Podcast: Will consumers adopt agentic commerce? (with Michael Morton)

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Wonderful, Eric. Thanks for having me.
So, um, on the occasion of our podcast recording, I get to wear my 1963 Se Master because I thought you'd appreciate it.
I like that a lot. I've I've fallen down the vintage Omega hole in a bad way.
It is a it puts a hole in your in your bank account. But this um this this was this watch is very meaningful to me. It was it was not it was not that expensive, but it was uh it's the watch I 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 Madmen.
So, it's a it's a really beautiful piece, although it's it's a little too small for my wrist.
I I love that. I uh well the vintage watches are all smaller, right? It's like in the newer era they they they made the the watches larger. I need to use the special event occasion to pitch to my wife why I should buy more watches. Like people buy around their

kids' births, their wedding. I need to I need to do this more often. I'm wearing my my my faithful speed master today.
Oh, you can't go wrong with the speedy. Uh I've got my good speed as well.
All right. You were new to the podcast, so we've spoken a number of times. Uh we we met in person, did uh the event that you hosted in in Boston. You've never been on the podcast. Um I imagine most listeners are familiar with your firm Minson. Um if not familiar with with you personally, but please introduce yourself to the audience.
So I am as most would know and describe as a publishing sellside analyst. I cover consumer internet marketplaces. is Michael Nathansson and I are doing digital ads together and the holistic umbrella of consumer internet. My background is kind of the opposite of the path 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 and moved to the

sell side because of a 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 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 Nathansson called me. I've admired Craig Moffett and Michael Nathansson's firm and research for my entire career. So when Michael Nathansson calls you and gives you the opportunity to come write research with him, it's the easiest career decision one could make. That was uh April 2022 that I left YouTube to join and uh we're approaching the 4-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 like a COVID

hangover for e-commerce. No such thing really as consumerf facing AI. Now, this is unquestionably the fastest pace of change I've seen in my entire career.
Well, I concur. I mean, it's it's frenetic um somewhat chaotic uh but uh very exciting and um 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 uh to talk about agentic commerce. Um I've booked a a sort of sequence of of experts like yourself to to come on and and just 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 onplatform agentic commerce and as of today I just published this I am also carving out

travel. So really what I mean is agentic e-commerce. So am I wrong about agentic commerce being a mirage?
Yeah first I have to 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 that's a 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 cuz like I can I can see myself being dragged on on X as like a lite unless I'm clear about it. Now, first thing we think AI is dramatically changing product discovery funnel already, right? Like 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 like the agentic bulls and find myself in your camp of the 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 a recent report we published, I avoided the technological debate because it's really easy for someone 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 that's that's like a very reasonable answer and has historically always been true. So don't bet on 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 I can't recall an example of where Silicon Valley and Wall Street or 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 like okay beyond me just saying guys like 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 use like 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 are bills are automated that I don't really think that's stressable. 10 go to prepared food and 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 Door Dash. But so 10 on bills, 10 on prepared food, six on gas stations and

transfers to your friends and you're kind of left with 21 payments. Let's just say 20 just the ground numbers and keep it easy. And if we want to be really generous and say that half of those are ecom penetrated, but we know ecom penetration is not that high, but let's just say it for 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 like the Silicon Valley tech broer the Wall Street dude running around fine doing meetings everyone 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 watching live commerce. 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 I don't see it.
I mean, that's such a good point. I So, I have a buddy uh 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 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 h it was a house. So it was a, you know, it was a freestanding house, so that's already quite rare in San Francisco. It was in the enrichment. It's a decent area. It's not, you know, it's not the nicest part of San Francisco, but it's it's a, you know, perfectly respectable place. It went for $15 million and it was 7 million over asking. This is play money. You know, if you work for one of these big labs, this is play money. And the

USD is play money. It's like the like there's this extrapolation of the the concerns of a very sort of like isolated peculiar group of people that are being made to commerce broadly that just like defy logic and defy reason. And it's like it is very frustrating because like I I've chosen this hill to die on. I've I've chosen it.
This is I've I've chosen I I choose hills to die on very infrequently and this is one and and I'm I'm willing to just die on it. have decided and so like you know I I engage in in these discussions on Twitter and I just want to ask people like from where are you drawing your frame of reference because to your point like ecom penetration uh per uh the census bureau is what 16%. I mean, so you're already talking about a fairly small pool. And like this is a problem for people to manage with an agent through automation. Intuitively, it feels that way to me out of the gate. And then when I looked at

the data, it is 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 strategy 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 I'm 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 like Morton you 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 you know like not 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 multiples better than fumbling around through traditional search and the sp and like that the the sponsor product cate uh 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 underounted 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 AI smaller than I would have expected it to be two to three years ago. Yeah, I mean that's that's a point I made in a podcast I did a couple weeks ago. Uh 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 and well we're four years into chat GPT. Are we really that early? We're four years in. I look at the user base numbers like and if you sort of like slightly relax the definition of a chatbot to include AI overviews

two billion monthly user what are we talk we're not talking about tiny numbers here a billion weekly activives for chat for chat GPT so even if like you wouldn't say like on a timeline standard were very late like even if you okay sure but like in the sort of like time span of like a meta look at the but on the on the adoption curve has been much steeper right and like lots I mean a significant proportion of humanity uses these things and we haven't seen I mean and 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 and 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 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.
I think uh it was Sam Alman did the recent interview. I'm trying to remember which podcast it was or where he said he was surprised by the inertia in the economy. And I think that's maybe one of the few things Saman and I share. I was also surprised even by the inertia in consumer behavior on this specific new tech change and I study 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. So it's moving slower than we all expected

I think unquestionably. And I just I want I want to I'm going to stay anchored to agent commerce here because don't we know things? So when I was making the point about the economy, it's like well okay we know that and we know what the penetration's 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 the sort of like widpread 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 OpenAI 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. What talk to me about what can we learn from OpenAI and from what they've already done? Talk

me through instant checkout. Is there a generalizable lesson from that?
Yeah, it's funny because a lot of us market participants, especially my friends who are other publishing Southside 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. Instinct new as well. So there has been some impressive developments, but we've done this fear and bare 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 and republish them and and it will still apply. I think there are a couple things we can learn from the open AI chatbt checkout. And the first is I say this half jokingly but also very seriously when it comes to consumerf facing products and also when you're working with enterprises focus is critical. I think at that point uh open trying to do too many things at once the consumer is unforgiving and you you don't get a lot

of bite at the apple if if you deliver a bad experience. And when checkout was active, I spoke to industry participants who were in in publicly disclosed partnerships with Open AI for checkout and OpenAI was the bottleneck. They had merchants and they had like offerings ready to be plugged into checkout and it wasn't happening because of some restraints I think at OpenAI. And that's kind of issue number one. like if if you're going to they're going to do it, you got to be singularly focused on it. E-commerce is really hard. We seem to do this every couple years. We're like big tech platform decides they want to do e-commerce and then we're all reminded there's a reason there's only a handful of gigantically scaled e-commerce players. 15% represent over 70% of US e-commerce GMV. Super concentrated when you think about it because it's really hard. And then the the the second lesson

for me and I think it's as important lesson for me as I will probably get to this today. Like I I think about the the David Oggovy quote where he used to talk about like the the consumer is 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 e-commerce market and inventory and they know that. And also if you're selling e-commerce in the US and there's a 100 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 as well as it could have be 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 that you need. You need creative

and images and ratings. And this is a thing that I'm going to talk about that I I I worry the marketplaces are undervaluing their content. But there 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 Instinct 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. I'm like, you know what? Save me the time. If it was bad, like 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 fullfunnel experience.
That is totally fair. I agree wholeheartedly that like what instant checkout is fundamentally different from what Muse and Instinct 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 uh for a number of reasons. Um I don't know if we get into those today but and I you know I've articulated those and I think people listening to this probably know

what my you know position is and totally you know fair about like opening I was 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, you I I think like they they clearly took a a a you know, an opinionated stance on where they thought the revenue opportunity was. And I think that's a 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 on the h 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 by your 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 Plus, Roku, Tuby. I mean, they are essentially the identity backbone of Fast and of the open internet. I mean, this there is just so much there 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? You know what? We're going to open up to the agents and we're going to pivot and um we're willing to forfeit all these other benefits." At some point, they may do that. I don't know. I I can't say for for certain that they won't. My sense is they they 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 have the identity and they can insert better recommendations to your point that are built around all of that data they have around historical um 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 sort somehow circumvent Amazon and still win and still provide a functional, useful product to consumers that can do e-commerce, I think is is is just premised on flawed logic.
Another thing I forgot to add to like why it failed. And then I also want to address your your FBA point, right? Fulfillment by Amazon. Another thing that I believe people don't fully appreciate about why e-commerce is so difficult and then also trying to layer between like yourself between the aggregators is scraping is a bad experience for e-commerce. So when chatbt did their initial kind of shopping journey, there was a lot of just raw web scraping and inventory availability, pricing and shipping speed changes a lot. So you need like API feeds which Shopify offers cataloges.

There's other players that offer these API feeds now. And it's gotten a lot better since then. So it's like I spent more time than I'd ever care to admit going through purchase flows on on chat GBT when they were doing this and you were getting a lot of mispriced products out of stock products because it was more of like a brute force scraping than API feeds which 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 mo, right? Like I could offer you billions of dollars and you couldn't dislodge Amazon because of 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 we move and Muse gets to 20% of e-commerce, right? Like it doesn't the number doesn't matter to

me, but where Amazon has to um 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 then is going to flow through agents. Well, what they're going to be able to do is they're going to look at their merchant base and say, "Hey, if you want to be part of our API feed to these AI platforms, it's a 3% fee, right?" And I don't know what the fee will be obviously, but to offset the decline and kind of 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, right? there is there is no other channel to the consumer in this fashion and Amazon has all the leverage here. I think when people argue in favor of of of like the sort of total consumer adoption of agentic commerce, um it's it's only out of ignorance of Amazon's scale and

business model. Like so so so this you know this there's a tweet going around yesterday. I responded to it this is this is the time where a startup could disrupt Amazon. I mean that that just seems like if you understand Amazon's business is is is just diluted on its face. And you know I again this is the hill I'm going to die on. I responded to it and and and I I said, you know, look, for all these reasons, you know, okay, so who does fulfillment, right? So who's who's doing fulfillment? Amazon has no incentive to do that if you take away the profit engine. So, okay, think about 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 is agent first. Um, and so here's what it looks Amazon's founded what, 98. So, here's here's here's what it looks like almost, you know, 30 years into the future. It's I I show you Amazon, but I rip out AWS and I rip out ads. And you say, "Wait a minute. This is 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?" Like, here here's the outcome. It's no AWS, no ads. So take away is essentially all the net income is a 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? No one would invest in that's not investable. And then someone was saying, well, yeah, but if you you're going to unbundle Amazon, so you're going to unbundle everything. You have some some company will be handling 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 like 3 hours? They finance the trucks. You go to Amazon, you get a loan for the trucks. He was walking me through this. Like, no, that's not an investable business on its own. As an independent business, that is just as it would never

evolve past some past adventure stage. It wouldn't be able to make money. It's only in the bundling where that is that becomes a valuable business. They're bigger than UPS now. Uh it's it truly the largest physical mo I can think of in my investment research career. And it and I saw I saw a great response to the tweet you were referring where a guy was joking uh as he's pitching to like the the Shark Tank and he's like, "Hey Sharks, I I want a trillion dollars for a quarter of my business so I can buy $100,000$100,000 vans and build like 1,500 fulfillment centers and like all this." It's like, yeah, it's this is this is 20 plus years in the making uh of solving for last mile in every nook and cranny and neighborhood in America. 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 is increasing constantly. When you talk to all these operators and go to the conferences and listen to the fireside chat, it's yeah, 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 it's a race for same day. Walmart gives these like sub multiple hour delivery stats and these executives are talking about conversion just goes to the moon when they're showing people, hey, we'll get you this in six hours. So it's now even harder than ever to satisfy the the needs 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.
Yeah. Groceries. Yeah. Yeah.
It's like this is this fantasy land that I think the people that are are championing this this framework the the loudest live in. And maybe that fantasy land is just Silicon Valley, but it just doesn't comport with reality. Okay. I I

Yeah. Yeah. I'm getting agitated.
We No, we get a to fairness like so and we're going to talk about Wall Street dynamics for investors. We have to we have to be in our client base has to be extremely sensitive to shifts like this because everybody likes to knock Wall Street as being short ter like short termism and and and shortsighted. I'm telling you there is nothing more long-term focused 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 like Wall Street is particularly sensitive to this. And when they when these types of paradigm shifts present themselves and they go back and look at generations of like pattern recognition, that's why you see investors get especially concerned.

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future and I wrote this in the very first aentic 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 you know what the response would that be? Well, I need one agent that does everything. And I but I just I don't but but but consumers have demonstrated that they're willing to use the Amazon agent.
This is a really hard question. There are some stuff I have firm beliefs on that I'm willing to change on a on a weekly basis. And then there's stuff that I'm not even I don't even have a firm belief on and that I'm constantly debating in my head and and we've we've published some notes talking about it and it's what are consumers going to look for? Are do they want one front door to the internet? Uh or do they want to go to Amazon for this portion of their shopping? Do and what I've tried to look at in the past is current consumer behavior, right? and how do how do consumers move about the digital

economy today? Uh and and you do see verticalization, right? So like you go to Door Dash for your food aspects and when you look at these top 15 e-commerce players representing 70% of the USGMV market, they all generate a majority of their traffic direct. So like Google is like a third kind of of shopping experiences 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 I'm doing my best to try to study how consumers have behaved for for decades and and then try to think about how they're going to behave in the future. And like the push back that the Agentic Bulls will give me is like, yeah, that's because like Mike, you've shown research that traditional Google

search for product discovery wasn't that great. Like brands showed up in the carousel at the top for the PLA's 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 starting at Google, you you probably will use a lesser like no to be fair, I am skeptical of almost every disclosed data ported from all of my covered companies, right? That's just how how you need to be. And what I found with Alexa, and at the time it was Rufus, they were autodeaulting me into it. So, I was starting a search and all a sudden I could realize like the feed didn't look the way it traditionally does within the Amazon experience. And I was like, "Oh crap, I'm in Rufus right now. I didn't even click to enter this.

They're trying I'm clearly 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.
That that's fair. That's fair. I 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, but this within the same context. So So this is I'm just quoting from your report. The top 16 e-commerce operators in the US who represent 70% of US e-commerce GMBB get 65% of their total web traffic as direct traffic. that dominant e-commerce operators spent decades building brands, trust, and reducing friction with the consumer. As discussed in a prior report, marketplaces have moes. 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 and that the brand can

only sort of you know they can only sort of delay the inevitable for so long. So, so I guess and I'm also like I'm very wary of making the 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 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 does Amazon have enough share to just foreclose this path? Um and what is the mode? Is it just the brand? You talked about fulfillment like what what what what constitutes this mode?
Yeah, let's talk about that a bit. And before I 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 we write. 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 uh 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 is 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 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 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 And what we wanted to do with this with that report to try to explain that marketplaces have modes 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 when and debate with people about this, every 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 let's walk through this. And the average marketplace take rate excluding fulfillment, right? Cuz 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 the scaled marketplace. And I I'll I'll move quickly if anybody wants to like engage with me on this deeper in like a little bit of a boring way over like accounting. We can, but call it 3% of that 10% is your your payments processing revenue. And that's that's a sub 30% gross margin business. But what that 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 e-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. Like it's really messy business and being 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 cost. 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 it, you don't even need to guess, right? Like, so, and then you can look at it and how they charge some of their fee structures. So Uber and Door Dash, if you just want to do a takeout order, the fee to the merchant is 6%. Well, I just told you there's like kind of 6% merchant of record payment revenue aspect. There's six there's three 3% of running the infrastructure. So 3 plus 3 is six. Like wow, Uber and Dash are basically trying just to cover their cost so they're not losing money on these takeout orders. So you're now at like 6 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 between this right now. I can't remember

such a fullcourt marketing press in consumer internet in a really long time as what I'm seeing with news right now. I can't open any consumer app like Instagram, uh, Reddit, anything without seeing a news impression at the top of my feed. I was in Chicago yesterday. There's Muse billboards. There's Muse. So like there's demand genen right there. Like you want to run one of these e-commerce businesses, you have to have demand genen and that's expensive. So 10 of the 17 is cost and that's not fun business and that's from really large scale marketplaces. So if you're someone who's trying to like layer in and displace these like what the bare case is, well imagine how much of a portion of your cost'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? six to 7% is like the profit pool, right? And four 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 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 it that's where they can kind of get this surplus and and earn themselves a a profit. It's trust and reviews and it's their content, right? Right. And that's 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 Marcato Libre 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 Chat GPT. Why would we complete your product offering? These guys have spent decades reducing friction, building trust with the consumer. Like it 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 like if you're 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 cuz what meta can see is how sticky the user base has been for chatbt. I think consumerfacing AI rewards first movers tremendously, right? Like and we have this chart showing like the MAUs up into the right for GPT to up over a billion from the beginning to then and then like on it's like a 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 and we put we plot along the line of all the competing products as they're launched. Grog, Meta AI, Perplexities, new additions and Gemini and they it just is really sticky and difficult to

dislodge. So I think Mark Zuckerberg and MetaZ have obviously seen that they know they have the first tomarket personal agent that can scale and I I was on the team at Meta. I let's spend on every possible channel we can to the most we can do it because if 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 going to be a while, right? the numbers are going to keep looking really good and it's not going to 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
yeah I I think it's I think it'll be ads okay I want to talk about Walmart because you brought up Walmart and that's a really interesting case is that a bellweather or a red herring when we

talk about agent commerce. We know their history with open AAI. 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 bellweather or red herring?
Yeah, I love watching Walmart here because in traditional re like retail, they are king, right? Largest grosser in the US. Like everybody lives within a few miles of a Walmart. um they control the world in e-commerce. I don't want to call them an ankle biter, right? They have eight or nine% market share, but but but we all get it, right? Like they're they're coming from behind trying to displace Amazon. And so it makes all the sense in the world for them strategically to embrace every one of these channels that pops up that Amazon is not in. Right? You should do that because you're also not like and you talked about it earlier like ads drives the profits of Amazon's retail

business. That's the world's worstkept secret. Like the the core retail business X ads is nothing to get excited about. Walmart has their own ads business and they're following the Amazon blueprint to a tea, right? like buying physio also like they get it. But so they have almost nothing to lose and everything to gain by one of these new platforms gaining share and a and riding it to take share from from Amazon. So it makes perfect sense for me. Stripe like we aren't payment analysts. I think the Collison brothers are are brilliant. This is a great opportunity for them. I think stripe link having like an aentic wallet the ball is is theoretically like coming their way but where we kind of care more about this overlap and you get a lot of misunderstandings in the equity market over the last month is like if they're trying to disintermediate

Shopify and we put this picture in her recent report and I'm not like it's fun when you finally get to have like a an enjoyable exhibit that you can laugh at and it was this picture of John Collison and Toby and Mark Zuckerberg after they spent a day together riding go-karts and they're like covered in dirt and Zuck put it up on his Instagram. It was like great day at the track. And my point is is that like that is a very important separate ecosystem to the Amazon one, right? So, like I don't it's I don't call it like the open web e-commerce ecosystem cuz it's not like the right description for it, but it's like the it's the meta shop e-commerce ecosystem that has a incredible opportunity to thrive right now. And it's really important to talk about the e-commerce ecosystem as it was versus where it's going because I do believe AI product discovery is changing the consumer's product discovery funnel. like that is that is a hill I I will die on and I think it has profoundly

important implications. So historically, and we talked about this in a report, Amazon or Shopify, can can they both like thrive in this world? And this was years ago, and basically talking about the fact that DTC is not a business model. It's a channel. And customer acquisition, they never got leverage. If you're like brand.com, you always ended up running into the arms of Amazon. Over like a 5-year window. Basically every DTC brand dies other than like the few occasional ones that explode because it's so hard to win in Google and Meta and you have to pay the tax every time. Now we have shown empirically that the search traffic that is coming from AI search platforms is out growing like brand.com search traffic so being sent from all the AI search added up being sent to brand.com which is the Shopify merchant base compared to all of the largest marketplaces. The brand.com traffic is out growing it by depending

on the window you want to cut it like year to date 5x. So this is a incredible opportunity for Shopify. We are really bullish on Shopify. We upgraded at the beginning of the year when we published this web traffic that we could empirically measure and show you like look this is potentially reworking the the infrastructure of product discovery in Shopify's favor. That's good for Stripe because Shopify we think is 13% of Stripe's payment volumes. And this is good for Meta as well because the like the R squared between Shopify's GMV and Meta's revenue is like basically perfect. Um the retail and e-commerce is the large sad buyer on Meta. And so this whole ecosystem outside of Amazon getting healthier together is a really great thing for those three players. Um, so that that's that's why we're

particularly uh excited for this opportunity for Shopify and it's going to benefit Stripe obviously as well
and and so so the incentive structures though for Shopify and you know I've made this case too uh again in the very first agent commerce is mirage piece I wrote I said it makes it makes sense for Shopify to embrace this because they are enforcing the use of Shopify checkout. You have to they prohibit autonomous transacting. You the human has to approve it and you have to use Shopify checkout. So yeah. So why not? Let's just align with everybody. Let's be part of every single commerce protocol or whatever because you're going to work through our payments infrastructure and that benefits us, right? And so like so I guess I guess so maybe the meta point I'm sort of hinting at is like if they do something I don't think it necessarily uh is a good indicator of whether or not there is real traction with agentic commerce because because they're just incentivized fundamentally to embrace everything because it's all good for

them because again they don't handle fulfillment like there's no there's no misalignment there like they all of it's good. It's just more transaction volume through their pipes. It'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 you have like Toby at the bottom and AI le 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 and I think I I think Toby is a generational CEO. Uh also Tony at Door Dash and and one or two other operators and like he is so fast moving on these changes. It's also driving more adoption for them. When I talk to brands like look like 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 more, you know, Tik Tok get all over the place. And like now with like AI, this is just it's 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. Mhm. So let's say you know I am wrong and you know this this overwhelms Amazon and they they capitulate. Talk to me. I want to talk about the three companies in particular. Amazon booking and Door Dash. What what does each gain and give up by capitulating here and letting an outside agent handle the customer interaction? I I know Door Dash has already sort of made some some moves there, so we get a sense of where they're headed. But just talk to me about what what what what each of these

three companies gains and gives up if they let an outside agent handle the customer interaction.
I think the short answer is uh I don't think they really gain anything because and like you have to go back to the view again. This is like where and I love these young entrepreneurs taking risk right like and growing these businesses. It's I I I'm just like a model monkey observing and building models and writing about it. um 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 pat on like oneclick checkout, right? Like it's like like they're actually not trying to make this hard because like every layer of friction and click you add you reduce conversion. So like this just they're not in the business of making this hard. They're in the business of making this easier and

they've developed they've developed these relationships with the customers over decades that I think is critical for them. Door Dash I've talked about the fact that like this is there's a lot of ways you can analytically prove that this is not how consumers eat. Um you can look at the data where like 50% of people spend somewhere between 5 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 US restaurants churn at 20% annually in the US 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 I just don't think that these AI platforms are going to really bring incremental demand to Door Dash. So I don't think Dash gains anything there. Amazon again I think kind of like

I don't see what they gain there. I think they have to go if we get this wrong, right? Like if if if Muse is 30% of e-commerce in three years, Amazon's got to go right. Like it like and and I got it wrong, you got it wrong. I don't cover the OTAAS where I struggle like where and there's like third party providers that aggregate these hotels and the flights and a lot of these airlines have loyalty program 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 OTAA note today. I was like, "Oh, this is good." The average American takes like three vacations a year and three roundtrip flights. And again, Silicon Valley and Wall Street folks, I take like sometimes three roundtrip flights in like a 10day window. Um, and and I fly a lot. I think you do as well. And we're again, we're extrapolating this on on onto the population at large. I have a very hard time thinking that the

average American consumer and they're their 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 the 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 like for it it to get messed up to to some extent or or like just give up control of it. I don't I don't I don't see the demand for that.
Yeah, it was funny. Someone on on on X said something like, you know, the agent like we're, you know, we're we're we're increasing the the the use cases that we're serving with with agents and and

this agent that we're building and and one of them is your green card paperwork. So, we're going to we're going to have it support that. I'm like, what is the market for that? My my wife got her 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 risk. if you got something wrong. We got something wrong with arguing 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 dubtales really nicely with my last question. You're going to use these tools for discovery of course and you're going to use them to uh get options and to like that's what you do. That's what they're really good at. Help me narrow down the list. to like help me find these, you know, specific properties that that meet these specific requirements. But like if the agent can only do that, let's say that at at, you know, with the high consideration stuff, 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 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?
Yeah. and kind I guess think that follow on to also like what's it mean for the digital ads ecosystem and before before I go on off on this one point just I was thinking about when I'm talking about why I'm not sure about travel I think a lot of investors who are clients and especially like my my family and friends they'll tell 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 5 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 like a counter consensus stock call I just don't see it right like and if I change my mind and a year from now I see it and um but I'm not a lite and I I really just studying how consumers behave and what I think people want. And so leading then into this product discovery aspect. I I'm kind of bummed out that like this agentic debate has run over this discovery conversation cuz I'm like, yo, this is so cool cuz 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 of AI search. I've spent like a week researching a couple products like flat flatfooted running shoes, filtered

coffee makers, and natural deodorant and reading like I'm not kidding like 30 different website journals about the best flatfooted 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 like what it means for the ads ecosystem. And like again like in the the news 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. Like if you just look what all these brands budget on ad spend and typically like pretty confident talking about consumer internet talking about ads with Eric

Seer is uh intimidating because I 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 Marcatoa Libre. and they have said, "Hey, you know, like we haven't commented on our click count, but it's like s like your your Amazon number of 14 products clicked per purchase is not like unreasonable." And what they said at our conference in the spring uh 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 decline in clicks. And then uh I'm fortunate enough to have Michael Nathan Nathan 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 like a billion dollar plus ad business and this this guy's like 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 talked about this I think like in 2023 on the Google calls they're taking stuff that used to be four or five queries wasn't particularly like high conviction traffic coming out of that would require like 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 like aggregate click growth rate is 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 Appalachian 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 like there like you look at like like the brand display ads on like there is waste in 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 that's how I think this product discovery shift is okay. It's going to be probably a good thing for digital ads at large. You're getting better commercial intent. And what's like 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 they just do better in like

Google scoring for for who gets the impression. It's blending better discovery and they're going to be able to then convert higher and bid on it and it's going to be more merit-based and I think that's really exciting for the longtail brands.
Michael Morton, this was fantastic. I really appreciate you coming on the podcast today to share your wisdom uh with with with me and and with the with the audience. How can people uh follow up with you? How how can they uh how can they follow you on social media and how can they learn from you elsewhere? Due 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 uh my email is morton moffetnathansson.com. I'm on LinkedIn. Look, all these these podcasts that I've gone on, it started some really fruitful relationships conversations. That's how you and I got started talking, right? Like I was on on Ben and then I reached out to you after you went on. like, "Hey, like like we should talk about this some more." We

did a like 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. Like, I I love talking about this. I just uh I I am a lurker uh in the social media world. So, it's going to have to go email or LinkedIn.
All right. Well, fair. Well, then this is it. This is all you get to the audience, but uh hope hopefully it was worth your while. It certainly was was uh was very informative uh and enlightening for me. Michael, thank you so much.
Thanks, Eric.