week's post for the answer.

Preparing for the 2020 Ecommerce Channel

Since 2000, e-commerce has more than tripled (a compound annual growth rate of 19%). And over the next ten years, Goldman Sachs projects e-commerce growth to be five times the rate of traditional retailing (CAGR 15% e-commerce vs. CAGR 3% traditional retail). E-commerce sales will reach $624.17 billion in 2020, as offline sales reach $3.64 trillion. This makes e-commerce equal to 17% of total U.S. retail sales in 2020, up from a current 5-6 percent of retail sales.

Bottom line: retailers need to be ready to support booming e-commerce sales.

We also see retail mindsets shifting. 90%+ of senior retail executives in a recent KPMG survey cited "product innovations" and "innovative merchandising strategies" (which includes online and mobile internet shopping) as their biggest revenue drivers over the next three years.

Analysts and retailers alike are recognizing the strategic importance of e-commerce.

Such significant shifts in channel sales require long-term foresight and technology evaluation. It requires looking at how to support future customer needs. It requires budget changes - cutting technology spend in slower channels and ramping up funding in fast-growth areas. Retailers need to ask themselves:

- What does our customer base look like in 2015? 2020? (customer intelligence)?
- What are the most effective ways to drive these future users to our site (marketing)?
- What are our biggest e-commerce platform needs (user experience)?
- What are our biggest sales needs (conversion)?
- What are our biggest payment needs (transactions)?

Likewise, e-commerce technology vendors need to be looking to the future. Product development needs to hone in on 2015 and 2020 retailer needs.

Of course, this is easier said than done. Retailers spend millions on customer intelligence activities, and its really quite impossible to predict the future - especially within the confines roller coaster economy. But there are still some sure-fire bets that retailers and platforms can make.

In my subsequent posts, I'll speak to these trends. Next up: "What does your customer base look like in 2020?"

Relationship Commerce Model #2: Solution Providers

Relationship commerce, the combination of social media and e-commerce, is the latest and greatest burgeoning e-commerce trend. And if you don't think social media is taking over selling efforts, look at this recent study:

-82% of the Fortune 100 tweet
-68% of the Fortune 100 youtube
-59% of the Fortune 100 facebook
-36% of the Fortune 100 blog

In this second article, we'll discuss the solution providers who are bringing retailers into the relationship commerce realm - and why they will grow very quickly.

We'll start with case studies. One company at the front of the trend is Shopigniter. This company is trying to bring human interaction into the e-commerce process via social media tools and tying the online process with the off-line, real world retail experience. ShopIgniter landed $3 million in its first institutional venture capital financing round just last March.

Shopigniter's platform is slick. Check out their video tour. They offer a full e-commerce platform (e.g. storefront, checkout) and a seamless integration into Facebook. I've never seen a more seamless Facebook integration. The consumer can purchase a product in Facebook, and it looks exactly the same as the store website.

It will be interesting to watch Shopigniter compete against the likes of ATG and Demandware, but my guess is that they'll find their niche with the right retailers.

More and more platforms (and maybe even ATG and Demandware) will begin to offer social media plug-ins like Shopigniter's. You heard it first here on the Stroop. In three years, this will become an essential feature for e-commerce platforms to offer to retailers. What is more, start-up firms who can offer this as a platform-agnostic plug-in will have dramatic success. Look for VC funding going to these types of firms. They're obvious future acquisitions candidates for bigger platforms, after they've proven their model.

Lastly, I find it necessary to mention OpenSky and Flattr. We'll start with OpenSky. OpenSky is another prime example of monetizing social media - in the case, it's all about blogs. The OpenSky platform enables bloggers, media personalities and trusted experts to sell unique products they love without worrying about the backend. OpenSky just raised $6M in VC funding in April. Novel idea.

Flattr is similar to OpenSky in principle, but is different in its functionality. In Flattr's case, the name of the game is social micropayments (which could be an entire blog post in itself). Check it out. Flattr is another way for social-media-content-creators to realize revenue. I've signed up for a flattr account and will provide a report on it later this Fall.

In sum, the signs are there. Relationship commerce is growing and will become mainstream in the near-term. Solution providers that enable retailers to capitalize on this trend will grow very quickly.

Relationship Commerce Model #1: the Social Media Player

It's the newest emerging retail channel. It's the combination of business models across the internet space. It's the latest and sexiest e-commerce phenomenon. Call it what you will. It's proper name is relationship commerce. This is the first blog post in a series of three where I discuss the concept of relationship commerce and whether or not it has legs in the market.

The first statistic you need to digest is that 28% of all e-commerce purchasing decisions are influenced by Social Media. If you take the $135B in retail e-commerce sales in 2009, that means that nearly $40B came from social media. Truly, social media is a powerful channel to drive traffic to retail web stores.

But it can be more than that; it can also be the actual store.

There are two notable player-types that I've seen in relationship commerce: (1) the social media player and (2) the solution provider. The social media player that most of us are probably familiar with is Facebook Marketplace, a great application that let's you view what your Facebook friends are selling. You can think of it as a more focused version of Craigslist - except this way, you are always buying from someone you know.

When Facebook Marketplace re-launched in March 2009, powered by Oodle, the synergy seemed obvious. The average high school or college-aged individual has 300 friends, and it made total sense that people would be interested in products these friends are selling - kind of like an online garage sale. Uptake of Facebook Marketplace has been relatively slow thus far, but the combination of Facebook growth, e-commerce growth, and social media growth position the application for substantial future growth.

This also paves the way for other social media sites to market products. Imagine LinkedIn applications for marketing B2B services to your contacts.

In any case, social media sites were just the first step for relationship commerce. It was only a matter of time before VCs and e-commerce platforms started throwing money into solutions. And this is where it gets interesting. How can retailers capitalize on this trend via technology solutions in the market? This is what we'll discuss in later postings. Read on tomorrow for article #2 pertaining to solution providers.

Palantir: the Billion-Dollar Firm You've Never Heard Of

TechCrunch recently interviewed the CEO of Palantir, Alex Karp. Very intriguing stuff.

Palintir, under 5 years old, has a team of 250-plus engineers nestled in downtown Palo Alto and has just raised $90 million in Series D financing at a $735 million valuation. The round was led by co-founder Peter Thiel’s The Founders Fund and included Youniversity Ventures, Glynn Capital, Miriam Rivera’s Ulu Ventures, Jeremy Stoppleman, Ben Ling, and a couple of high-profile NY funds.

In a nutshell, Palantir’s analysis program is becoming a major player in the war against terrorism and cyber espionage, stimulus spending accountability (Palantir is literally powering the administration’s efforts to identify fraud in stimulus projects), health care, and even natural disasters like the recent earthquake in Haiti. 70% of Palantir's revenues are from government spending.

This year, the platform famously helped researchers at the Munk School of Global Affairs at the University of Toronto expose a cyber espionage ring called the Shadow Network, which was stealing classified materials from India’s Defense Ministry.

Firms that make data sets very user-friendly and easy to manipulate are poised for huge market growth, in my opinion.

Palantir's product is a child of PayPal, born from the start up’s methodology for combating fraud:

Karp said: “They (PayPal) had this massive problem of essentially cyber fraud…they tried algorithmatic approaches…one of the things about that is it doesn’t work really well because the opponent is highly adaptive…What you need is a human mind that’s adaptive."

That would form the foundation for the Palantir platform, which merges human-based algorithms and a powerful engine that can scan several databases at once on an incredibly fine, granular level. The basic system accepts huge databases and allows users to slice the information in seemingly innumerable ways.

Economists Treasure Onling Gaming Data

What economists are doing with EVE is one of the most fascinating concepts I've seen in a while. EVE, a gamer's dream created by CCP Gaming, is an imaginary place set 20,000 years into the future in a galaxy known as New Eden. There, imaginary citizens of five different imaginary empires fight imaginary wars in a bid for imaginary domination over each other. 350,000 real world subscribers to EVE Online from all over the world.

These people’s actions, economists say, offer a treasure trove of information to study and analyze, primarily because each one of their decisions leaves a trail, creating a vast database that economists can only dream of in the real world.

In effect, it creates a giant laboratory within which to study human behavior, dramatically scaling up the kind of classroom-based experimental economics that were pioneered by 2002 Nobel Prize winner Vernon Smith.

Some people scoff at the viability of EVE's data, but CCP Chief Executive Officer Hilmar Petursson, who could be thought of as EVE’s head of government, disagrees.

“People say the real world in a casual way, where it sounds like something fundamental,” he said. “But people tend to forget that the world we live in is just a game designed by our governments. Our economic systems are just a game.”

The Fragmented E-commerce Platform Industry

The e-commerce platform industry is an interesting one. The top five players - IBM, Microsoft, Oracle, ATG, and GSI Commerce - have less than 40% of the total addressable U.S. market. Other top-tier platforms - Venda, Demandware, Fry - have another 5% total. And then there are literally 100+ other platforms who remain competitive, even when stacked up against the big guys.

After 10+ years of e-commerce platform, the industry remains relatively fragmented.

Will the industry ever consolidate?

At its base, that answer depends on the retailers who buy the platforms, and retailers come in all shapes and sizes. All have different needs, whether its a flashy interface, or robust merchandising tools, or solid product search functionality. And all sell to different demographics.

It's hard to predict if the industry will consolidate in the long-term, but if I could make one prediction, it would be this: the platforms with the best partnership programs will win the market. Those firms who focus on best practices in bringing on technology vendors which compliment their own technologies will be best positioned to please their customer base.

Because the industry is so diverse, technology platforms need to be prepared to offer everything - and the beauty of technology is that they can - if they make it easy for partners to plug into their systems.

IBM and Roche - an All-Star Partnership

Often times, I'm reminded of the beauty of corporate partnerships. Yesterday was one of those times. I read the title, "Roche and IBM Collaborate to Develop Nanopore-Based DNA Sequencing Technology," and thought to myself, "What a perfect partnership." Here's two companies leveraging their core capabilities in a perfectly complimentary way.

The collaboration will take advantage of IBM's leadership in microelectronics, information technology and computational biology and Roche's expertise in medical diagnostics and genome sequencing.

The article went on to say, "Ultimately, the technology has the potential to improve throughput and reduce costs to achieve the vision of whole human genome sequencing at a cost of $100 to $1,000. Having access to an individual's personal genome could allow personalization of medical care."

Obviously, this has enormous implications for the future of health care - implications that would take five more blog posts to cover. But one thing is for sure: if the partnership proves successful, this could be a major disruptor in drug development.

Google: Stick to Acquisitions

Google is good at acquiring. Sure, they've dabbled in a few markets through organic expansion, such as television, radio, and e-commerce, but this has historically led to limited success. On the other hand, in other markets, Google decided to jump in head-first by making large acquisitions, such as mobile ads with AdMob and most recently online travel with ITA.

These latter two acquisitions were strategically solid. Both moves contained remarkable market characteristics. With AdMob, Google bought its way into a market with an enormous growth trajectory, at a moment when the market was fragmented and consolidation-ready. For a cash-laden, agile firm like Google, the mobile ad market was perfect. Perfect timing and perfect target company.

The online travel market is similar. A large ($80B+) market, online travel will experience solid growth for the long-term. The acquisition, ITA, also brings Google a huge customer advantage. Alaska Airlines, Continental Airlines, Hotwire, Kayak, Orbitz, Southwest Airlines, United Airlines, US Airways, Virgin Atlantic Airways all utilize ITA's core technology. Talk about a golden customer base. That alone made the acquisition worth it.

It appears that Google's market entry strategies are slightly better when they enter a market via an acquisition (as opposed to organically). This, of course, is a generalization and shouldn't be taken across the board. But, I do think it's interesting that Google hasn't hit many home runs with organic innovation.

Look for Google to create value with AdMob and ITA. In an age where 1 in 10 acquisitions actually works, I think Google has chosen wisely here.

The Google Machine

Everyone uses it (at least, something north of 70% of internet users), but how many people know anything about how it works?

Well now you have no excuse.

Click here to see how Google actually works.

Square, iPhone - Perfect for SMB Payments

Square, the latest in the person-to-person (P2P) payments space, is making a splash on the scene. Depicted above, any person with an iPhone can accept credit card payments. This is especially helpful for small business owners who don't want the hassle of investing in any kind of point of sale system.

Does the Square application have legs? Is it a sustainable solution?

I think so! The card processing rates aren't too bad. It's 2.75% + $.15 per transaction, which is slightly less than PayPal's 2.9% + $0.30. Visa and Mastercard's rates are slightly less than Square's, but suffice it to say that Square's rates are at market value. Beyond this, I believe that the convenience of using your iPhone as your payment terminal is highly attractive to artists, shop owners, and other SMB (small to mid-size business) owners - not to mention average people who need a one-off payment.

Look for Square to have growing penetration into payments - it won't get too high, but it will grow its customer base within its niche for the next 3-5 years at least.