Understanding Value in the Evolving E-Commerce Ecosystem

News this month that Amazon is about to acquire French package delivery service Colis Prive is further evidence that the boundaries of e-commerce are in a significant state of flux. While Amazon is reaching closer to the customer and investing further in the very non-virtual world of warehousing and delivery, traditional players such as Visa and UPS are extending their reach into the e-commerce value chain from the other direction. From a merchant’s perspective, the move is very much towards a best-in-class approach to solutions, with Amazon among the very few that are in a position to own versus outsource, given the scale requirements needed to deliver many of the capabilities that are proving to be high-value differentiators at the service levels the marketplace is demanding.

E-commerce today is a multi-trillion dollar market. Global business-to-consumer e-commerce transactions were over $1.6 trillion last year while business-to-business transactions were over $5 trillion. As such, the e-services industry continues to explode, and we’re seeing some notable shifts in what it takes to win as a service provider in this vast and cut-throat market.

 

Changes in the E-commerce Landscape in 2015

As the e-commerce landscape has taken shape over the past couple of decades, the ecosystem for supporting services developed much as expected, with an array of platform providers strategically expanding their bundle of commerce engine and surrounding services from marketing and ad tech to analytics, merchandising, and logistics. These platforms grew both organically and inorganically, with Oracle, IBM, and eBay becoming the dominant players.

In more recent years, successful cloud-based offerings have matured from companies like Demandware and Shopify. As we enter 2016, we are seeing the maturing of a shift in what have been the cornerstones of value in e-commerce. This site-centric view is giving way to a more fractured In world, one that better reveals the value of ancillary retail services, such as warehouse logistics and fulfillment, CRM, and payments. This is leading to important implications for those investing and competing in the e-services space.

2015 revealed some significant departures from the aforementioned linear progression in the competitive landscape that we have witnessed in the past. Non-traditional players are making significant moves. Examples of this departure from the past include UPS and Fedex, through their respective acquisitions of i-parcel and Bongo International. These acquisitions have extended UPS and Fedex’s logistics business, helping these companies to try capture ownership of the e-commerce shopping cart for international orders. In another example of third-parties taking ownership of the e-commerce transaction, Amazon has evolved to become perhaps the biggest growth channel for other e-commerce merchants. In 2015, Amazon alone accounted for half the growth in e-commerce revenues, a testament to the value of scale in everything from demand aggregation to logistics efficiencies. Last but not least, everyone from Apple to Samsung, from Google to Visa, is aggressively trying to own the payments piece.

Most of Amazon’s growth in 2015 came from the marketplace sale of third-party products, meaning that a major portion of the growth in non-Amazon e-commerce sales were actually transacted on the Amazon site. It is important to note that Amazon is typically not the merchant of record for these sales. At the same time, Amazon is using both carrot and stick to encourage large numbers of merchants to use Amazon services for warehousing and fulfillment. These moves by Amazon, and similarly by UPS, show the importance of the logistics portion of the e-commerce value chain. In other words, anyone can build a web site, but delivering the service levels customers have come to expect requires worldclass fulfillment capabilities.

Similarly, capturing demand is something that benefits from scale in the way of search algorithms, brand awareness, marketing, advertising, and operating efficiencies. Furthermore, success begets success in that higher conversion rates increase ROI on ad spend and enable greater reach. As a result, the power of the Amazon engine is now such that for many manufacturers and sellers it is their most cost-effective growth channel. While Amazon has seemingly succeeded at growing many pieces of the pie, it is worth noting that one of the few places that it has failed in providing retail services is as an e-commerce platform provider. The company is no longer providing e-commerce platform services for large retailers like Target and Toys-R-us, and it recently phased out its Amazon Webstore business. As such, perhaps more than the astonishing growth story of Amazon, the break-up of eBay—one of the biggest e-commerce stories of 2015—provides greater insight into the broader market trend towards best-in-class services.

 

The eBay Break-up and the Race for Best-in-Class Solutions

With logistics having been a key driver of Amazon’s business, one interesting piece of the eBay break-up was the merger of eBay Enterprise with Innotrac by Sterling Partners to create what has been touted as the world’s largest e-commerce operations company (Magento was separated out of eBay Enterprise by Permira Advisers). Sterling Partners has recognized that this high-value component of e-commerce services is inevitably moving to the edges of the software stack and, therefore, it has chosen to invest in service delivery at key customer touchpoints—think payments, customer service, and fulfillment—and in integrations with traditional retail systems in an omnichannel environment.

For years we have seen a few larger players—namely IBM, Oracle, and eBay—grow their e-commerce footprint horizontally to encompass everything from the core e-commerce platform to marketing automation, CRM, analytics, call center, and fulfillment capabilities. Now, we’re seeing the emergence of more specialized services enabled by APIs and cloud-based integration. As evidenced by the eBay break-up, this delineates loosely into pre-click (eBay CRM division), post-transaction (eBay Enterprise), and site operations (Magento, Shopify, and SquareSpace).

 

What Happened to eBay?

Amazon, eBay, PayPal, Magento, eBay Enterprise, e-commerce, business-to-consumer, B2C, e-services

 

Similarly, Oracle has been trying to chase this trend in focusing on high-value enabling services, as evidenced by its recent $5.3B acquisition of Micros, a provider of POS, back office, and analytics systems for consumer facing business. Without a doubt, the Micros acquisition is a big bite to swallow, particularly following the struggles Oracle has had in carving a clear path for its marketing-cloud and service-cloud businesses. In any case, as we’ve seen in other categories, best-in-class solutions in e-commerce are tending to win out over solution suites. As the cloud continues to mature and architectures align around cloud-enablement, we can expect this to continue.

The plumbing required to connect best-of-breed system is indeed very complex. A single page view of an e-commerce site involves the integration of a content management system, an e-commerce catalog, an e-commerce shopping cart, a content delivery network, a marketing automation system, and a personalization engine. Until the emergence of ubiquitous web services, service-oriented architecture, and cloud infrastructure, these capabilities would only be feasible in an integrated suite. But because of ubiquitous modern cloud and service-oriented architectures, the best-of-breed approach is very much alive and partially responsible for the growth and success of the Demandwares and Shopifies of the world by making it much easier to enable integrated solutions for clients with 3rd party tools and enhancements. These companies don’t need to support all parts of the e-commerce value chain, and can focus on core competencies and larger market opportunities, without losing deals due to lack of specialty components, as long as those are supported through easy API integration.

 

 Key Vendors and Where They Compete

Amazon, eBay, Magento, Shopify, UPS, IBM, Oracle, Google, Apple, Visa, Facebook, Squarespace, demandware, eBay Enterprise, e-commerce, business-to-consumer, B2C, e-services, vendors,

 

Conclusion

This broader market trend towards best-in-class services for e-commerce means that for the vast majority of businesses competing online will require substantial and growing reliance on third-party providers. The ecology of supporting industries, from marketing automation to commerce enablement and logistics, will continue to see exciting growth. However, this is an increasingly complex arena. The competitive space is moving quickly and agility around the ability to leverage new services is critical. Competitive durability for both service providers and retailers and other online sellers will rely more than ever on adaptable architectures.

In hindsight, one factor that may have played into the dismantling of eBay’s CRM and marketing suites was a lack of best-in-class components despite a broad portfolio of services. SaaS is a beautiful model, if you can make it work, but retailers today are often not as technically locked in to service providers as they were to enterprise solutions and for eservices companies a great sales team can no longer deliver salvation Product features, performance, and roadmap are critical to avoid the painful bugaboo of customer churn. For online retailers, the key is a flexible architecture that supports ease of integration, strong technical and business diligence on technology choices, and a discipline with service contracts to minimize lock-in.

Authored by James Keller, Executive Partner, with contributions from Jeffrey Vogel, Co-head of Strategy Consulting. Originally published on Internet Retailer.

Posted on February 1, 2016 in Insights, Technology Industry