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"E-Commerce 2.0" – The Velvet Revolution

"I see three big trends framing the evolution of E-Commerce 2.0"

With all the noise the Web 2.0 revolutionaries are making, it’s easy to ignore another – this time velvet – revolution. "E-commerce 2.0" is coming into maturity and getting ready to relieve its now ten-plus year old predecessor. It’s about time.

What makes an "E-Commerce 2.0" site? Well, as Supreme Court Justice Stewart’s famous saying (about pornography) goes: “I know it when I see it.” This may not be a satisfactory answer but it’s an honest one. It’s too early to tell. E-Commerce 2.0 sites look better, they are easier to use but, most importantly, they drive better economics.

Let’s look at the E-Commerce 2.0 drivers, the trends that define the transition and the architectures and technologies that enable it.

What drives the change? For starters, maturity and perspective. E-commerce has been around for over a decade now. Online retail spending will near $100B in 2006 with close to 20% Y/Y growth. The Internet influences an increasing portion of total retail sales. Jupiter Research predicts the number to go from 27% in 2005 to over 50% in 2010. E-commerce has become strategic. Businesses need to find differentiation because, as Esther Dyson puts it, “You can no longer tell people about your brand; you have to let them experience it.” Well, there is something wrong when the real-world Old Navy and Banana Republic stores, both owned by Gap, look nothing like each other yet have identical online experiences.

Another driver is entropy. Many of the largest etailers are running systems that are 6-8 years old, built by long-gone bubble-time integrators on top of highly customized e-commerce platform infrastructure. Brand managers and merchandisers have to talk to IT to get things done. Everything takes too long because IT is understaffed and they often care more about running a site well than about the site making lots of money. These are some of the factors that make Forrester predict a major re-platforming of e-commerce sites, starting this year.

Online consumer behaviors have also changed. Trust in online shopping and payment mechanisms has increased. Consumers are buying more online and they are buying more complex products as well. On the flip side, they are becoming pickier. A survey by Allurent found that when consumers are faced with a frustrating experience, 82% are less likely to return to the site, 55% form a negative impression of the retailer and 28% are less likely to shop at the retailer’s physical store. That last one really hurts…

Last but not least, broadband penetration has gotten to a point where etailers can safely start downplaying dial-up traffic and experimenting with richer content and experiences.

I see three big trends framing the evolution of E-Commerce 2.0 and helping address the challenges of finding shoppers, turning them into buyers and collecting payment.

TREND #1: Rich Internet Apps Are On the Rise
First, expect a significant move to more interactive user experiences delivered through rich Internet applications (RIAs).

The early signs are everywhere: from Gap’s QuickLook to Amazon’s & Angara’s Diamond Search to MyRatePlan’s phone chooser to Harley Davidson’s bike configurator. This is just the beginning. With E-Commerce 2.0, RIAs will dominate. The main goal will be reducing shopping cart & checkout abandonment which, believe it or not, is sometimes in excess of 50% and is the key ingredient of low conversion rates (some of the best etailers are in the 3-4% range). In a world where shoppers can increasingly get the same product from ever more etailers, innovation will also target search integration and optimizing consumers’ browsing & product selection experiences to attract a bigger audience.

TREND #2: Disaggregation is Accelerating
The second trend is accelerating disaggregation, brought about by the dual forces of focusing on core competencies and leveraging network effects.

Disaggregation is not foreign to E-Commerce 1.0. Some businesses have pushed it to the extreme, outsourcing their entire online operations to Amazon, GSI Commerce and the like. For years, Amazon’s affiliate Web services have allowed businesses to build sites using the Amazon catalog and backend. That’s nothing new, though even more highly-customized, audience-specific sites will serve the Long Tail of consumer interests.

What’s new in E-Commerce 2.0 are network-wide services that provide only a portion of the e-commerce experience yet benefit from focused network effects. Ratings and reviews are a good example. E-commerce 1.0 has aggregators such as NexTag and Epinions. E-Commerce 2.0 has BazaarVoice and PowerReviews, which bring ratings & reviews capabilities to all sites. Payment is another good example. E-Commerce 1.0 has PayPal while Google Checkout belongs in 2.0. The key distinguishing features of the 2.0 services are tight integration with the e-commerce experience and the ability to go beyond simple hosting and leverage network effects. The most successful services will reduce the barriers to purchase across sites. Google Checkout and ARPU are two early innovators that merit keeping a close watch on. It is also interesting to ponder whether there is a 2.0 version of e-commerce analytics driven by the following trend.

TREND #3: "Social Commerce" is Emerging Fast
The third trend is social commerce, which comes in two flavors: content-driven and interaction-driven, or passive vs. active.

Examples of content-driven social commerce are already present, albeit not automated. Our purchase choices are influenced by those in our social networks. Brands know that. That’s why promotion on MySpace is the cool new thing. What about being able to see what products your friends have viewed or purchased? It’s coming to an e-commerce site near you.

Interaction-driven social commerce is different yet, again, a new spin on an offline idea—multi-level marketing. Remember Tupperware house parties? Well, the company has started hosting these online. Why can’t iTunes start offering incentives to people who recommend songs to others? And, since any individual can become an Amazon affiliate, anyone can have product links in their social network profiles that reward them for sending interested buyers to Amazon. With E-commerce 2.0 these types of social interactions will infiltrate the shopping experience. Combined with disaggregation, it means that social commerce will happen everywhere, not just on the e-commerce sites.

E-Commerce 2.0: Architecture
There are three architecture elements that define E-Commerce 2.0 sites and help break the virtual store (everything under the same roof) mentality:
  • A composite front end that integrates disaggregated services into a coherent, fluid user experience. How is this different from a portal? In a portal, the various pieces of content are often independent of one another. Here, everything is highly integrated from a data and user experience standpoint. The front end will initially run in parallel to the existing e-commerce 1.0 site because etailers will experiment and make the switch to e-commerce 2.0 gradually.  Pieces of the front end will be embeddable in other sites. (Yes, even as MySpace widgets.)
  • A backend suite with three main purposes: (1) tying into existing e-commerce functionality that doesn’t need to be replaced such as the catalog, order processing and customer service, (2) creating an intermediate data layer optimized to support the user experience and (3) maintaining interaction state, a task which becomes a lot more complicated with disaggregation.
  • A sophisticated battery of tools for brand managers, merchandisers and analysts that takes IT out of the equation. Control of content, promotions, design, layout, interactivity and analytics should be firmly in the hands of business users and the creative types. IT should worry about scalability, reliability and security.

Great E-Commerce 2.0 sites leverage a multitude of technologies, many of which are unfamiliar to E-Commerce 1.0 developers. Rich interactivity requires some combination of Flash and AJAX. Going from simple mashups to flexible composite front ends becomes easier with advanced platforms such as Flex and Atlas from Adobe and Microsoft. Audio and video usage will increase, bringing new tools and servers into the mix. Looking at the work of companies such as Kaon Interactive, I even expect 3D to get a second chance in certain verticals. Core Web services protocols enable disaggregation with a special role for Atom/RSS in dynamic syndication.

Social commerce brings in the rest of the Web 2.0 compendium such as user-generated content (some of it pulled from blogs and wikis, the rest captured on e-commerce sites), trust/reputation building and information discovery and management through folksonomies and social networks. Of course, all of this has to be tightly integrated with both horizontal and vertical search, which is no small task. Backend innovations will target complex product configuration (often an information architecture problem more than a presentation problem), navigation path optimization (for example, see Endeca) and new kinds of personalization (based on social context, real-time site activity, etc.). Agile response to user behavior requires integrating real-time business intelligence with traffic flow modeling.

That’s a lot of technologies to wrap in a solution bundle. It begs the question about what will the e-commerce platform vendors do. Existing e-commerce platforms are too tied to HTML on the presentation side and lack sophisticated data processing and state management capabilities. Incumbent e-commerce vendors’ attempts to make an evolutionary transition to E-Commerce 2.0 will fail until they commit to significant re-architecture. This creates an opportunity for three kinds of players:

  1. system integrators who move quickly to assemble necessary pieces into solutions
  2. a new generation of e-commerce platform companies such as Allurent (which I’m an investor in)
  3. the network-wide service providers such as ARPU, Google, BazaarVoice and PowerReviews.

This is but a quick glimpse into the future. For etailers, consumers and everyone building Web sites, it’ll be exciting times ahead. Know of any E-Commerce 2.0 sites and services? Let me know either in the Feedback form below or at simeons.wordpress.com.
 

    More Stories By Simeon Simeonov

    Simeon Simeonov is CEO of FastIgnite, where he invests in and advises startups. He was chief architect or CTO at companies such as Allaire, Macromedia, Better Advertising and Thing Labs. He blogs at blog.simeonov.com, tweets as @simeons and lives in the Greater Boston area with his wife, son and an adopted dog named Tye.

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