a16z General Partner Alex Rampell and Partner Justine Moore explore how AI agents will change commerce and the implications for Google’s business model, affiliate marketing, online shopping, and more.
Timecodes:
00:37 Why Alex and Justine are thinking about AI’s role in commerce
06:08 How much will AI result in dynamic pricing?
07:09 Why is e-commerce so small?
12:28 Why have e-commerce brands struggled?
17:46 Does AI threaten Google’s business model?
33:18 Which categories of shopping will AI eat?
39:52 What net-new commerce companies will be created post-AI?
Transcript
This transcript had been edited lightly for readability.
00:00:37 Why Alex and Justine are thinking about AI’s role in commerce
Erik Torenberg: So you guys have both been thinking about AI and commerce for a while. Alex, why don't you talk about what inspired this piece and how did this all germinate for you?
Alex Rampell: Well, so I had started a company called TrialPay a long time ago. And actually I'd been selling stuff on the internet for a very, very long time, even before the internet.
And I was just trying to think, well, number one, like, what happens to Google? Because a lot of people, this is on their minds, so like, is search volume going up or down? So I have my own personal experience of like, well, my search volume is going down, but not for commerce, but clearly for everything that is not commerce.
So that was one thing, but also, this company that I started, TrialPay, we were one of the biggest affiliates in the world. And affiliate marketing is basically you send somebody, this is the oldest business model, on the internet, if you will. It actually predates AdWords and AdSense by a bit, of, you just get a share of the, you get a commission basically if you send something there.
This was started apparently apocryphally, it came from pornography, because that was the world's oldest business model on the internet. Like how do you track, how do you, how do you… So that eventually made its way to commerce, and it's all based on cookies and pixels. So you drop a cookie on the person's computer, and then on the confirmation page you have a little, like invisible one by one tracking pixel that reads the cookie, and that's how you know to say, “Erik sent me the customer.” So what we did at TrialPay, we were one of the biggest ones there, like, is that really gonna be what powers this new realm of commerce? And then is it even relevant for a lot of things because impulse buys are huge. And with impulse buys, like almost tautologically, you're not going to use AI to tell you to buy something.
Like you shouldn't buy anything that's an impulse buy. Like you go to the supermarket, you shouldn't be buying like Coca-Cola, like in the checkout line. They actually charge you more at the checkout line than they do if you just buy it in the Coca-Cola section. So like all of these things are designed to like tug at your emotions to get you to buy and spend money that you don't want to.
That's not gonna be AI. On the other hand, it's like these very, very expensive items. You're researching the heck outta them with AI. But like there's no affiliate model. Like how do you then commerce and transact? So like number one was like the ontology of commerce was very interesting. And then number two was this whole like affiliate thing, is it still gonna be relevant? Because it seems like that's what ChatGPT and others are getting into. And then number three, it was just my own personal behavior of it's just like I probably use ChatGPT like three orders of magnitude more than I use Google now, which is interesting.
Erik: Justine, what excited you to contribute to this piece slash what did you find most remarkable or?
Justine Moore: There's a couple really massive consumer markets, the biggest of which might be like online shopping. But I think we've seen thus far relatively few startups trying to take a crack at that market with AI, even though, like Alex said, there's a lot more opportunity because you now have these really smart LLMs and agents that can help you make better decisions than you could have made on your own or even make purchases on your behalf.
Which you would think would create an opportunity for more folks to package these into products that they then offer to consumers, but we haven't seen a bunch of folks doing that yet. So I think part of this piece was to dive into like, why is this system so complex? What are the different types of purchases where AI can play a role. And what are we hoping to see as we think about the broader market in hopes that, you know, folks who are also, who are working in this space would kind of give us a heads up and let us know and we could hear how people were approaching it.
Alex: And you can observe, I always like to observe first because like, that's objective and then predict second. Predicting is hard. I forgot the funny quote about predicting the future, but it's very hard to predict the future. And like there actually is a lot that can be observed. And that's where like, I think CamelCamelCamel is like the greatest site in the world. We have no stake in CamelCamelCamel.
So this is not self-promotional at all, but it's like, people use this thing, it's like Google News alerts for pricing. And I gave a talk to the Amazon Prime team recently, and like they're very, very aware of it because I think it's actually Amazon's biggest affiliate, and people every day, like, I would buy this product…
I mean, this is like Econ 101. I would buy this product if it was priced here. It is currently priced here. Please let me know when it's priced here because what will I do with that information? I'm not just gonna, like… I'm gonna buy it, so like the consumer is the agent, and this is like a very, very inefficient AI.
And if you could actually complete the entire circle and say like, no longer give information, but allow for automatic action on information. Like people will do that because we have observed that behavior today. This is like the easiest form of predicting the future ever, because you're really just like, you're chronically in the present, and you're just saying there's gonna be one additional appendix to the present, which people would do anyway because they are doing it anyway. They just have an easier way to do it.
Justine: I think my version of observing was seeing, there's a couple viral examples of this, some that were really good because the AI found the product perfectly and some that were hilariously bad because AI couldn't find the product. But teenage girls started using ChatGPT to upload photos of like Lana Del Rey at a concert or Taylor Swift like snapped in a street style photo or whatever and asking like, what is this hair barrette she's wearing? Or like, what is this sweater? Like, I wanna find it and I wanna buy it. And it, when it worked, it worked really well because it often found like, “Hey, this sweater is like $5,000. Like you as a 19-year-old girl in Missouri are probably not gonna be buying this. Like here are some alternative, maybe less expensive options that look the same that you can buy.” And that age demographic tends to be like a really early predictor of all sorts of consumer behavior, which is why I was kind of like, you know, this is probably gonna be happening more and more from the research side of things all the way to making purchases probably agentically when prices are right, like Alex was mentioning.
00:06:08 How much will AI result in dynamic pricing?
Erik: Alex, do you imagine a world where there's sort of dynamic custom pricing sort of to the extreme where it's like we're looking at the same thing on Amazon, but it charges you more because maybe I'm cheaper than you or you have more money. Do you imagine that world?
Alex: Well, I mean, people have tried this a lot. It's a very smart world from an Econ 101 perspective for sure. Like how do you capture the consumer surplus? Consumer surplus is great for consumer, it's bad for producer. And apparently Delta is doing this a little bit, or they were trying to do this.
There are like the poor man's versions of this, which are like, if you have an iPhone, you should get charged more than if you have an Android phone because like iPhones are more expensive. Like you have basically communicated that your elasticity of demand is different than somebody who, you know, has less money.
I think probably you're gonna run into regulatory challenges with that. Or certainly you will run into like very, very high levels of unpopularity with your customer base, but people have tried this. But generally it's hard to get away with. Right.
00:07:09 Why is e-commerce so small?
Erik: Right.
Let's reflect on previous platform shifts before getting into this one. Right now e-commerce is 16% of total retail sales. If we were, you know, talking 20 years ago and predicting, you know, what percentage of commerce would be e-commerce, we would probably think it's much higher. Why hasn't that been the case?
Alex: It turns out the demand curve is different for immediacy versus non-immediacy.
So even though like overnight shopping is pretty darn cool, like instantaneous, like one-second shopping is like, “I need toothpaste right now because I'm going to bed and I wanna brush my teeth. And I just ran out. Oh, there's a Walgreens over there. I'm gonna go there and buy toothpaste and like Amazon is awesome, but getting the toothpaste at 7:00 AM. It's like I don't have demand for that.” Like that's not part of the demand curve. There's demand curve for like real-time toothpaste. That's part. The other part is just like, I'm bored, like what do I do today? I know, I will go to the shopping mall. And like there's the experience of doing that, and it's like that's kind of a little bit more impulse, but even it's like, ah, there are these long-term considered purchases or we talked about in RPs, aspirational purchases.
Like, maybe I'm gonna gawk at that Rolex a little bit more and ooh, I just got my bonus, maybe I'll go buy it. But it's all part of the experience. So I think those are kind of broadly speaking, the two… I mean, I've seen this, I'm on the board of a company called Wise, and the product is sending money, and it turns out that the market for sending money where it is received in real time, it's just much, much different than the market for sending money where it is received two days later.
Because sometimes it's just like the two days later send thing is just like, less demand for that. And again, Amazon has proven this as shipping has become, it's like once upon a time, like when you go back to the early days of e-commerce, you would get something in like two weeks. So it's almost not surprising that the curve has just like continued to expand. It's almost surprising that it's only, you said 16%. Yeah, that seems very low.
Justine: I think it's higher. So I'm not doubting your research on the numbers. Here's why I think it's higher. I think there's a lot of behaviors where people do research online and then purchase in person. Like especially for big sorts of purchases or even like sometimes I'm like, “Hey, I need a new laptop. I'm gonna do like all of the research on like Reddit or on Instagram or on the Apple website. But then I'm gonna like go into the store and feel like, okay, what is actually the difference in like the Pro weight versus like the MacBook Air weight,” right? And so I think there's a lot of those sorts of things where like… Or buying clothes is another great example where like, I live in SF so a lot of people will just order a ton of clothes, try it all on, and then send a ton of it back because there's not a lot of big stores near us.
But I grew up in Oregon and there like, it doesn't make a ton of sense to order a ton of clothes online and send them back. It's just inefficient when there's so many clothing stores that are like a five to ten-minute drive from you. But, a lot of people will kind of do research about where to go, or what specific items they're looking to find, or like what style they're looking to buy online.
So I think, yeah, it might be like 16% or like fully transacted online. But I think, even in a lot of those other purchases, there is some sort of online research component.
Alex: Well, this is actually the hardest thing, that's related to this topic is attribution. It's, the bane of everybody's existence, which is like, okay, how do I allocate attribution for Justine's MacBook sale?
And like the most kind of pervasively corrosive business model, I think on the internet is this like last click attribution. So you allocate 100%. It's like, okay, part of it was like, I read this post on Reddit that kind of inspired me. Part of it was I saw this really cool ad at the Super Bowl.
You could do this like kind of piecemeal, which is probably the more accurate way of doing it, but it's not exactly deterministic. And the thing that feels deterministic, which is actually incorrect, is it's like, oh, whoever sent me the click last is the one that I should reward with the spoils.
And a lot of people that just don't understand correlation versus causation fall into this trap where, and this is the business model that I hate the most in the entire world, like the things like Honey. You know Honey, right? So what is that doing? It's like you're already on the webpage about to purchase.
And then it's like, do you want a coupon code? Oh, why, yes I do. Why would I not want a coupon code? 10% off. Click here. You go click here. What does it do? It redirects you to an affiliate page. It puts a cookie on your machine. It redirects you back to the page that you were just on, and then it actually steals that attribution.
And what's funny is if you talk to a lot of the marketing people at these larger e-commerce companies, and Amazon is very smart. That's why they don't do any of this stuff. They're like, “Oh, our best channel by far is Honey. Like they're growing so much.” Or RetailMeNot. That was the original one.
It went public, you know, big valuation, and it was just theft. But it's just because, again, like how do I figure out how to do attribution? And this is only gonna get more complicated in the AI world, where like it might be the same thing where it's like Justine might have researched on Reddit, saw the Super Bowl, like did all of these things, asked a question on ChatGPT, and then clicked purchase. And it actually is incorrect for Apple to say, ChatGPT, we owe you the entire, that drove the purchase. No, it didn't. Yeah, it's part of it, but it didn't drive the purchase. And figuring out and disentangling attribution is very, very hard.
00:12:28 Why have e-commerce brands struggled?
Erik: Let’s reflect back on the category as well. It seems like the big winners have been, at the aggregator level, sort of Shopify or obviously Amazon and sort of the individual, you know, big brands like, I don't know, Allbirds or Casper. It seems like they were quick to get a lot of revenue, but didn't become, you know, durable businesses in the same way. Didn't get, you know, didn't get better as they scaled. Why don’t you reflect Alex a bit on the category in general and why it's played out that way?
Alex: Well, I mean, ultimately if it's a one and done transaction, you don't really make the product. Like, you know, Casper didn't make the mattress right? Like there's probably some OEM in China that made the mattress, and they put their little logo and they called it Casper on it. Well then they're just buying traffic on Google and Facebook. So actually Google and Facebook were the real victories there, more so than anybody else. And then people are like, “Wow, mattresses, that's a really good category. I should do that. Oh, I'm gonna go to Shenzhen or wherever. Like, I'm gonna slap my logo on it. I'm going to undercut them on price.” And that's what always happens. And it's one thing of, you can ameliorate this to a certain extent, if at least you have recurring billing where it's like, I'm gonna have this problem.
Like, you know, think about what Dropcam did, if you remember that. That was an e-commerce product, but at least it was attached to a subscription. So now there are like 9 billion cameras that all do the exact same thing. So like that category has arguably gotten worse even as the category has expanded or like the demand has expanded.
But at least like, you know, Google owns Nest, which bought Dropcam, like they probably still make a lot of money on that category. Whereas Casper, if I bought a Casper mattress five years ago, I'm still sleeping on it. And like they have to find new people to sell that mattress to. And meanwhile, the original factory that was making the mattresses is now selling the exact same mattress to like 5,000 other manufacturers. And it's just like not a good business model. So in general, just being a commodity reseller of products… And like, I think this is the problem, it's like a lot of people will say, “Oh, well, like Casper is its own mattress. Allbirds is its own shoe,” but like they're not normally making these products. Like there's somebody else that's making the product.
Because it's almost obvious, like what happened during internet 1.0? The long tail of commodity resellers went away because location no longer mattered. Because a lot of what really drove retail for the longest time was that like in Justine's town in Oregon, like there's this store, and like you could drive like somewhere else, but that's really far away.
So of course you're gonna go to this store. Now the internet, you can go to any store. So if there are like 5,000 stores that don't make their own products and they all sell the exact same shoe from Nike. That doesn't make sense. You should either go to Nike directly. Or you should go to like the one store that has fastest shipping, the best service, whatever.
And like the long tail of commodity retailers basically started dying. And like we saw this play out, but the first party commerce experience is not that much better either. There's no barrier to entry, and if there's no barrier to entry, then that normally doesn't, it works out great for the consumer in capitalism, it doesn't work out great for that, you know, one of n, where n is quite large, producers, or non-producers, but just marketers of the product.
Justine: I think there's also, especially with like true consumer products, and I would consider a mattress maybe more of a utility product, but with, you know, shoes like Allbirds or makeup, it's very trend-based, especially with the internet.
Like nothing stays that hot for that long. Like, you know, Allbirds is the big shoe one year, and then the next year it's the retro Adidas that everyone's going back to. And now it's like the On running shoes. Like I was watching the Bama Rush Sorority TikToks this year, and like every single girl has the On running shoes, whereas last year they all had the New Balance, like, cool look from Japan.
And if you are Allbirds, like that's a problem, right? Because you can't capture all of the trends. Like you have your kind of one SKU or multiple SKUs across one style, whereas like the Shopifys and the Amazons can kind of ride whatever the trend is and have demand come to those individual SKUs, which I think is gonna be an interesting challenge in the age of AI too because you could argue that AI agents can direct people to things if people start their purchase activities there. Which could be an opportunity or a challenge for like the single SKU retailers. My guess is it'll still end up being more of a positive for like the aggregators.
Alex: Also, I think it's gonna be very hard for AI to, for lack of a better term, inculcate demand.
Which is like, how do I know that like the On shoe is cool. It's like, well, I need to see that Bama…
Justine: I'll send you some.
Alex: No, I mean, it's a metaphorical I, right?
Justine: Yes, yeah.
Alex: It's like once I see, “Oh, wow, I should have that too,” right? “I'm in a sorority, I want that shoe.” And it's very hard for AI to do that.
Which is why like the utility part of it's like, “Well, I know what I want. Now buy this for me.” Like that seems like a no-brainer. Because that's a lot of what Google does. Like Google. I mean, I respect the hell outta that company, but they kind of are a tax on GDP. It's like a lot of GDP happens.
A lot of that is commerce, right? Consumer spending is a huge part of GDP. Where do you start that spending journey? With that little nice little search box. And then they get a percentage of all that spend because they're charging per click or per impression or per action. So, that is somewhat imperiled. Like that tax might just shift elsewhere.
00:17:46 Does AI threaten Google’s business model?
Erik: Yeah. Let’s flesh out the piece now. Let's get into, you know, what are some of the things that are gonna be taken away from Google? What are some of the things that are gonna stay? I also want to get into the different kinds of consumer spend as it relates to e-commerce. Maybe Alex, do you want to start with you?
Alex: Well, I think, Google has been the canonical freemium business model forever, which is, they built a better search engine, everybody knows that, that started in 1998. And it was like the 47th search engine or something. “Ah, this isn't gonna work.”
But it was just so much better because of the way that they linked it. It really kind of goes actually back to like research, which is like, it's kind of like the h-index but for finding things. Like when you search for “bagel,” everybody like hyperlinks to this one site, like that must have a high PageRank.
Like let's go show that first. So, but most of the searches when Google started, because commerce was actually quite nascent on the internet at the time, like it was all free, it was all kind of information. I remember using Google when it first came out and it was like, ah, this is so much better than HotBot and all the other things out there.
It was all free, non-monetizing. They eventually basically copied the Overture business model, which this guy Bill Gross came up with. This was an IdeaLab company that eventually became part of Yahoo. This is why Yahoo ended up owning part of Google, if you know the whole history, and the entire thing that made Google this like, you know, giant $2 trillion company was AdWords.
And actually the cool thing about it is that there are a lot of freemium business models where it's like, “Ah, I don't wanna pay for it.” Here, it was freemium, but actually having relevant search results that are paid alongside search that is organic made the search better. If I'm searching for “tennis racket” and somebody hadn't figured out how to PageRank optimize and everything else, or SEO optimize, it was very useful for them to be able to show ads here.
And then those ads wouldn't show up unless people clicked on them. Because the relevance was never like preordained. It's like if people click on it, it's relevant. If people don't click on it, it's not relevant. So Google has always been freemium. And that's kind of bearing out right now, which is like, you know, it's still freemium.
Like you search for lots and lots of things with no intent to buy. But every now and then it's like, this is your default behavior. It's like, “Hmm, I wonder about X,” you go to Google. Or sometimes you don't even go to Google. You go to like, you know, Safari because like Apple makes tens of billions of dollars a year by sending all of those searches to Google.
So what is currently happening is they are starting to lose some of the “free,” but not any of the “mium,” right? They're losing some of these informational queries like who won the Oscar in 1977? Like, that's not a monetizable query, but like, that's what you're gonna want to know. You're gonna just ask ChatGPT, and people are doing this right now, and ChatGPT has, you know, I think, what is it, 800 million weekly active users? A huge, huge number. That's what they're doing with it because they're not buying in ChatGPT, we know that because. OpenAI is trying to build commerce. So like, clearly they haven't built it yet, so like they're not buying directly in there.
But for the “mium” right, the premium part of the freemium, that is happening in Google still. And like, how do I know that? Well, I can look at their financials. And like their financials, like the numbers are still going up, but we also know that search volume is actually going down. So what are they losing if they're not losing revenue?
They're only starting to potentially lose some of the free searches. What I don't know is maybe they're directing some of those to Gemini. But I think that's unlikely. I think right now what's happening is it's like people are using paid for Google, no changes at all. They're just going elsewhere with AI for free.
Justine: I think part of probably why that's been happening is, like all LLMs, but I'll use ChatGPT as the example because the most people use it, had this really unfortunate and annoying problem of hallucinating around product recommendations that basically everyone experienced if you tried to use it for that.
Like, I think you have this grand idea of like, “Okay, I wanna buy a pair of leggings, and I'm gonna go search in Google, or I'm gonna go search in Amazon and then like I'm gonna get the highest rank pages. But what I really wanna know is like I'm doing this specific type of hiking and this is what the weather is gonna be like, and I want to know specifically for my needs, like what is the best legging? It might not be the best overall legging,” right? And so a lot of people, I think especially, I saw a lot of young women trying this. We're like, “Great, I'll go to ChatGPT. It can take all my information in natural language. It can make a recommendation, it can spit out products.” And then they would find that a lot of the products it recommended did not exist or previously existed, but did not exist in a current form, or the amount that they were charging was way different than it said, which I think drove a lot of people who experimented with it sort of back to, you know, I'm gonna return my searches to Google or Amazon and wait until ChatGPT figures out this commerce thing. My take is, as we know, OpenAI is working on commerce, and they're trying to integrate it more into the experience and have actually like real, relevant, up-to-date information on products. Google will probably be at risk of losing some queries, but I totally agree with Alex that we have not really seen that behavior at any sort of scale today.
Alex: Well, the biggest problem right now for the internet writ large is, I would say, and I remember I've talked to John Lilly, he was the CEO of Firefox back in the day and kind of an early web stalwart, the internet is unhealthy or the web, the World Wide Web, is unhealthy right now. And the reason why it's unhealthy is because so many things that used to be the open internet, when it really was like, you know, DARPANET, then ARPANET, then like this, like internet thing, that people started using, but only really researchers and stuff like that.
Everything was just on the open web. There was no concept of a walled garden. I mean, like, search has already been fractured, by the way. It didn't happen with ChatGPT. It's like if you want realtime search, you go to Twitter, or X. You want search for your friends well you go to Facebook. Like none of that is… You can't search for Google in terms of like stuff that's happening amongst your friend group that's like walled off there.
So you have all of these different walled gardens, so that's unhealthy part number one. Unhealthy part number two is just the commercialization of the internet, which is not bad. I'm a capitalist. I like commercialization. But so much of like, if you look for what is the best sneaker, right, like, who are the people that are writing content best about great sneakers? Like in 1995, if you had a blog, well, number one, you just hosted it on your own site. You set up Apache on your own server that you racked yourself, and then you just did it for the love of the game. And then affiliate links provided the monetization model, but they really polluted the internet that was still open because like so much is like, oh, top 10, like a lot of these top 10 sites are out there.
It's like top 10 running shoes. You know what that is? That's top 10 affiliate revenue to me. And I pay somebody in India to go write gobbledygook and then SEO the heck out of that to make money. Contrast this with like pre-internet where there's a publication still around today called Consumer Reports, and the really cool thing about Consumer Reports is they were the only publication that refused to take advertising.
It was entirely subscription based, and the idea was that you could trust the actual reviews. And they would do things like, they were like the Ralph Nader of consumer products, where it's like, you know, this thing is terrible. Don't buy this blender, it will chop off your finger. Like, do buy this thing. Like they would really, really review everything.
We kind of need that, and like that entire business model just went away. Like, you know, Craigslist killed almost all of traditional media. I mean, maybe they deserve to die, maybe they didn't. But like they made money from two things. They made money because they had a monopoly on information. They charged for ads there. But like a big part of the monetization model was like the local classified. All of that went away, which is why newspapers have been dying. And you could imagine like a newspaper would have like a do-gooder thing where it's like, ‘Oh, let's review all the blenders and like, we're obviously not gonna like show blenders that cut off your fingers. Like that's bad.” Like that whole thing went away. Like, so the summarization of the open internet is tough because there's less open internet than there used to be, like as a percentage of all the content being generated. A lot of it is walled off. And then the stuff that is not walled is just pervaded by like junk.
And that's why, like what we talk about in the piece is like, you can't turn shilled junk into honest analysis. So I don't know how we solve that. Like no matter how good, like no more hallucination, like everything is awesome, but like most of the things on the internet are crap. And they're crap. And we know that they're crap, but they SEO optimize crap in order to earn affiliate commissions, and like summarizing that crap is not helpful. So how do you decrapify that? And that's quite challenging.
Justine: I think honestly what I've seen in terms of the channels where you see the least crap is actually video. Like if you're a creator now it's, you know, due to the death of traditional media, there's now creators who go out and review 10 different shoes for running, and will specifically make it very clear in the video, either this is sponsored by this specific brand, or the better ones obviously are completely non-sponsored, but they get ad revenue from Google, from YouTube, from people watching the video. And so honestly that, when I want an honest review of like someone has looked at five different blow dryers for this sort of hair, I will go to an unsponsored YouTube video, which often have a lot of views because there's a lot of people having similar queries.
But the sense I have is that Google is not… Like, because it's a video and it's not skimmable, and they're not like automatically generating transcripts for every video, that information does not appear in traditional search. And I think we're starting to see some companies say like, “Hey, look, like we should turn all of those high quality videos into transcripts, and an LLM can then read and review and make recommendations.”
But that doesn't seem to have hit like the traditional Google part of the internet yet.
Alex: Yep. I agree with that.
Erik: The New York Times recently bought Wirecutter which may be an example of what you’re talking about.
Alex: Well, but it… Yes and no. I mean, it's like everything is affiliate linked, right? Like is it really true? Like it's so suspicious that like almost every item that they recommend always has an affiliate link. Isn't that odd? Right, like, does that mean like, you know, is that like a sampling bias thing? Is that true? Like, so I'm quite skeptical of a lot of these things.
And again, like the Consumer Reports era was just a little bit different. I mean, you might have the biases, like maybe the person reviewing things for Consumer Reports, like just hates this one company and is taking out their bias… This is always possible, but you would think with all these algorithms and everything else, if you could get like true objective feedback, this would be fantastic.
I mean, Amazon actually is a giant search engine. And like that thing is polluted to crap as well. Because what happens is a lot of the sellers on Amazon, what they do is they go on the site called AliExpress. And AliExpress, I mean, this has changed a little bit with tariffs, but like they'll buy like 400 of some gizmo that shows up six weeks later, and they'll buy it for $2 each. They’ll slap their logo on it, now, they'll sell it for $25. That actually goes back to this latency point that I was making before, like, how many people want something six weeks from now versus how many people want something tomorrow? So a lot of what Amazon was, is they would just arbitrage that.
But if you search for an item, like particularly in consumer electronics, I remember I was looking for heated socks for skiing. Turns out they're very useful. There are like 9,000 different pairs of heated socks that all have the same OEM, the original equipment manufacturer. And it's like, and they all have like bogus reviews and part of like the bogusness, and Amazon should fix this, but they have no incentive to do so, it's like I used to sell a rock on Amazon. I get five star rock reviews. Now I switch the SKU from rock to heated socks. And I trade off my five star review. And it's like, how does Amazon… And again, Amazon just wants to sell more crap. So like they're totally fine with this, but like most things, if you're willing to wait, you're so much better off buying on AliExpress than Amazon.
And it's just like this polluted sea of crap.
00:29:30 Costco’s business model
Like my favorite business model for commerce by far is Costco. I think Costco is the greatest company in the world because Costco refuses to sell bad things. They refuse to take a high gross margin. Like why would they refuse… It doesn't make any sense. Why would they refuse to take a high gross margin? You know, why? Do you know why?
Erik: Because they want to pass it back to customers or?
Alex: No. No, it's because it degrades the value of the membership. They make money from the membership, so they'll charge you like something like $100 a year to join Costco. And if you look at their net income, it's basically the number of memberships… They have like 50 plus million members, it's some huge number, times the price of the membership, that's their net income. And then everything else just kind of is a wash. And if you are making a 50% gross margin on a shirt, they're like, “That's too much. You're fired. Like, you can't make that much money.” It devalues the membership. They'll do crazy things like, you know, the hot dog is still a dollar 50.
They started their own chicken farm because the rotisserie chicken, like the costs were going too high. It's like, that's how they run the business, and they refuse to sell anything that they are not proud of. And the generic brand is just as good. Like, you know, Kirkland wine, Kirkland beer, Kirkland shirts. They're getting sued by Lululemon right now because they made pants that were better than Lulu's pants that are much, much cheaper, but they're actually much better. So Costco is the greatest thing… Like for everything we talked about in commerce, like pre-internet, like internet, AI, like Costco's immune to all of this because it's like, they're like the Consumer Reports plus like… They treat customers incredibly well, and that's why this company is worth hundreds of billions of dollars.
Justine: And people really trust them. Like my mom has been a Costco member for forever, and now she gets her glasses at Costco. Every time I like want to go get flights or something, she's like, “Log in and like use the Costco thing.” Because she always thinks that Costco is gonna have the best option at the best price, and she's usually right.
Alex: That is sacrosanct to them. Yeah. They refuse to violate that because they could make so much more money if they decided to. And Amazon, it's interesting because like normally I remember, there's a speech by Jeff Bezos where he talks about this like, you know, there are two business models.
There's the like, what's the most that we could get away with in terms of charging, like that's Apple. It's like, oh, like, you know, let's charge $1,600 for this iPhone, you know, 25 that we're gonna come out with that has 18 cameras. Can we even get away with $1700?
They have very high gross margins. There are other companies like, how do we charge the least amount possible? That's kind of Amazon. Like, let's have this sea of like, crap, but like, you know, whatever. Like why would we curate the crap? Like that's up to the consumer. We'll have the reviews and everything else, but they don't do a great job on the reviews.
And like, those are the extremes, right? Like, you know, Android and Apple are like, you know, there are so many examples of this. There's like the premier provider, right? There's like the Mercedes, the Ferrari, whatever. And like they just wanna show like high end stuff. And then there's like the mass produced like, you know, low end stuff.
And then there's this very, very unique business model that is very hard to replicate called “Costco” because normally it doesn't work because it's like, “Hey, just trust me because I'm the best.” Well you have to have like many, many decades of trust such that Justine's mom is like, “I don't know what it is, but if it's sold at Costco, it's good.”
Erik: And if you were CEO of Costco, would you further leverage that trust to do other things? Or would that risk the whole enterprise?
Alex: I think it risks the whole enterprise, but there's a lot that they can… It's funny. One of my partners met with the Costco board and like pitched them on financial services. Because it's like, you know what? Every bank is trying to rip you off, right? They're trying to overcharge you for loans or like underpay you on your deposits. And like the Costco loan would just be like the cheapest possible. Like they're trying to make no money on that because they make money on the membership.
So they probably could expand it quite a bit. But yes, it's hard there. There's some modernization that they could probably do because it still is this very warehouse thing that like closes at 5:00 PM, and I wish it were open later, and everything like this, and like their shipping isn't great if you want to order stuff. But it is a very, very unique business model that is somewhat of a… it will stand the test of time, and I think it's AI proof.
00:33:18 Which categories of shopping will AI eat?
Erik: Yeah. Justine, why don't we get into other ways in which AI will change commerce? You outline a few different types of purchases that might get eaten.
Justine: Yeah, so we kind of looked at the range of purchases from like the impulse buys, which I think used… I mean still, they still are, like the Coke thing, the Coke bottle on the aisle.
But often now for like a lot of people, they're like the TikTok shop thing where you're watching a video, and it shows up, and you're like, “That T-shirt looks cool. I'm gonna buy it,” all the way to like really considered purchases like a house or like a wedding venue or like a car where you're spending like a significant chunk of your income.
It's like a one or a multi-time thing and you're like doing a lot of research. So both ends of the spectrum I think are harder for AI to disrupt. I think the impulse buy because like there's no research in advance, and you're not going anywhere specific to buy it. Like by its nature you are making the decision to buy it immediately when you see it.
And so, you know, like algorithms will get better and better to target you with the shirt that shows up on your TikTok feed that somehow has your dog's name, and you're gonna buy that more than the other thing. But that's sort of not the like generative AI that we're talking about.
And then sort of the most consideration end of the purchase. I think it's hard to have that be fully AI end-to-end because while you may start doing your research online on ChatGPT or Gemini or any sort of new AI-native property that shows up, the purchase is so significant that you're probably going to want to have some sort of in-person experience where you're seeing the thing, touching the thing, experiencing the thing.
Talking to another human expert about it, right? And so that means there's this whole range of products in the middle that I think we believe the purchasing behavior could be disrupted by AI in a couple different ways. So one is obviously like the research way of like, you know, my handbag wore out that I bring when I travel all the time, like I need the best one that fits a laptop, can fit a big water bottle, all this sort of stuff, can be fine in the overhead part of a plane… And if you're busy, you don't have a ton of time to do that research yourself. And you might ask an AI agent that can watch all the TikToks for you, read all of the Reddit posts and pull in the kind of real consumer feedback and then make a recommendation. And you might want to do some of your own sort of clicking through to look at options. But I would say in that case, it's like decently likely that if there's then a good integration to purchase, you might do it through an AI agent.
There's also sort of just things you already know you want, like Alex has mentioned, where you want the best price. And so I think AI agents can do a lot around price optimization. Like if you always buy a specific type of laundry detergent, it can find across the internet, where is this laundry detergent best priced?
And it can also probably know, “Hey, I should scan this daily. And if it's 30% less on this specific site than it usually is anywhere else, and it's gonna arrive in a reasonable amount of time, I should probably just buy this, and they can store an extra box of laundry detergent because based on what I know about the consumer, that's worth it to them.”
As you move sort of up the consideration stack, there's another sort of purchase that I think will be sort of AI-intermediated, but maybe have some human impact. Things like maybe bikes or couches, like a little bit of higher value purchases, laptops, where you want to feel like someone has taken the time to really understand all of your criteria and help you make the best decision about what you should buy. This is probably an item that you are going to be using for years, and it's important to you that it works and that it's the best option and doesn't kind of immediately become obsolete. And today, I think the only way that this has happened is like people will go super deep into these Reddit threads on the, like buyitforlife forum and all of these different places.
Or they have a brand they really trust like Apple, and they're willing to pay the premium. I think in the future it's fun to think about having an AI agent that really kind of deeply understands you, where you can have a more in-depth conversation about that sort of thing. Like maybe even a phone call where they're asking you a bunch of questions dynamically back and forth, and you're providing them with the information they need to go back, do the research and decide. So that's kind of some of the things that we've considered about how AI could impact purchase behavior.
Alex: Well, and there's another kind of lens, there are many different ways of cutting this, but like, does the product that you're buying have a UPC or no? A UPC is a universal product code, and that's the little scannable thing. It's kind of the successor to the ISBN, which is for books. And if it doesn't have a UPC, actually a lot of the commerce that has worked, kind of post internet 1.0, like, you know, how did Wayfair work? Why did Wayfair work well?
Well, like they're selling things like barstools and you're like, I want a barstool, but there's no UPC on this. So it's like, well, here's a barstool. It fits the right dimensions, but like there's no scannable code. If there is a UPC, you can run this little algorithm of like, get me the lowest price. And pre-AI, you would just run this algorithm on your own, and you would probably end up at Amazon. So like everybody who wasn’t Amazon just got killed, and Amazon did well. I'm oversimplifying a little bit. If it doesn't have a UPC, then that's a little bit of a different process than if it does because if it has a UPC then like the algorithm that I was describing is like exponentially better with AI because like before, you'd have this, like some people value time more than money, and some people value money more than time. And if I value money more than time, I am the algorithm. I need to find the best coupon, I need to find the best cashback site. Like all of these like cashback sites are out there on the internet, which lots of people, money more than time, like they do this.
All of that will be automated away, or automated for the benefit of the consumer if and only if you have something where you have determined the SKU or the UPC. You know, the SKU has a UPC, you feed it in there. Good. If it doesn't have that, then that's another lens where it's like, okay, I'm probably… I can't feed whatever, like, again, kind of impulse to highly considered. AI is gonna help you on the highly considered side, but not help you buy it. But if it spits out something with a UPC or a SKU, then this part of the AI will just automate that.
So if it's like bike, sure, like, I don't know what bike to buy, but if it's a specialized bike and like, here's the thing, it has a UPC on it, like, boom, why wouldn't you feed it to this part of the thing as this gets developed? Because that's just going to buy it for you with the best shipping, the best terms, the best, whatever. And right now, the reason why that doesn't happen, or, well, it does happen, but it happens manually.
And the people that have time valued more for them than money, they don't do any of that stuff.
00:39:52 What net-new commerce companies will be created post-AI?
Erik: Putting this all together, we were talking about how over the last decade there hasn't been a ton of net-new, you know, big winners in this space and a lot of the gains have gone to the aggregators. Why do we believe that over the next decade there's some opportunities for net-new big and durable companies?
And maybe let’s share, what types of companies could exist that we're excited about that could exist?
Alex: I mean, obviously ChatGPT is, I mean they are an upstart to a certain extent, but it's not Amazon. It's not Shopify. It's a net-new company that clearly will have a role in commerce.
The question is, will there be specialized subsegments? And I do think that the, like, you know, the hyper-optimized, I know you very well… And like, you know, CamelCamelCamel is an independent company that's probably very, very profitable, as far as I know. They've never raised venture capital. A lot of people use them. A lot of these cashback sites. Like these things that have always been like, you value money more than time. There was a site called Ebates that was bought by Rakuten a while ago. There's a company in the UK called Quidco, which is very, very similar, like these kind of things, you can imagine them going much, much more mainstream and being very, very specialized shopping agents, particularly not on the heavy research side, but on this one little tiny vector that might actually be very big, going back to how like most companies can't really figure out attribution. It's like we are going to be the last click, like the last click of the 21st century post-AI is going to be AI companies that know how to do this. And it might not be ChatGPT because they're like this horizontal everything. But it's like, I'm going to give you all of my credit cards.
You're actually going to even figure out which credit card you use for this particular purchase because this one has higher cash back than that one for this type of good. And you're going to integrate, like affiliate tracking where you give me cash back like Ebates does, or you know, Rakuten does. You're gonna do all the coupon stuff.
Like, and not all of this will be good for merchants, by the way. But you can imagine, and again, it doesn't require a lot to imagine this because like there already are a lot of companies that do this, but they have been somewhat of a niche space because they only appeal to the like people, and there are plenty of people, that are like this, by the way, that value money more than time and are somewhat technical. So it's actually not just money more than time, it's like, my mom might want to use one of these, probably would value money more than time because she's retired, so why not? But it's just too complicated to use, and if you make it so easy, I mean, that's the other thing. It's like we talked about like how if you make something show up right now that's gonna have a bigger market than if something shows up five weeks from now. Like, that makes sense. If you make something so painfully easy to use that it's more of an IQ test, it's like, do you want to pay less for something or more for something? And like everybody of course would say, “I want to pay less for something.” But it's like, oh, but you have to do these 18 things, download, they're like, “Ah, that's too complicated. I can't figure out how to do that.” But if it's so easy, I think that that's one area where you could… I mean, this is where startups have lived because it's clearly not going to be Amazon because it's like Amazon wants you to shop at Amazon.
Amazon, by the way, like the other thing that they're somewhat imperiled by, Amazon has a giant revenue and profit line item from advertising. It's like you go to the Amazon website, and then you click on an ad that takes you away from the Amazon website. That's a hundred percent gross margin for Amazon.
They'd rather sell you that than sell you a product, but they have to deliver it, God forbid. So like the best SKU that they sell is the advertising SKU, and that's going to be imperiled if they no longer control the presentation layer because like AI intermediates it. But I think it's like this kind of money more than time, expand that to the entire universe. There's certainly a there there.
Justine: I think there's sort of two sides. So I think there's the consumer side, right? Which is, if we go back to my conversation earlier about you want to have a really in-depth conversation about what bike to get, you could imagine someone fine-tuning a model that is much better on tons of conversations between bike experts and people to actually know the right questions to ask to give you a much better buying experience and better outcome than ChatGPT could. So that's one way that like consumer distribution could be disrupted beyond the ChatGPT disruption that will happen. Then I think there's the merchant side of things, which is like what are the implications if we suddenly have a ton of AI agents browsing your site and potentially even making decisions on behalf of consumers and hitting the purchase button instead of people? How should websites change to make themselves more browsable, more easy to interact with, more easy to find what the agent is looking for? What sort of infrastructure do we need on the financial side for AI agents to actually be able to make a purchase on behalf of someone and use their credit card? The entire infrastructure and merchant-facing side of it is probably going to change quite a bit.
And I think that will be just as big as the consumer side of the market.
Erik: I think that’s a good place to wrap. Alex, Justine, thanks so much for the great conversation.
Alex: Thank you
Justine: Thanks for having us.
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