Could Shopify actually be disrupted?

Seems unthinkable.

I see two ways it could happen.

I love the platform and hope it endures, but it’s possible.

Shopify’s been a beacon for merchants, a platform I’ve been enamored with since its early days, marveling at its rise. From my first experiment in 2008—rigging a storefront to funnel Froogle traffic through affiliate redirects to generate commissions (a bit rogue, I admit, and guilt nudged me to abandon it)—to coding one of the first survey apps for customer attribution (70% response rate, but I built it into checkout, a no no if you want to be listed in the app store). I was undeterred though and launched Honeycomb Commerce, the first dropshipping network built on Shopify’s backbone, later acquired by Onward. For over a decade, Shopify’s been near and dear to my heart.

Its brilliance lay in its focus—core functionality honed to a razor’s edge, with edge cases handed off to app partners. This kept Shopify lean, adaptable, and ahead of the pack. APIs, Shop Pay, Online Store 2.0—these were no mere updates; they were a tidal wave of innovation that left competitors choking on dust.

Wither Innovation?

Until AI entered the scene, Shopify’s feature progress seemed to stall. Recent updates—tweaks and polish—improved the platform but didn’t really get merchants energized. They’re not the kind of breakthroughs that would sway a brand to choose Shopify over a rival, if one actually existed. 

Shopify’s centralized nature, like Meta or Amazon, makes it an intermediary—a gatekeeper between brands and customers. Historically, it’s been a merchant’s ally, with low costs and a friendly face. But there’s been a notable shift, one that could threaten its merchant-friendly reputation. As Chris Dixon lays out in Read Write Own, internet platforms climb the adoption S-curve, peak, and then shift from an “Attract” to “Extract” mindset.

The gist is that as platforms reach the top of the adoption S-curve and dominate their market, their relationship with users and developers shifts from positive-sum (mutually beneficial) to zero-sum (platform gains at others’ expense). Once in the “Extract” phase, these platforms aim to maximize shareholder value by extracting more and more value from the community without providing meaningful incremental benefits in return (Side note, if you’re curious about where the interest is going next, I can’t recommend this book enough. It’s been a huge influence on my thinking recently).

Take the Shopify Plus price hike in April ’24. A $500 bump from $2,000 to $2,500 a month seemed mild—unless you noticed the real hike: the $40,000 monthly fee cap disappeared. For Shopify’s biggest merchants, costs can now spiral unchecked. Then there’s the app developer revenue share change. It used to be the first $1 million in app earnings reset annually and were exempt from Shopify’s 15% cut. Now, it’s a lifetime cap—cross $1 million, and you’re paying full freight from then on. This, just four years after the exemption began in 2021. These aren’t moves to nurture the ecosystem; they’re a shareholder request to drive more profit.

The grumbling’s begun—pretty low key for now, but it’ll crescendo if the screws continue to turn.

AI To The Rescue?

So value extraction appears to be accelerating, but are brands getting anything of real use for these higher fees? The answer hinges on Shopify’s new AI features. If no additional value can be unlocked here, Shopify platform maturation will be complete, leaving it vulnerable to a lower priced upstart. So far, Sidekick, their AI assistant, feels underclocked—being trapped within Shopify’s walls is stifling its potential. The upcoming Storefront MCP could open up that potential, letting Sidekick tap into data from apps that integrate, but the impact is TBD.

The real AI unlock lies in Shopify embracing its network effects. To date, customer insights haven’t been leveraged across the platform —brands are left to piece together their own customer analysis, shelling out for separate data tools. How valuable is this new customer? Do they return everything? Shopify holds the answers, with 2.4 billion transactions alone last year, but isn’t telling. Fraud prevention is a glaring example: why should brands need third-party prevention tools when Shopify could use its data and provide much more robust tooling? A skeptic might wonder if fraud suits Shopify’s bottom line.

Let’s pull on that thread a bit.

It’s All About Shopify Payments

Shopify’s lifeblood—72% of its revenue—flows from its “Merchant Solutions” division, which is mostly Shopify Payments. Through a deal cut with Stripe, Shopify pockets a significant percentage of the credit card processing fees captured through its platform. When discussing fraud, it’s all about chargebacks. Brands almost always lose these cases, but when they do, they don’t get refunded the processing fees. Sure, Shopify Protect covers fees on chargebacks for Shop Pay orders (about 35% of transactions), but why not all? It begs the question: Is it disinterest—or does the status quo fatten Shopify’s margins?

While instructive for framing the issue, keeping processing fees from fraudulent transactions would be a pittance compared to an actual material decline in credit card transactions. Could that actually happen? In my piece on Gen Z Commerce, I flagged crypto as a disruptor. Younger generations, skeptical of traditional finance, could very well lean into decentralized alternatives. When Shopify announced USDC, a crypto stablecoin, as a payment option, it seemed like just the forward thinking that led them to prominence.

Instead, they faltered. USDC payments, processed through Shopify Payments, carry the same 2.9% + $0.30 fee as credit cards—a fee structure tied to bank and card network costs that crypto sidesteps entirely! Shopify will toss back a 0.5% rebate to the merchant, but that’s just a small fraction of margin they are keeping. Emerging tech deserves to be nurtured and encouraged, but Shopify is obviously wary of fully embracing the shift here. Crypto’s promise—significantly lower processing costs, instant settlements, fraud deterrence—could very well fail to materialize for brands should Shopify refuse to rethink its model.

I believe Shopify will find itself with a fateful decision to make. Will it turn into the coming DeFi/Crypto wave and save itself? Or will it let shareholders steer the ship into the rocks?

Time will tell.

EDIT:

Big announcement this week after the post went live. The new Base app (Coinbase's L2 built on Etherium) announced Base Pay, which allows customers to purchase on Shopify stores using USDC.

Shopify is promising a 1% rebate to consumers when they check out with Base Pay. A great step and would bring the total rebate from USDC payments to 1.5% (Merchant + Customer).

I'll be discussing Base in an upcoming crypto post.