Thoughts on the Commerce Platform Market in 2019

As 2019 begins, I'd like to take a few minutes to make some predictions for the year ahead of us.

Before I get too far, I want to remind you of just how quickly the commerce platform space changes from year to year. Consider 2014 vs. 2018's Gartner Magic Quadrant for Digital Commerce. Of the 11 vendors listed, only three remain in their current form (SAP/hybris, Digital River, Oracle/ATG). Magento, and Demandware were acquired and now form the basis of Adobe and Salesforce's respective commerce platforms. Micros and NetSuite were acquired and left to stagnate. IBM just sold off its commerce platform, which just a few years ago had been ranked at the top of most analyst evaluations. Intershop and eBay Enterprise's original platform fizzled out. This is a very fast-moving market.

Source: Gartner, Inc., Magic Quadrant for Digital Commerce, Chris Fletcher, Gene Alvarez, Praveen Sengar, Penny Gillespie, David Kohler, September 29th 2014

Source: Gartner, Inc., Magic Quadrant for Digital Commerce, Penny Gillespie, Jason Daigler, Mike Lowndes, Christina Klock, Yanna Dharmasthira, Sandy Shen, June 5th 2018

Move Away from Suites

Gartner's Move Digital Commerce Architecture Toward a Digital Business Technology Platform research note uses a great framework to show how the commerce platform market has evolved.

Source: Gartner, Inc., Move Digital Commerce Architecture Toward a Digital Business Technology Platform, Mike Lowndes/Sandy Shen, July 10th 2018

All of the legacy platforms clearly had a "Commerce-Led" approach whereby the commerce platform was the center of the front office, in much the same way as the ERP was and still largely is the center of the back office. Commerce platforms were suites of every piece of functionality you'd ever want, from CMS to OMS to analytics and beyond. Platforms were (and still largely are) evaluated based on how many pieces of complementary technology were included in the offering, rather than how good they were at pure commerce or the non-functional requirements like deployment architecture.

Over time, Digital Experience Platforms (DXPs) like Adobe Experience Manager and FatWire were added on top of commerce platforms to drive the user experience, but the commerce platforms were still at the center of the universe. In the past few years, many legacy platforms have added APIs which allows for entirely custom front-ends. But again, the commerce platforms were still at the center of the universe.

We're now in an era that's markedly different than what we've seen. Now we see organizations assembling a large portfolio of APIs from cloud vendors, specialized SaaS vendors, from third party systems integrators, and from internal teams. That catalog of APIs representing hundreds of pieces of functionality and data is then exposed so that those with appropriate permissions can build experiences for customers. A retailer can hand their catalog of 200 APIs to a creative agency to have them build a Google Home Hub application, for example.

I expect core commerce (shopping cart, checkout, product catalog, etc) to continue to be further commoditized over 2019. This is very clearly the future of commerce, at least for the enterprise segment of the market. Every one of those old platforms are commerce-led, experience-led, or API-oriented which still places the commerce platform at the center. This is outdated and it's no longer what organizations want. Organizations want a broad assortment of data and functionality exposed as APIs, with those APIs often backed by microservices representing the sole source of truth within an organization.

The Rise of the "Website in a Box" Segment

There used to be "one" commerce platform market because for many years it was prohibitively difficult to build and operate your own platform and the options were fairly limited - you bought some packaged enterprise software from a vendor, implemented it and deployed it yourself to production. Many of the vendors from years ago all fought over the same customers.

Now there's a clear bifurcation in the market between those who want a "website in a box" for a few hundred dollars a month and those who want to build their platform using Lego block-style pieces from other vendors. Shopify was founded in 2007, hit a $1b valuation in 2013 and now have a market cap of $15 billion. They processed roughly $40 billion dollars in Gross Merchandise Value (GMV) in 2018. If you're a brand or small local retailer who wants an all-in-one stack, Shopify and its competitors are great. That market just didn't exist a few years ago.

On the enterprise-side of the market, there are vendors like commercetools that offer commerce functionality and data as a service, in much the same way that you consume cloud services from AWS, GCP or Azure as building blocks for your own custom applications. Things you cannot do on your own or things that are commoditized and don't make sense to do on your own should be consumed from more specialized best of breed vendors, like commercetools. This is an entirely different approach to commerce that just didn't exist a few years ago.

I expect the market to continue to bifurcate, with Shopify and its competitors getting stronger for those who want everything in a box and us and our competitors getting stronger for those who want a more a la carte experience in support of a commerce platform that's being built in-house. The days of those enormous packages you pull off a shelf and use are just over, which is in large part why IBM pulled out of the commerce space entirely.

The Web is Dead, Long Live the Internet

The famous 2010 article proclaiming the end of the web is truer today more than ever. U.S. adults spend far more time on mobile devices than desktops (inclusive of desktop time spent at work).

Source: Mary Meeker's State of the Internet Report, 2018

In emerging markets where eCommerce is still a low single digit share of physical retail spend, nearly 100% of purchases come from mobile devices.

The commerce platforms of the past were built entirely for the web. The first iPhone debuted in 2007, more than a decade after IBM WebSphere Commerce, ATG (now Oracle Commerce) were founded and a few years after hybris, Magento and Demandware were founded.

I expect to see the web continue to erode as an eCommerce channel in 2019 as:

• Mobile devices get better and cheaper
• Today's youth enter the economy (most don't even have laptops!)
• Mobile experiences get better through the use of technologies like Progressive Web Apps
• Voice and other channels continue to rise in prominence
• Digital natives rise to positions of authority within brands and retailers

The makings of this transition have been in the works for over a decade now but 2019 is when that trend will accelerate.

New Technologies Becoming Mainstream

All new technology is adopted according to a bell curve, with there being a big gap between the technology that innovators use and the technology that the majority use. Geoffrey Moore's famous 1991 book, Crossing the Chasm, defines this lifecycle nicely.

Gartner's hype cycle is a similar concept.

The past few years have seen an explosion of new technologies enter the market, including augmented reality, virtual reality, blockchain (it pains me to even write that word), machine learning, GraphQL, edge computing and serverless. Of these technologies, I think machine learning, GraphQL and serverless have really "crossed the chasm," entered the mainstream and will be adopted in any meaningful way in 2019. Let's look at each:

• Augmented Reality: The few augmented reality devices on the market cost thousands of dollars, bulky are hard to use, have no real supporting ecosystem of applications, and are mostly limited to very nice industrial purposes. Until someone can sell an AR headset that looks like a pair of normal glasses, I don't see this technology being adopted by the mainstream any time soon
• Virtual Reality: 2018 was a great year for virtual reality headsets, with prices dropping and supporting ecosystems getting larger by the day. You can buy an Oculus Go for $200 and be entertained for days. The issue is, what can you do with these devices after the novelty has worn off? There are only so many times you can go on a virtual rollercoaster or have a monster pop out from under your virtual bed. Long-term there may be a virtual world parallel to our physical world (similar to how the internet is parallel to the physical world today) but for the time being they're more for novelty purposes. They're also quite isolating, as you're totally immersed in this virtual world when you have your headset on. Once (if) they truly enter the mainstream, I expect to see many shopping applications. But in the meantime, virtual reality is still a niche technology sold primarily to gamers and very early adopters of technology
• Blockchain: Outside of cryptocurrencies, the only conceivable use case I see for blockchain in the commerce platform space is for tracking the provenance of goods. This is particularly helpful for grocery items. Actually using blockchain to solve that problem requires that every member of the entire supply chain be fully aligned and that there are universal standards in place. Given many B2B invoices are still paper-based, getting every member to use blockchain is an absolute non-starter. There really aren't any blockchain products out there yet, nor are there any accepted standards, both of which make blockchain completely unnecessary. Maybe in 10 years, but for now this is a dramatically over-hyped technology that has next to no use cases that benefit commerce. Blockchain represents industry marketing at its very worst

• Machine Learning: There's a whole new ecosystem of architecture patterns, open source tools, and commercial products that make it easier than ever to use real machine learning (not just re-labeling something from 10 years ago as machine learning because the term is now in vogue). Check out AWS's offerings, as an example of what's available commercially - it's quite impressive. The issue many commerce platforms have is they are on premises applications that cannot rely on the mostly SaaS ecosystem of machine learning technology. There are also competitive barriers that prohibit commerce platform vendor X from using cloud vendor Y's machine learning tooling. In 2019 I expect to see the more modern commerce platforms using machine learning to start solving real problems because it's the best way to solve those problems, not because they can issue a press release using the term "machine learning." The ecosystem is strong enough and commerce platforms need to show they're not commoditized. (Note: at commercetools we've made huge investments in machine learning-based innovations - check out our documentation and tech blog for more)
• GraphQL: I'm really excited about GraphQL as being a complement to traditional REST APIs. Here's a good primer I wrote for CIO.com earlier this year. A who's who of large tech companies are using it. As of November, it now has its open top-level foundation under the Linux Foundation umbrella, which is a big vote of confidence. Commerce platforms including Shopify, commercetools and now Magento support GraphQL. I expect to see 2019 be the year that GraphQL truly goes mainstream and the remaining commerce platforms adding support for it
• Serverless: Serverless, also known as Functions-as-a-Service, allows you to paste a snippet of code (typically a function) and have it execute in response to an HTTP request, an event, or some other action. Serverless is most often used with events, whereby the commerce platform emits an event (inventory decremented, order placed, customer profile created) and a corresponding serverless function is triggered (check if more product needs to be ordered from the wholesaler, send the customer a thank you email, create profile in CRM system). While the serverless and eventing ecosystems are fairly robust (AWS Lambda was released in 2015), none of the legacy commerce platforms really support eventing. They support traditional JMS-style messaging but not newer-style eventing whereby every action and state change within the commerce platform is represented as an event. The product that really kicked off eventing (which then led to serverless) was Kafka and that was released in 2011, a full decade+ after most of the commerce platforms on the market were first released. I see the newer platforms fully embracing serverless in 2019 (at commercetools serverless is now the primary of extending/customizing our platform) but the legacy vendors just cannot adopt this new technology in any meaningful way due to their architecture.

A common theme is that the legacy commerce platform vendors are just stuck in the past and unable to use many of these newer technologies, no matter how many times their marketing departments say "cloud" or "API." For more about what a truly modern commerce platform looks like, check out this article or watch this video.

Improved Business Practices

Much of the rest of the software industry has moved away from licensed on premises software towards real cloud, which completely changes the commercial relationships that customers have with their software vendors. Onerous commercial terms ultimately end up being technical debt that inhibit future innovation. When your commerce platform vendor makes it prohibitively expensive to run their software on AWS, for example, the entire AWS ecosystem is now off-limits because of an anti-competitive commercial decision. Or when you’re forced to aggressively cache because you’re worried about how many CPUs you’re using, your architecture ends up being impacted. Cloud is just as transformational to the commercial-side of software as it is to the technology-side. 

Unfortunately, many of the legacy commerce platform vendors have not yet moved away from these old practices. Support to run on premises products in competing clouds, less aggressive audits, more favorable partition recognition policies, more metered/incremental pricing, and fewer true-ups and the end of contracts.

With almost every other commercial software adopting this new style, I expect many of the legacy vendors following suit out of necessity.

Final Thoughts

As much as I've discussed technology and individual platforms, the real hindrance to innovation is resistance to change from within organizations. It's the CIO who opts to renew an IBM WebSphere Commerce contract because they've done it every three years for the past 20 years and it's all they (care to) know. It's outdated procurement departments that don't allow a developer to buy a month's worth of a SaaS product for $20. It's HR departments who won't approve higher-than-average salaries for React developers ("What are we doing giving some kid out of university a six figure salary?" is something I heard last month from a CIO). Once an organization has gone through some form of digital transformation, the right technology will naturally follow. Check out this article I wrote about digital transformation if you'd like to learn more.

I wish you a happy and prosperous start to 2019 and beyond.

About commercetools

commercetools is a next generation software technology company that offers a true cloud commerce platform, providing the building blocks for the new digital commerce age. Our leading-edge API approach helps retailers create brand value by empowering commerce teams to design unique and engaging digital commerce experiences everywhere – today and in the future. Our agile, componentized architecture improves profitability by significantly reducing development time and resources required to migrate to modern commerce technology and meet new customer demands. 

The innovative platform design enables commerce possibilities for the future by offering the option to either use the platform's entire set of features or deploy individual services, á la carte over time. This state-of-the-art architecture is the perfect starting point for customized microservices, enabling retailers to significantly reduce time-to-market for innovative commerce functionalities.

With offices in Germany and the United States, B2C and B2B companies from across the globe including well-known brands in fashion, E-Food, and DIY retail trust commercetools to power their digital commerce business.

Visit www.commercetools.com for more information.