This week, we look at new product announcements from Netflix, Shopify, and Amazon, and discuss the strategic implications of these announcements.

Netflix going into ecommerce

What was announced?

Netflix announced its own ecommerce shop to sell exclusive merchandise from its own shows. While the company has some 3rd party licensing deals with traditional retailers for hundreds of products based on its original programming, this is the first time the company ventured into the space on its own.

Why is this potentially a big deal? 

In a previous article, we wrote about the different ways companies can compete with Netflix. Here’s a summary:

Netflix has a scale advantage. The company has more than 200 million paying subscribers globally, it can spread out its large fixed content investment costs (anywhere between 15 billion to 20 billion a year) to a large user base. It’s extremely difficult for any company to match this level of investment.

Method 1: Instead of competing with Netflix on diversity of content, you can choose to compete on differentiated content instead. This is the strategy that HBO MAX is pursuing. The streaming service is leveraging its HBO original IP, DC Comic franchise, and making available Warner Brother’s entire 2021 movie slate through its streaming service (basically foregoing theatrical revenue in lieu of customer acquisition costs).

But it appears that this strategy isn’t panning out for AT&T (the owner of Warner Media and HBO). It can no longer stomach the losses and has decided to spin out Warner Media, merging it with Discovery, a cable channel provider.

Method 2: The orthogonal approach – make content, provide it to your users for free, and monetize via other means. This is Amazon’s approach. Prime Videos competes with Netflix for your viewing time, but Amazon monetizes through Prime memberships, advertisements, and the sale of everyday goods.

Method 3: A combination of (1) and (2). This is Disney’s strategy. Disney has a history of very differentiated franchises (Star Wars, Marvel, Disney, Pixar, etc.) and legacy businesses that allows the company to compete with Netflix. The company undercuts Netflix on the streaming front and monetizes its investments via other methods: theme parks, cruises, and merchandise sales.

Sorry for the long recap – but it’s important in the context of our current discussion. Netflix’s ecommerce push, when looked through the lens of Method 3, is taking a page from Disney. Netflix has the intellectual properties, it wants to generate more revenue from its franchises, to increase operating leverage.

When Disney invests US$15 million per episode in Mandalorian, the company recoups its investments through two ways: 

  • Subscription in Disney+ (average monthly revenue per user is US$3.99 as of end of Q1 2021 – a 29% decrease when compared to the previous quarter due to the bundling of Hotstar in India & Indonesia).
  • Sales of toys (Baby Yoda toys were very popular)

In fact, Disney made a total of US$2.9 billion in the past two fiscal quarters from selling toys and merchandise, or about 9% of the company’s total revenue, and it does so at a 52% operating margin. Selling merchandise can be a very profitable business.

Netflix realizes this. The company already has direct relationships with its global users; the next step is to leverage its strong global IP to expand into merchandise sales. In previous letters to shareholders, Netflix highlighted the impact its shows have to the popularity of its casts. It does this by showing the increase in Instagram followers of a hit show’s cast – see Figure 1). Clearly, Netflix’s shows can have significant cultural influence – the company is now expanding its efforts to further monetize this.

Figure 1: Netflix tracks Instagram followers of the stars of its shows.

Note that Netflix’s ecommerce shop is powered by Shopify.

Shopify Pay expansion

What was announced?

Shopify announced an expansion of its payments product that may have significant implications on the future trajectory of the company. The company announced that Shop Pay can now be used by any merchants that sell through Facebook and Google (in a previous article, we talked about how Facebook and Google are starting to internalize ecommerce transactions within their platforms – instead of consumers completing purchases on 3rd party websites).

Shop Pay is an ecommerce checkout tool that stores users’ information. It is not just a payment tool, but also an identity management solution for ecommerce. This means that a shopper can shop on different ecommerce shops (that use Shop Pay) without logging in and filling their personal details. According to the company, Shop Pay checkout is 70% faster than a typical ecommerce check out, and increases conversion by 1.72x.

Why is this potentially a big deal? 

When it was first founded in 2006, Shopify was a pure software-as-a-service company (SaaS), providing easy to use tools for small businesses to create their own ecommerce website. Now, the company has evolved beyond its SaaS offering. It has two business segments.

Here’s an excerpt from our previous deep dive:

  • Subscription Solutions: This business unit provides software (online store, analytics, inventory management) and logistical solutions for small, medium and large businesses (Allbirds, Gymshark, PepsiCo, Staples, and others).
  • Merchant Solutions: This business unit is actually a fintech play. It is a global payment processing provider that offers automated recurring billing, mobile payment capabilities, real-time transaction results, web-based reporting, PCI compliance and fraud management.

Shop Pay is part of the Merchant Solutions segment. It is a payment solution that allows Shopify to take a cut of the gross merchandise volume (GMV) of ecommerce transactions on its platform.

This announcement indicates a shift in strategy for the company (see Figure 2 for an illustration).

  • Before, Shopify would acquire customers through a Subscription Solution, generating recurring revenue for the company, and then convert the users to using Shop Pay.
  • With this announcement, Shopify is putting Shop Pay front and center. Anyone can use Shop Pay – regardless of who the ecommerce store provider is (right now, it is Facebook and Google, in the future, it can be other providers).

From their press release:

“… the expansion to all merchants selling on Facebook and Google is a mission-critical step in bringing a best-in-class checkout to every consumer, every merchant, every platform, and every device.”

Figure 2: Strategic shift for Shopify by making Shop Pay available for all.

Even when only serving its own customers, Shopify’s Merchant Solutions segment is growing very fast. At the end of Q1 2021, it was growing at 137% year-over-year vs. Subscription Solutions which was growing 71% over the same time period.

By enabling Shop Pay to be used anywhere, Shopify has the opportunity to take a cut of the gross merchandise volume (GMV) of ecommerce transactions everywhere.

What is surprising, however, is that both Facebook and Google are relinquishing the payment portion of their ecommerce platforms. In a previous article, we discussed that both advertising giants are vertically integrating into ecommerce, so that the shopping experience can be done on their own platforms (as opposed to being done on a 3rd party website). At the time, we hypothesized that they would tackle the payments portion themselves – since this functionality can generate significant revenue.

The Shop Pay announcement means that both Google and Facebook have decided to stick to their core competencies, focusing on the advertising segment of the value chain, and leaving the payments solutions to Shopify. Although we do not know what terms were struck between the companies. It is very likely that some sort of revenue share agreement is in place. This means the Shop Pay revenue from these external platforms will be less profitable for Shopify (the current gross margin for this segment is currently about 44%). 


Note that in providing a universal payments and identity management solution, Shop Pay is not the first mover. It is entering a space that was pioneered by Amazon Pay (read more about Amazon Pay here).

Amazon One expansion

What was announced?

Amazon announced that its latest grocery store is now equipped with its Just Walk Out technology.

There’s a lot to unpack here: 

  • What is Just Walk Out: Amazon’s Just Walk Out technology is its cashierless checkout system. With this system, customers can pay without interacting with the cashier – offering a frictionless checkout solution.
  • What is Amazon Fresh: Amazon Fresh stores are full-sized grocery stores. It is the latest iteration of Amazon’s retail experimentation. It takes elements from its other experiments and from other successful stores: (i) It offers cheap everyday items to lure foot traffic in (similar to what Costco has done – see Figure 3), (ii) it offers limited, high quality brand selection (similar to what Whole Foods has done), and (iii) it acts as a last mile shipping hub for Amazon (package returns and grocery deliveries).
Figure 3: Cheap everyday items to get foot traffic in. If you are familiar with Costco’s strategy, the above offerings are very similar (Costco is well known for its US$4.99 rotisserie chicken). Image is taken from Amazon.

Why is this potentially a big deal? 

The announcement of the Just Walk Out expansion is potentially a big deal because:

  • This is the first time that the Just Walk Out technology is deployed at a full-sized grocery store. In previous iterations, the technology was deployed in smaller stores. This means Amazon has improved the robustness of its technology.
  • Amazon wants to sell Just Walk Out technology to other grocery stores. In order to do that, Amazon has to deploy the solution in its own stores to showcase the benefits. 
  • In a way, if Shop Pay is a payments and customer identity management solution for the ecommerce space, then Just Walk Out is Amazon’s version for real physical commerce.

Our team members at Vested may own investments in some of the aforementioned companies/assets. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

%d bloggers like this: