The Evolution of E-Commerce
What Came Before and What to Expect Next
Realizing that the e-commerce industry, as with all industries in modern economies, as a whole continuously moves towards increased efficiency, we can make predictions about how the industry will evolve next. At the same time, the move towards efficiency comes with growing industry complexity through furthering both horizontal and vertical market integration. Efficiency and complexity are tied to each other. Complexity is necessary for increasing an industry’s efficiency, but at the same time, this very complexity will ultimately slows down the rate of growing efficiency.
With these principles in place, we can make long-term predictions about what is going to happen next in a given modern industry. Firstly, the rate at which an industry’s efficiency increases tends to follow a familiar sigmoid function. After a decade of exponential growth has passed by, the rate at which the e-commerce industry is becoming more efficient has already begun to slow down.
Secondly, as industry complexity becomes irreversible in order to support legacy operations, a point will be reached at which an industry’s efficiency can no longer grow. At that point, the industry has reached ‘Peak Efficiency’ and maximum productive output. Since such a perfectly efficient industry can no longer move forward, it either has to be superseded by a revolutionary new idea, or it will be abandoned in favor of more profitable industries.
Revolutionary New Ideas
This may sound strange. Why would the e-commerce industry as we know it one day cease to exist in its entirety? That’s because of the same principles that drove the analog photography film industry out of the digital age. Digital photography, a revolutionary new idea superseding the old industry, bankrupted the old industry’s biggest player, Kodak, once founded in 1880. Similarly, the coal-powered steam engine industry was once entirely abandoned in favor of oil engines.
The same will eventually also happen to online e-tail, because the same general principles apply. At some point in time, an industry will fail to move forward, because it has achieved maximum complexity and peak efficiency. Out of necessity, these industries will be replaced by other, newer industries, as people discover that their productive efforts have become more profitable elsewhere. The same thing will happen to the internet as a whole. Nothing people can build lasts forever.
Having worked in the e-commerce industry myself for over a decade, I have identified five distinct phases. Three of the phases lie in the past. As of 2016, we are currently transitioning from the third to the fourth phase. The five phases of the commerce industry are roughly as follows.
Phase I: Early Settlers (1984–1994)
From the eighties to the early nineties of the past century, early electronic commerce settled as a new industry. E-commerce was the revolutionary new idea of its time. It was seen as a way to transcend the boundaries of brick-and-mortar stores, whose income was limited to casual passersby. With the internet, a single store could potentially supply a global crowd. Few believed this idea would materialize, but one man who did believe in it, Jeff Bezos, went on to found Amazon in 1994. Amazon always envisioned itself to be a book store where people from all over the world could buy all available books, but it has become much more than that.
During this early phase, however, most of e-commerce was earmarked by manual processes. Very few online stores existed and most were so obscure they could not yet compete with physical stores. Each potential merchant had to build its proprietary solutions from scratch. As most online payment and shipping integrations had not been invented yet, online checkouts often consisted of consumers sending merchants an email with their shipping and payment instructions, or calling them. Static web pages promoted painstakingly maintained catalogs.
Phase II: Economies of Scale (1994–2004)
During the late nineties and early 2000s, a handful of major e-commerce players arose that would continue to dominate online retail today, such as for example Amazon, eBay, PayPal, Alibaba, Expedia and others. Together, this elite club of top dogs controls a majority market share, each greatly benefiting from their economies of scale. As big companies grow into monopolists, they benefit most from an industry’s increasing efficiency. During this decade of online commerce, crucial progress has been made in building necessary e-infrastructure to support automated payments, shipping, e-fulfillment and a host of other services.
Around the same time, small to medium enterprises still had almost no meaningful tools to their disposal to build their own online stores. While existing stores professionalized, their solutions were proprietary, while the open source, code-sharing community slowly began opening its doors. It wasn’t until the year 2000 that a popular software suite became freely available, osCommerce. There were many others like it, but by 2004, the osCommerce suite had become the dominant solution offering small businesses an affordable means to roll out their online presence.
Phase III: Paradigm Shift (2004–2014)
Until now, e-commerce heavily competed against physical stores, but during this phase e-commerce began forcing ‘legacy stores’ into bankruptcy. The e-commerce industry’s growing efficiency now finally began to pay off early investments. Legacy stores went in panic mode as they realized they could no longer compete without an online presence of their own. Everyone rushed to get their gear online. As popular demand for online sales skyrocketed, many urbanized areas of the developed world have witnessed shopping streets emptying, with tenants closed shop in favor of dedicated online e-activities.
So, the paradigm shifted. People thinking of opening their own store would now consider an online-first approach. Starting your own online shop removed the cost of having to rent a physical store. While the risk of failing online was high, the cost of failure was kept relatively low. As a result, millions of individuals worldwide ventured into selling online. This pressing need for a more professional software suite gave birth to Magento Commerce. Founded in 2008, Magento quickly overtook osCommerce’s popularity by 2010. Because of its advanced features and object-oriented code, Magento was a major improvement compared to osCommerce’s notorious ‘hackiness’.
Phase IV: E-Fulfillment (2014–2024)
This fourth phase of the e-commerce industry began with yet another paradigm shift. Rather than opening up your own shop, small businesses realize it’s easier to push their catalogs to major players such as Amazon, or to price comparison sites, in order to benefit from existing consumer bases. By now, it has became cumbersome for online shoppers to have to register their personal and payment details with each individual store they visit. New account registrations have become a real barrier to sales. To escape such convenience problems, small businesses have long begun moving away from Magento towards software-as-a-service solutions, such as for example Shopify.
With Shopify, merchants can roll out an online shop without having to worry too much about the many payment, shipping or bookkeeping integrations. These are now provided as a service. As a result, Shopify happens to manage product catalogs and user accounts for many thousands of merchants. Pooling this data together, I predict that such centralization will evolve into a ‘sell-anywhere’ paradigm. The coming decade, e-commerce merchants will be able to sell their products to each other’s customers, using a centralized checkout (perhaps powered by Amazon), furthering industry efficiency. In the end, multi-vendor-checkouts and shared customer accounts will become the industry standard.
Phase V: Integrated Web Protocols (2024–?)
Interestingly, when the current HTTP protocols were designed back in the early days, just like the 404 Error Document, the status code 402 for ‘Payment Required’ had already been provided for. Yet e-commerce workflows have never been properly integrated with the web’s protocols. I predict that the need for growing efficiency will indeed push web browser manufacturers to integrate a range of e-commerce-related protocols. In other words, the internet as a whole will become one giant online store, where users only need to sign up once, namely in their own browser. Consumers will then be able to purchase and pay for anything anywhere online.
Making the web one giant store will solve all sorts of convenience issues. By this time, cryptocurrencies will have matured to allow for so-called value transfer protocols (vtp//). Money and payments will be entirely digital, sent through protocols deeply integrated with the internet. PayPal will cease to exist as a service and will transform itself into a web protocol (though still profiting from transactions). Small to medium enterprises will simply make their catalogs known to the internet, thereby allowing any internet user in the world to place orders with them. Major players such as Amazon will dominate the global order fulfillment centers and manage other merchants’ inventories.
Thus the e-commerce industry achieves maximum (global) efficiency. No further efficiency is possible. Many players will choose to direct their productive and creative efforts towards other, more profitable industries. Perhaps ‘molecular replicators’ as seen in Star Trek may entirely replace the need for selling physical items, thereby ending the age of global retail.