Speaker 1The sponsor of this week's episode is Incremental. Connected TV is here with the premium audiences everyone wants. But how are you measuring performance? Hoping your users will scan QR codes or smudge the screen by clicking the TV? CTV joins the new era of advertising. Your measurement should, too. Incremental is the future of measurement, helping you measure CTV, linear, influencers, podcasts, and more without user tracking. Google Incremental, the future of measurement, or click the link in this episode's description. The problem is that the distinction needs to be drawn between the competence of the economists and the correctness of their analysis. Welcome to the MDM podcast. I'm your host, Eric Sufert, and I'm joined today by Michael Morton. Michael, good to see you, brother. How are you doing?
Speaker 2Wonderful, Eric. Thanks for having me.
Speaker 1So, on the occasion of our podcast recording, I get to wear my 1963 Seamaster because I thought you'd appreciate it.
Speaker 2I like that a lot. I've fallen down the vintage Omega hole in a bad way.
Speaker 1It is. It puts a hole in your bank account. But this watch is very meaningful to me. It was not that expensive, but it's the watch I bought for my wedding. And. The reason I wanted to buy it is that it's the watch, or I guess it's one of the watches that Don Draper wears in Mad Men. So, it's a really beautiful piece. Although, it's a little too small for my wrist.
Speaker 2I love that. Well, the vintage watches are all smaller, right? It's like in the newer era, they made the watches larger. I need to use the special event occasion to pitch to my wife why I should buy more watches. People buy them around their kids' births, their wedding. I need to do this. I need to do this more often. I'm wearing my faithful Speedmaster today.
Speaker 1Oh, you can't go wrong with the Speedy. I've got a good Speedy as well. All right. You are new to the podcast. So, we've spoken a number of times. We met in person, did the event that you hosted in Boston. You've never been on the podcast. I imagine most listeners are familiar with your firm, Moff & Nathanson. If not familiar with you personally, but please introduce yourself to the audience.
Speaker 2Well, I am, as most would know and describe, is a publishing sell-side analyst. I cover consumer internet, marketplaces. Michael Nathanson and I are doing digital ads together and the holistic umbrella of consumer internet. My background is kind of the opposite of the paths that most people take. Many people start on the sell-side or in investment banking, and then they move to the buy-side and do the investing. I started on the buy-side. Okay. So, I moved to the sell-side because of the physical move to New York, fell in love with the aspect of writing for public consumption and debate. Something about my personality likes debating with people. And I had worked at a firm called Bernstein Research, and then I left and I worked at YouTube on the strategy team for a brief period until Michael Nathanson called me. I've admired Craig Moffitt and Michael Nathanson's firm and research for my entire career. So, when Michael Nathanson calls you and gives you the opportunity to come write research with him, it's the easiest career decision one could make. That was April 2022 that I left YouTube to join. And we're approaching the four-year mark of my initiation covering marketplaces and consumer internet. And it kind of brings us up to this point today, it's a dramatically different time than when I initiated at the end of 2022. We were on a co-op. Yeah. We were on a COVID hangover for eCommerce. No such thing really as consumer-facing AI. Now this is unquestionably the fastest pace of change I've seen in my entire career.
Speaker 1Well, I concur. It's frenetic, somewhat chaotic, but very exciting. And we certainly have a lot to talk about today. I'm excited. All right. So I've got a number of people coming on the podcast to talk about agentic commerce. I've booked a sequence of experts like yourself to come on and just help me understand, help the audience understand this new frontier of commerce. And the first question I'm asking all of them is, "Am I wrong about agentic commerce being a mirage?" And of course, by that, when I say agentic commerce, I mean, third-party independent agentic commerce, not on-platform agentic commerce. And as of today, I just published this. I'm also carving out travel. So really what I mean is agentic e-commerce. So am I wrong about agentic commerce being a mirage?
Speaker 2Yeah. First, I have to respect that title. As someone who writes research titles for a living, they matter more than I think people would expect. I think that that's a great title for the subject matter. I also think it's really important here just to be a little bit nuanced about when we're talking about agentic commerce and what we're. Discussing, because I can see myself being dragged on X as a Luddite, unless I'm clear about it. Now, first thing, we think AI is dramatically changing product discovery funnel already. I think it's going to compress the funnel. It's going to help consumers find products faster in a more efficient manner. This is going to have big implications across the e-commerce and ads ecosystem, where I've. Kind of found myself disagreeing with what I'll call the agentic bulls and find myself in your camp of the mirage aspect is I don't think consumers want agents, like third party, autonomous agents buying things for them. And the way that we tried to approach it in our recent report we published, I avoided the technological debate. Because it's really easy for someone to disagree. I don't want to dismiss that right now if I try to highlight some product shortcomings. The quick response, as it always has been in technology, is today's the worst it's going to be. And also, that's a very reasonable answer and has historically always been true. So don't bet on tech standing still. So what we wanted to do and where I find myself generally agreeing with you, I wanted to think about how the average consumer behaves on a monthly basis with their purchasing activities. And I love taking shots at Wall Street people and model monkeys, myself being one and Silicon Valley. And I think, in my career, I can't recall an example of where Silicon Valley and Wall Street, so the people building and investing, are extrapolating their lives and their personalities and viewpoints onto the general population and such a mismatch as ever before. And so, okay. Beyond me just saying, "Guys, the average person doesn't live like you." let's go look at the data. Federal Reserve once a year publishes this data about consumer payment patterns. And we're going to use round numbers to get through this quickly. But the average US consumer has 47 payments a month. And 10 of those are on bills, and most of their bills are automated. I don't really think that's dressable. 10 go to prepared food. We can have the conversation today if you're going to tell your agent to order pizza or if you're going to go on DoorDash. But so 10 on bills, 10 on prepared food, 6 on gas stations and transfers to your friends. And you're kind of left with 21 payments. Let's just say 20, just the round numbers and keep it easy. And if we want to be really generous and say that half of those are econ-penetrated, but we know econ-penetration is not that high, but let's just say it for the sake of being generous. You're left with 10 purchases that the average consumer makes per month. And the point. I'm trying to make there is that the average consumer is not overwhelmed with this crushing burden of purchasing decisions that the Silicon Valley tech bro or the Wall Street dude running around doing meetings ever thinks. It's just not what the average person experiences on an average day. On an average day, they spend close to an hour on social media, two and a half hours on television. The average whatnot user spends 95 minutes. I'm just skipping the technological debate and trying to think about, is this what people really want in their life? Is this what they're really trying to have optimized for? And I don't see it. I mean, that's such a good point.
Speaker 1So I have a buddy, a very good friend of mine who just bought a place in San Francisco. And it was like last shopper out of Vietnam. He got this place right before OpenAI did a big secondary and Stripe did a big secondary. And he's like, I don't know. I'm just trying to figure this out. And so he's constantly sending me these listings and telling me how far over asking they went. And he sent me this house that looked like. Yeah, it was a house. So it was a freestanding house. So that's already quite rare in San Francisco. It's in the inner Richmond. It's a decent area. It's not the nicest part of San Francisco. It's a perfectly respectable place. It went for $15 million and it was $7 million over asking. This is play money. If you work for one of these big apps, this is play money. And the USD is play money. There's this extrapolation of the concerns of a very isolated, peculiar group of people that are being made to commerce broadly that just defy logic and defy reason. And it is very frustrating because I've chosen this hill to die on. I've chosen it. I choose hills to die on very infrequently. And this is one. And I'm willing to just die on it. I've decided. And so I engage in these discussions on Twitter. And I just want to ask people, from where are you drawing your frame of reference? Because to your point, e-com penetration per the Census Bureau is 16%. I mean, so you're already talking about a fairly small pool. And this is a problem for people to manage with an agent through automation?
Speaker 2Intuitively, it feels that way to me. Out of the gate. And then when I looked at the data, it's even more compelling to me. And look, to be fair, it's probably two years ago, maybe a little more, we started writing the research when people weren't talking about it. It was one of the first times I went on. Second time I was on Stratechery, talking about like, hey, funnel's going to compress. This product discovery thing is so much better. No one's talking about this. Everyone should be freaked out. And the, like I joke on like the silverback gorillas of the investment community, like the old school guys who've seen a lot of cycles. They immediately came to me and they're like, Morton, directionally, you're correct. The consumer moves way slower than this. And retail behavior in particular is really sticky. You're getting ahead of yourself. And I am like, I'm not young anymore, but I'm not, I'm not like their age and, you know, passionate. I'm like, no, look how much better this is. I can empirically show you product discovery is better. Multiple is better than fumbling around through traditional search. And the spot. And like that, the sponsor product kind of carousel at the top of Google isn't good. This is inevitable. And if you look at the percentage of AI source traffic sent to the big e-commerce websites today, it's still less than half a percent. And we're years into this. Now, industry participants have told me that that number is undercounted today. It's not tagged appropriately. So even if it's multiples bigger than that, right, it's still years into chat GPT. AI mode, meta AI, smaller than I would have expected it to be two to three years ago.
Speaker 1Yeah. And I mean, that's, that's a point I made in a podcast I did a couple of weeks ago. What if everything's all right? Like, what if everything's just all right? Because, you know, you hear about these, these sort of like prophecies about, you know, the total collapse of the economy as a result of AI. And we're four years into chat GPT. Are we really that early? We're four years in. I mean, look at the user base numbers. Like, and if you sort of like slightly. You relax the definition of a chat bot to include AI overviews, 2 billion monthly user. What are you talking? We're not talking about tiny numbers here. A billion weekly actives for chat, for chat GPT. So even if like, you wouldn't say like on a timeline standard, we're very late. Like even if you, okay, sure. But like in this sort of like time span of like a meta, look at that. But on the, on the adoption curve has been much steeper. Right. And like lots of, I mean, a significant proportion of humanity uses these things. And we have. I haven't seen. I mean, and so like with the economy, the economy is strong. Like there, there is, there is simply no sign yet that this is like truly fundamentally deteriorating any of like the core pillars of the economy. Yes. There are challenges in like sort of early career stage hiring. Yes. That's, you know, and, and, and maybe they're attributable to AI, but like what we do know is the economy hasn't utterly collapsed. Right. And so we know that. People are saying, we don't know anything yet. It's too early. No, we do know. We do know that four years in the economy hasn't actually materially deteriorated. And also it's holding up. It's quite robust. So shouldn't we update? Like, so you can't just keep changing the, the, the time. Like, well, yeah, I, four years ago I said in 10 years, but now I'm saying in 10 years, it's going to be, it'll, it'll be like this fiery hellscape. No, I think you need to update your priors here.
Speaker 2I think, uh, Sam Altman did the recent interview. I'm trying to remember which podcast it was. There's the, where he, he said he was surprised by the inertia in the economy. And I think that's maybe one of the few things Sam Altman and I share. I was also surprised even by the inertia in consumer behavior on this specific new tech change. And I studied consumer shopping behavior for a living. So there, there is more inertia in this. And there's a whole group of investors who like to joke about investing around the thesis of like things don't change. It's moving slower than we all expected. I think unquestionably.
Speaker 1And I just, I want to, I want to, I'm going to say anchor to agent of commerce here because don't we know things. So when I was making a point about the economy, it's like, well, okay, we know that. And we know what the penetration has been and it hasn't been disastrous for the economy. Well, we know what the penetration has been and we haven't really seen, you know, this sort of like widespread proliferation of like autonomous buying. Right. And so like, we know that like, yes, of course there's uncertainty about the future, but we know where we're at right now. And if we had a prediction, two years ago and that didn't track, then we can update that prediction and we don't just get to borrow that prediction and then just like shift it two years forward. Right. And so what do we know? Like, well, we know what open AI has done because they went through the process. We can see, I feel like I'm in groundhog day sometimes because if people are just pretending like this has never happened, like this is utterly entirely novel and new. No, it's not open AI tried it. And where did they land ads? Talk to me about what can we learn from? Open AI and from what they've already done. Talk me through instant checkout. Is there a generalizable lesson from that?
Speaker 2Yeah, it's funny because a lot of us market participants, especially my friends who are other publishing sell side analysts, we're all kind of pulling our hair out a few weeks ago when this happened again. Now, in fairness, Muse is different. This is like the best type of personal agent product we've seen and sync new as well. So there has been some impressive developments, but we've done this fear and bear case. Before and all of us were like, hey, and I'm joking, like I could just rewrite the front page of some of my notes I published a year ago and republish them and it will still apply. I think there are a couple of things we can learn from the open AI chat GPT checkout. And the first is I say this half jokingly, but also very seriously when it comes to consumer facing products and also when you're working with enterprises. Focus is critical. I think at that point, open AI was trying to do too many things. It wasn't. Once the consumer is unforgiving and you don't get a lot of bite at the apple if you deliver a bad experience. And when checkout was active, I spoke to industry participants who are in and publicly disclosed partnerships with open AI for checkout and open AI was the bottleneck. They had merchants and they had like offerings ready to be plugged into checkout and it was not happening because of some restraints I think at open AI and that's kind of issue number one. Like if they're going to do it, you got to be singularly focused on it. Ecommerce is really hard. We seem to do this every couple of years where like big tech platform decides they want to do ecommerce and then we're all reminded there's a reason there's only a handful of gigantically skilled ecommerce players, 15% represent over 70% of us ecommerce GMB super concentrated when you think about it. Because it's really hard. And then the second lesson for me, and I think it's an important lesson for me as I will probably get to this today, like I think about the David Ogilvie quote where he's talking about like the consumer's not stupid, she's your wife. The consumer's smart and the consumer knows they're not seeing Amazon product listings on there. They're not seeing, you know, call it 40% of the US ecommerce market and inventory and they know that. And also if you're selling ecommerce in the US. And there's a hundred million Prime members, like everybody you're serving these answers to is a Prime member. And so I think the launch wasn't like as well as it could have been done. Second, the US consumer is entirely a Prime member user base and that inventory wasn't there. And then we can talk about this some more. It's a very hard experience to get right. There are some things. Things that you need, you need creative and images and ratings. And this is the thing that I'm going to talk about that I worry the marketplaces are undervaluing their content, but there's a, there's a mountain of data that shows reviews and ratings has a correlation with conversion. And like when you're screwing around right now on Instink and Muse and you just see products without ratings, I take a lot of faith when I see 5,000 people have, have rated a product 4.7 stars. But save me the time if it was bad, like it would have shown up in the numbers now. So they fell short, I think on several aspects of what it takes to launch a successful e-commerce full funnel experience.
Speaker 1That is totally fair. I agree wholeheartedly that like what Instink checkout is fundamentally different from what Muses and Instink are offering. Right. Like, so that's, that's totally fair. And so I still believe we're going to end up with ads in those products for a number of reasons. I don't know if we get into those today. But, and I've, you know, I've articulated those and I think people listening to this probably know what my, you know, position is. And totally fair about opening. I just had too many balls in the air. But they still did end up with ads and they still did shut it down. I mean, I think they clearly took an opinionated stance on where they thought the revenue opportunity was. And I think that's the question that always sort of like changes the trajectory of these conversations. Because to your point, Amazon, 100 million prime subs, but a lot of the value of that company is sort of captured by that identity that they have at the household level, right? I mean, they said at Amazon Unboxed last year, they have deterministic identity on 90% of US households. I mean, so they essentially can identify yourself. household, no matter where you show up on the internet through their DSP. And you've seen them partake in these identity partnerships with Disney+, Roku, Tubi. I mean, they are essentially the identity backbone of Fast and of the open internet. I mean, there's just immense value in that. And so if they take this hard stance. Now, they may change their mind. I don't know. They may see a different value calculus and they say, You know what? We're going to open up to the agents and we're going to pivot and we're willing to forfeit all these other benefits. At some point, they may do that. I don't know. I can't say for certain that they won't. My sense is they can't though. Because if they hold the line, the agents have to bend to their will. And they want to because Amazon has the products and they can insert better recommendations to your point that are built around all of that data they have, around historical reviews and ratings and returns, and make the recommendations in the agents better. And that's what everyone wants. That's what everyone wants. They want more relevant recommendations that works in everyone's interest. And the idea that you can somehow circumvent Amazon and still win and still provide a functional, useful product to consumers that can do eCommerce, I think is just premised on flawed logic.
Speaker 2Another thing I forgot to add to why. Failed. And then I also want to address your FBA point, right? Fulfillment by Amazon. Another thing that I believe people don't fully appreciate about why eCommerce is so difficult, and then also trying to layer yourself between the aggregators, is scraping is a bad experience for eCommerce. So when ChatGPT did their initial shopping journey, there was a lot of just raw web scraping. And inventory availability, pricing, and shipping speed changes a lot. So you need API feeds, which Shopify offers catalogs. There's other players that offer these API feeds now. And it's gotten a lot better since then. So I spent more time than I'd ever care to admit going through purchase flows on ChatGPT when they were doing this. And you're getting a lot of mispriced products, out-of-stock products, because it was more of a brute force scraping than API fees. API fees, which leads to a bad experience. Now, to your Amazon point, I think the market now, more than ever, everyone has always known FBA is a huge moat. I could offer you billions of dollars and you couldn't dislodge Amazon because of this physical layer. Now, it is critical because what it's going to do, if you have a physical fulfillment aspect to your business, it gives you leverage with merchants. So even if this world does change and Muse gets to 20% of e-commerce, the number doesn't matter to me. But where Amazon has to rethink their strategy and say, okay, maybe we don't control consumer demand as much as we thought. This means fewer visitors to our website, less on-site ads. How do we deal with this, that 20% that's going to flow through agents? Well, what they're going to be able to do is they're going to look at their website and say, okay, I'm going to be part of our API feed to these AI platforms. It's a 3% fee. And I don't know what the fee will be, obviously, but to offset the decline and ad spend that they need. And if you're a merchant on Amazon, how else are you going to get your goods to the person same day or next day? There is no other channel to the consumer in this fashion. And Amazon has all the leverage here.
Speaker 1I think when people argue, in favor of the total consumer adoption of agentic commerce, it's only out of ignorance of Amazon's scale and business model. So this tweet going around yesterday, I responded to it. This is the time where a startup could disrupt Amazon. That just seems like if you understand Amazon's business, it's just diluted on its face. And again, this is the hell I'm going to die on. I responded to it. And I said, look, for all these. All these reasons. Okay, so who does fulfillment? Right? So who's doing fulfillment? Because Amazon has no incentive to do that. If you take away the profit engine. So okay, think about that pitch. You're a VC. And I'm coming to you. And I'm pitching you. I'm saying, look, agentic commerce is the future, man. It's the future. And so I'm going to build an Amazon that is agent first. And so here's what it looks like. Amazon's founded in what, 98? So here's what it looks like almost 30 years into the future. I show you Amazon, but I rip out AWS. And I rip out ads. And you say, wait a minute. This is going to take an incredible amount of investment to get to that point in almost 30 years. And there's essentially no net income. Why would I invest in that? What VC would invest in that if that's the vision in 30 years? Here's the outcome. It's no AWS, no ads. So takeaway is essentially all the net income is a very low margin. Very low margin. Retail business with a massive amount of infrastructure investment needed to get there. Would you invest in it? No one would invest in it. That's not investable. And then someone would say, well, yeah, but you can unbundle Amazon. So you're going to unbundle everything. So you have some company will be handing logistics. That's not profitable. You can't make money doing that. My neighbor runs a business that does delivery for Amazon. Do you know how Amazon gets deliveries done? How they manage to get deliveries done in three hours? The trucks. You go to Amazon, you get a loan for the trucks. He was walking me through this. No, that's not an investable business on its own. As an independent business, that is just it would never evolve past some best of venture stage. It wouldn't be able to make money. It's only in the bundling where that becomes a valuable business.
Speaker 2They're bigger than UPS now. It's truly the largest physical moat I can think of in my investment research career. And I saw a great response to the tweet you were referring where a guy was joking as he's pitching to the shark tank. And he's like, hey, sharks, I want a trillion dollars for a quarter of my business so I can buy $100,000, 100,000 vans and build 1,500 fulfillment centers. And all this is like, yeah, this is 20 plus years in the making of solving for $100,000. And now, more than ever, we talk about it a lot with our coverage of the gig economy stocks and grocery delivery. Consumer demand for time-sensitive deliveries is increasing constantly. When you talk to all these operators and go to the conferences and listen to the fireside chat, obviously, Amazon took everything to two days and killed a lot of retailers along the way. But it's now beyond that. Now, it's a race for same day. Walmart gives these sub-multiple-hour delivery stats. And these executives are talking about conversion. It just goes to the moon when they're showing people, hey, we're going to do this in six hours. So it's now even harder than ever to satisfy the needs of the consumer. And where the incremental growth and penetration is coming in e-commerce is the most time-sensitive stuff. It's these everyday essentials and grocery aspects.
Speaker 1Yeah, groceries. Yeah. It's like this fantasy land that I think the people that are championing this framework, the loudest, live in. And maybe that fantasy land is just Silicon Valley. But it just doesn't comport with reality. I'm getting agitated.
Speaker 2We get to the fairness. And we're going to talk about Wall Street dynamics. For investors, our client base has to be extremely sensitive to shifts like this. Because everybody likes to knock Wall Street as being. Like short-termism and short-sighted. I'm telling you, there is nothing more long-term focus than tech investing on market share dynamics. And the second the market gets a whiff of market share loss for a given operator, it will take a multiple and cut it in half. And so that is why Wall Street is particularly sensitive to this. And when these types of paradigm shifts present themselves, and they go back and look at generations of pattern recognition, that's why you see investors get especially concerned.
Speaker 1The sponsor of this week's episode is. Incremental. AI has transformed our trillion-dollar advertising industry. Super awesome. Your ad platforms are using AI for targeting, optimization, and even modeling attribution. You're probably using AI to generate creatives, or at least creative ideas. AI models are even predicting LTVs. So why is your measurement stuck in the dial-up era? Incremental is to measurement what Excel was to accounting. Incremental is the future of measurement. But why do investors give no credit to Rufus or the artist formerly known as Rufus, now Alexa for Shopping? It's years old. $12 billion in incremental annualized sales in 2025. This is not some skunkworks tool that's being incubated currently. It is working. Consumers adopted it. So yes, if you think agentic, commercial, or digital marketing is the right thing to do, then you're wrong. And I wrote this in the very first Agentic Commerce is a Mirage piece that I published a year ago, more than a year ago. I said, then I agree with you. It is the future. Amazon proved it. But it may take place on Amazon. And then what the response would that be? Well, I need one agent that does everything. But consumers have demonstrated that they're willing to use the Amazon agent.
Speaker 2This is a really hard question. There are some stuff I have firm beliefs on that I'm going to change on a weekly basis. And then there's stuff that I don't even have a firm belief on and that I'm constantly debating in my head. And we've published some notes talking about it. And it's, what are consumers going to look for? Do they want one front door to the internet? Or do they want to go to Amazon for this portion of their shopping? And what I've tried to look at in the past is current consumer behavior. And how do consumers move about the digital economy today? And you do see verticalization, right? So like you go to DoorDash for your food aspects. And when you look at these top 15 e-commerce players representing 70% of the USDNV market, they all generate a majority of their traffic direct. So like Google is like a third kind of shopping experience is getting started. And some have way less Google traffic and they get more through social, but like, but in general, like 65% of their web traffic is direct. Someone opens up their browser and they type amazon.com, they type eBay, they type Wayfair. And so again, I'm doing my best to try to study how consumers have behaved for decades and try to think about how they're going to behave in the future. And like the pushback that the agentic bulls will give me is like, yeah, that's because like, Mike, you've shown research like Google search for product discovery. It wasn't that great. Like brands showed up in the carousel at the top for the PLAs that, that, that weren't actually the best answers. And now they're going to have this front door that gives them the best answer. And this product experience is going to get so much better. So I think it's very fair feedback. But when I look at how consumers have behaved for almost like the entirety of my life, it's a majority of it goes right to where it wants to go. And then the stuff where you really don't know it's high consideration purchases, you're like, no, you probably will use a lesser, like, no, to be fair, I am skeptical of almost every disclosed data pointed from all of my covered companies, right? That's just how you, how you need to be. And what I found with Alexa at the time it was Rufus, they were auto defaulting me into it. So I was starting a search and all of a sudden I could realize like the feed didn't look the way it traditionally does within the Amazon experience. I was like, oh crap, I'm in Rufus right now. And I was like, oh, I'm in Rufus right now. I didn't even click to enter this. They're trying to, I'm clearly a part of some AB testing. So then when I see like, when I see the stats, they disclose around that, I take that with a, with a heavy grain of salt.
Speaker 1That's fair. That's fair. I, so I want to bring Muse into the, into the discussion. So I want to quote from your recent report on Muse, you know, within the same context. So this is, I'm just quoting from your report. The top 16 e-commerce operators in the U S who represent 70% of U S e-commerce GMB gets 65% of their total web traffic is direct traffic. The dominant e-commerce operators spent decades building brands, trust and reducing friction with the consumer as discussed in a prior report. Marketplaces have moats. The rumors of their death are greatly exaggerated. So, so I mean, you just, you just sort of walked me through that, but talk to me about what exactly that moat is, because I think what the, the bull argument back would be, well, that sounds like a brand to me and brands can erode over time. If you give the consumer a better experience, then that, then they'll just, they'll just embrace it. And the, and the brand can only sort of, you know, they, they can only sort of delay the inevitable for so long. So I guess, and I'm also like, I'm very wary of making an argument like, well, Amazon is big and powerful. And so then it can just block the adoption of this new commerce paradigm, which is, you know, which, which, if I, you know, accept the premise that it is just vastly superior, like objectively vastly superior, they can only delay the adoption of that for so long. So like, does Amazon have enough share to just foreclose this path? And what is the moat? Is it just the brand? I mean, you talked about fulfillment, like what, what, what, what constitutes this moat?
Speaker 2Yeah. Let's talk about that a bit. And before I go off on this, I think it's important just for people who kind of live outside of my ecosystem to understand the genesis of a lot of these reports, right? Right. So for, for my job, I research, I write reports, and then I spend a big portion of time talking to investors yesterday. I was in Chicago in meetings all day today that I've already done six calls with investors. And we're just talking through the risk and rewards in consumer internet right now. And the way these risks show up in the market is multiple compression, but I mean, valuation, multiple compression, right? It's actually not a lot of movement right now with fundamental numbers and forward-looking estimates. Yes, there's always some up and down, but really the big volatility swings you're seeing right now is perceived existential threats that's taking stuff up and down. And so when I write these reports, I'm not arguing with like an invisible person in the sky, right? It's addressing what are some of the really topical debates showing up in the markets. And especially magnified by the release of Instinct and Muse has been this view like, oh, I've seen some really bad takes on it on experts. Like everybody is all of a sudden available, right? To Muse because Muse can just scrape the web. And I've told you why I don't think that's the case. But there's a fear in the literal sense that web browsers, marketplaces and apps and aggregators are dead. And what we wanted to do with this, with that report to try to explain that marketplaces have moats is what they do is extremely challenging and also very expensive. And the way I thought we could do it was to bridge through the average take rate that a marketplace has and what portion of that take rate is expenses and really messy work that people don't want to do. Because when you listen and debate with people about this, everything is under threat right now. The AI platforms are going to build payments, checkouts, they're going to take everybody's payments, revenue. So I thought, let's walk through this. And the average marketplace take rate, excluding fulfillment, right? Because Amazon's FBA will take it much higher. But if you just X fulfillment fees is called 17%. And the point that we make is 10% of the 17 is cost. And it's like unavoidable costs if you're going to operate a scaled marketplace. And I'll move quickly if anybody wants to engage with me on this deeper in a little bit of a boring way over accounting weekend, but call it 3% of that 10% is your payments processing revenue. And that's a sub 30% gross margin business. But what does is it covers the costs that it what it means to be a merchant of record. It's something everyone forgets in this whole like it's meant to be commerce to be like, oh, yeah, you want to be a merchant of record? Well, in the US, you are then legally responsible for refunds, fraud, consumer protection laws, because it's really messy business. And being a merchant of record carries a bunch of costs around it. That basically gets covered by these companies payments revenue. So that's three, then you move to like the next 3% of the costs. Well, these are these are huge marketplaces with hundreds of millions of listings and enormous infrastructure and cloud costs, customer support, merchant onboarding, and a lot of the public companies, they break out these costs and their cost of revenue. So you can see you don't even need to guess right. So and then you can look at it and how they charge some of their fee structures. So Uber and DoorDash, if you just want to do a takeout order, the fee to the merchant is I just told you, there's like, kind of 6% merchant of record payment revenue aspect, there's 6%, there's 3%, 3% of running the infrastructure. So three plus three is six, right? Well, Uber and Dash are basically trying just to cover their costs. So they're not losing money on these takeout orders. So you're now at like six, 7% of this 10, that's all costs. And then the rest of that is demand generation, like even Amazon buys ads. And like, look, Muse is trying to layer in this right now. I can't remember such a full court marketing press in consumer internet. in a really long time as what I'm seeing with Muse right now. I can't open any consumer app like Instagram, Reddit, anything without seeing a Muse impression at the top of my feed. I was in Chicago yesterday. There's Muse billboards. There's Muse commercial. There's DemandGen right there. You want to run one of these e-commerce businesses, you have to have DemandGen and that's expensive. So 10 of the 17 is cost. And that's not fun business. And that's for really large scale marketplaces. So if you're someone who's trying to like layer in and displace what the bear case is, well, imagine how much of a portion of your cost that's going to be when you're not the best at it and you're not scaled doing it. So then what's left in these businesses, 6% to 7% is like the profit pool, right? And 4% to 5% of that, depending on the platform, is the on-site ads. And I've talked and written a lot about how I'm worried about that. There's definitely some risk there. And we can talk about that today. And then the last portion of it, is what I call, it's trust. And that's where they can kind of get this surplus and earn themselves a profit. It's trust and reviews and it's their content, right? And so I worry right now that these marketplaces, and we can kind of talk about why Walmart is embracing them and some other are not, and Amazon is throwing up the wall. You look at MercadoLibre in Latin America, they control half the market similarly to what Amazon does in the US. And they're like, no, thank you. Like, we don't need to be part of ChatGPT. Why would we? Why would we complete your product offering? These guys have spent decades reducing friction, building trust with the consumer. Like, by running into these platforms, I think a lot of these marketplace CEOs are undervaluing the content that they have spent decades building. And if you look back through the history of content distribution, distributors pay the content providers. In the report on personal reasons that we published, we tried to make it super clear. If you're an investor and you're waiting for like the sell-off in marketplaces to end so you can get long one of these positions, I would be terrified of the MUSE numbers for the near to medium term. 'Cause what Meta can see is how sticky the user base has been for ChatGPT. I think consumer facing AI rewards first movers tremendously. Right, like, and we have this chart showing like the MAUs, up and to the right for ChatGPT to up over a billion from the beginning to then. And then like on, it's like a two Y axis. And then you do the engagement stats, right? Like DAU over MAU. And it's incredible. They've been able to grow this base. And we put, we plot along the line of all the competing products as they're launched. Grog, Meta AI, Perplexity's new additions and Gemini. And they, it just is really sticky and difficult to dislodge. So I think Mark Zuckerberg and Meta has obviously seen that they know they have the first to market personal agent that can scale. And I was on the team at Meta, I'd be like, let's spend on every possible channel we can to the most we can do it because of what the land that we can grab now, we'll be able to keep. So like, if you're trying to put some bet of this slowing down, it's gonna be a while, right? The numbers are gonna keep looking. It's gonna be really good. And it's not gonna be for a while, I think, until people like, oh, it turns out the path to monetization with this is not a commission rate on commerce. It's ads or the fact that it's really good helping like a two job family with two kids manage their life.
Speaker 1Yeah. Well, I think it's, I think it'll be ads. Okay. I want to talk about Walmart. Cause you brought up Walmart. And that's a really interesting case. Is that a bellwether or a red herring when we talk about agent to commerce? We know their history. We know what they do with open AI. And then after Walmart, talk to me about Stripe and Shopify, because they both occupy kind of like different. They both have all three of these companies have different incentive structures, but let's start with Walmart. Is it a bellwether or red herring?
Speaker 2Yeah. I love watching Walmart here because in traditional res like retail, they are king, right? Largest grocer in the US, like everybody lives within a few miles of Walmart. They control the world. They have a lot of money. And then they have a lot of money.
Speaker 1handles fulfillment. There's no misalignment there. All of it's good. It's just more transaction volume through their pipes.
Speaker 2It's all upside for Shopify. And anything that just like you think about this giant product discovery of billions of people on the planet, right? And you're just like Toby at the bottom and AI-led search just leaning on pulling it just a little bit more in the Shopify merchant-based favor has profoundly important impacts to the business, to the health of the ecosystem that they run. And I think Toby is a generational CEO. Also Tony at DoorDash and one or two other operators. And he is so fast moving on these changes. It's also driving more emotion adoption for them when I talk to brands. But look, we've been running our custom e-commerce stack for 20 years. Team of engineers and devs doing the best we can to keep up with things. It's hard, but it's fine. Seems like every day there's a new API platform we're plugging into because we're cross-selling on TikTok. Get all over the place. And now with AI, this is just too much for us to keep up with. And you look over at Shopify, you have a singularly focused platform attacking this issue. We picked up the phone and are working with the system integrator to replace our tech stack and go with them. So product discovery is changing and it's going to drive more merchants into their arms as well.
Speaker 1So let's say I am wrong and this overwhelms Amazon and they capitulate. Talk to me. I want to talk about the three companies in particular, Amazon, Booking, and DoorDash. What does each gain and give up by capitulating here and letting an outside agent handle the customer interaction? DoorDash has already sort of made some moves there. So we get a sense of where they're headed. But just talk to me about what each of these three companies gains and gives up if they let an outside agent handle the customer
Speaker 2interaction. I think the short answer is I don't think they really gain anything because. And you had to go back to the view. Again, this is where. And I love these young entrepreneurs taking risks and growing these businesses. I'm just like a model monkey observing and building models and writing about it. They're actually doing. But they're really not giving these platforms any credit to the fact that they have spent decades and untold billions of dollars reducing friction. Like Amazon had the patent on one-click checkout. They're actually not trying to make this hard because every layer of friction and click you add, you reduce conversion. So they're not in the business of making this hard. They're in the business of making this easier. And they've developed these relationships with the customers over decades that I think is critical for them. DoorDash, I've talked about the fact that there's a lot of ways you can analytically prove that this is not how consumers eat. You can look at the data where like 50% of people spend somewhere between five to 10 minutes looking at a menu. People who are members of restaurant loyalty programs still eat an equivalent amount of restaurant variety as those who don't. The reason that U.S. restaurants churn at 20% annually in the U.S. is because we all get sick of eating the same stuff and we want to go eat other places. We are not dogs. We're not going to eat the same dog food all the time. You're not going to tell your agent, order me the same thing every week. It's just not going to happen. So I just don't think that these AI platforms are going to really bring incremental demand to DoorDash. So I don't think Dash gains anything there. Amazon, I don't see what they gain there. I think they have to go if we get this wrong, right? Like if Muse is 30% of e-commerce in three years, Amazon's got to go, right? And I got it wrong. You got it wrong. I don't cover the OTAs where I struggle and there's like third party providers and I agree with these hotels and the flights and a lot of these airlines have loyalty programs. Like, but where I struggle with this again is on human behavior. Maybe I'm actually more bearish on this than you are. I saw your OTA note today. I was like, oh, this is good. The average American takes like three vacations a year and three round-trip flights. And again, Silicon Valley and Wall Street folks, I take like sometimes three round-trip flights in like a 10-day window and I fly a lot. I think you do as well. And we're again, we're extrapolating this onto the population at large. I have a very hard time thinking that the average American consumer and they're either once or twice annual vacation with their family isn't going to want to sit. And there's data behind this. Like they look at eight or nine pictures and look at a couple different hotels, see what the pool and beach situation looks like for the different hotels. I want to go look at what the hotel gym looks like. I want to go see what the food in the restaurant that's inside the hotel looks like. And I just have a hard time believing that the average American family is going to outsource this to an agent, their largest arguably discretionary spending single purchase moment of their year for it to get messed up to some extent or like just give up control. I don't see the demand for that.
Speaker 1Yeah, it was funny. Someone on X said something like, you know, the agent like we're increasing the use case is that we're serving with agents and this agent that we're building and one of them is your green card paperwork. So we're going to have a support that I'm like, what is the market for that? My wife got a green card. You're going to do that once in your life. If you do it, the number of people that ever do it is small and they do it once and it's high stakes. It's high rate. If you got something wrong, we got something wrong with our green card paperwork. It set us back like three months. This is just not something you're going to surrender to an agent. But I think that's it's it's a but it's a great point because like I think and this actually dovetails with my last question. You're going to use these tools for discovery, of course, and you're going to use them to get options and to like that's what you do. That's what they're really good at. Help me narrow down the list. Like help me find these, you know, specific properties that meet these specific requirements. But like if the agent can only do that, let's say that at, you know, with the high consideration star, that's just as that's the limit of the authority you give it. They find me options, describe them, be a discovery tool and be a really good one, a really comprehensive one. And as I work through this big decision, give me all the available information, have it suit my preferences. When it comes time to pull the trigger, I'm going to go directly to the website. If the agent can only do that, let's say that that that's where we land with agent to commerce. It's just good for that. It's just good for the discovery piece. And then you take over. You take the wheel. What's the opportunity there?
Speaker 2Yeah. And I just think that follow on to that is also like, what's it mean for the digital ads ecosystem? And before I go on off on this one point, I was thinking about it a long time ago. I'm not sure about travel. I think a lot of investors who are clients and especially like my family and friends, they'll tell you like, I'm adversarial by nature or about things. There is nothing I would love more from a career perspective to think that this was really truly going to disrupt the e-commerce ecosystem because I would love to downgrade everything to sell be this like pariah making this short call for the next five years and watch like a bunch of businesses collapse and like not like in a bad way. People lose their jobs just like make a counter consensus stock call. I just don't see it right. Like if I change my mind and a year from now, I see it and but I'm not a Luddite and I really just studying how consumers behave and what I think people want. And so leading then into this product discovery aspect, I'm kind of bummed out that like this agentic debate has run over this discovery conversation because I'm like, yo, this is so cool because we have published research on this. I think it's really exciting for this report we did three years ago. It was like the coming impact debate I searched. I spent like a week researching a couple products like flat-footed running shoes, filtered coffee makers, and natural deodorant. And reading like, am I kidding? 30 different website journals about the best flat-footed running shoes, counting the references to see what's the actual best one. Same thing for coffee. I've done this for a lot of different products. And then what you see is the LLMs nail it. They do that, right? They do what took me 40 hours to do in 30 seconds. And this is awesome for the consumer. You're going to take out so much inefficiency and wasted time from our ecosystem. And then the question is, and what originally got me all fired up, is what it means for the ads ecosystem. And again, in the Muse report, I'm like, this should be monetized through ads. And I think it's the best clearing mechanism for this type of product discovery. Honestly, I think it will lead to a higher take rate than a 3% or 4% commission. If you just look at what all these brands budget on ad spend, and to be pretty confident talking about consumer internet, talking about ads with Eric Super is intimidating because I do it I read your stuff to learn about ads, so smack me into line if it's needed. But what I have picked up so far, right? And the company that's been most transparent about it is MercadoLibre. And they have said, hey, we haven't commented on our click count, but it's like your Amazon number of 14 products clicked per purchase is not unreasonable. And what they said at our conference in the spring was that, yes, they've rolled out LLMs in product discovery on their website. And yes, it leads to a compression in this discovery and fewer clicks. But the higher conversion rate is making the clicks way more valuable. And cost per click is going up more than enough to offset the declining clicks. And then I'm fortunate enough to have Michael Nathanson as my mentor. And he brings me to some of these dinners. And I get to hang out with his incredible. Rolodex at times. And we're at dinner with an ad executive of a billion-dollar-plus ad business. And this guy is more in the open web. And even what he was talking about is he's seeing the value of clicks go up. Because just the commercial intent. You're taking things that used to be. And Sundar talked about this, I think, in 2023 on the Google calls. You're taking stuff that used to be four or five queries, wasn't particularly high conviction, traffic. Coming out of that would require a lot of iterations that's now getting honed down into one. And you're getting a lot of commercial intent. And so I'm perfectly comfortable in this world where aggregate click growth rate is slowing. But the value of the traffic, especially as consumers learn to trust the models. Hey, these three or five answers I'm getting are what I would end up landing on if I spent six hours researching. What's the best 10 for hiking the Amplation Trail? I'm going to get this anyway, so I should just buy it. I'm really comfortable and not super bearish with that world. Now, I do think you look at the brand display ads on Ampli. There is waste in the ad ecosystem. We all know that. And I think this future will, I think, squeeze out some of that waste. So not everybody is going to get out of this cleanly. But that's how I think this product discovery. If it's okay, it's going to be probably a good thing for digital ads at large. You're getting better commercial intent. And what's most exciting for me, and you've heard Shop talk about it, the better brands are going to win. No longer are these super high quality brands just getting pushed out of product discovery because the Nikes of the world have this enormous marketing budget and this perfectly converting website. And now. And it's just do better in Google scoring for who gets the impression. It's blending better discovery and they're going to be able to then convert higher bid on it. And it's going to be more merit based. And I think it's really exciting for the long tail brands.
Speaker 1Michael Morton, this was fantastic. I really appreciate you coming on the podcast today to share your wisdom with me and with the audience. How can people follow up with you? How can they follow you on social media? And how can they learn from you elsewhere?
Speaker 2Due to financial regulations, I am a ghost on social media. So when I do occasionally see people make fun of me, I just have to read it and keep scrolling. It's better that way. No, but my email is morton at moffittnathanson.com. I'm on LinkedIn. Look, all these podcasts that I've gone on, I started some really fruitful relationships conversations. That's how you and I got started talking, right? I was on Ben and then I reached out to you after you went on. I was like, Hey, we should talk about this some more. We did an investor dinner together. So people in the space who love to talk about this stuff, work for brands, work for ad platforms, please reach out. I love talking about this. I am a lurker in the social media world. So it's going to have to go email or LinkedIn.
Speaker 1All right. Well, farewell then. This is it. This is all you get to the audience. But hopefully it was worth your while. It certainly was very informative and enlightening for me. Michael, thank you so much. Thanks, Eric.
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