Is Shopify a platform business? This is a common question we’ve gotten from listeners of Winner Take All.
Tech companies providing SaaS solutions are often referred to popularly as “platforms.” These companies tend to use the term “platform” as a marketing term that doesn’t have any substantive meaning or definition. Indeed, Shopify is not a platform business and is better classified as a linear business, at least for now.
Although it has reached an impressive $55 billion market cap as a provider of eCommerce services, the core of Shopify’s business is not based on platform dynamics, which involve bringing together networks of users and creating value from transactions between those user groups.
Why is Shopify, and many other SaaS companies like it, not a platform? Its core business offers its proprietary eCommerce tools and technologies to merchants and small businesses, enabling them to set up virtual online stores with catalog and shopping cart functionality. At its core, this is a linear business model: Shopify leverages its own resources to develop or procure the solutions it sells to its customers on a subscription basis.
However, there is a small and relatively new part of the Shopify business that is a platform — the Shopify App Store. Featuring more than 3,200 apps, it enables merchants to browse and purchase third-party developer apps that add extra value to eCommerce outlets built through Shopify. Shopify then levies a take rate on those app sales. That income can be classified as “platform revenue.”
Shopify’s financial statements don’t clearly delineate income along these lines, but instead describe “subscription revenue” representing what Shopify earns on a recurring basis from their customers, and “merchant revenue” which describes earnings from the ancillary services Shopify provides to merchants. With this categorization, it’s all but impossible to parse out how much is coming from the App Store, and how much is owed to the linear aspect of the business. But analyst estimates put it as a negligible source of revenue. Until Shopify’s development platform and app store become a significant source of revenue, its unit economics and business model are almost will remain linear.
An example of a SaaS business that has a more prominent development platform would be Salesforce — despite the fact that most of its revenue still comes from its linear operations.
As a member of the PLAT ETF, Salesforce has garnered a market cap of $162 billion and reported $10.5 billion in revenue for the 2018 fiscal year. That includes roughly $1 billion that Salesforce earned in platform revenue through its thriving AppExchange platform, which is 5,000 apps strong. Salesforce exacts what works out roughly to a 15-25% take rate on transactions between its enterprise customers and third-party developers.
Salesforce acknowledges this platform revenue as a major driver of growth, even though the linear CRM and ancillary enterprise services that the company is known for currently account for a larger slice of revenue. The company’s recent spending spree has apparently been focused on top-line growth, but it remains to be seen whether Salesforce will continue on that trajectory or double down on the virtually zero-marginal-cost opportunity its app marketplace presents.
Essentially, Shopify would have to generate much more growth and revenue from its App Store. As of right now, it plays a negligible role in the economics of the business.
The other platform route for Shopify, albeit a remote one, is for it to pull together products and services sold by the merchants who use its eCommerce SaaS capabilities, and to make those third-party items available for sale to consumers generally through a centralized product marketplace. This, however, would be a big departure from its current business model, and it would likely alienate many of its core SaaS customers.