Social Commerce & the Open Web: A Future Transformation?

Automattic's Broad Portfolio and Market Perception

While Automattic holds a prominent standing within the industry, public understanding of the full scope of its operations is often limited.

Mark Davies, Automattic’s CFO, frequently encounters this lack of awareness. He notes that individuals familiar with WordPress often remain unaware of WooCommerce, a key subsidiary of the company.

Davies highlights this disconnect by pointing out that Automattic processes $30 billion in payments through WooCommerce, a figure that often surprises those who only recognize the WordPress brand.

WooCommerce's Significance and Growth

The importance of WooCommerce is underscored by the fact that it powers more online stores than Shopify, a platform widely recognized by investors and industry analysts.

WooCommerce represents a crucial element in Automattic’s long-term strategy to foster a more open internet. The company’s valuation has increased significantly, moving from $3 billion in 2019 (following a Salesforce-led funding round) to $7.5 billion with a recent share buyback.

This expansion is driven by a deliberate move beyond traditional publishing services into the profitable e-commerce sector, alongside the acquisition of Tumblr.

A Vision for an Open Internet

Automattic’s core strategy centers on expanding open-source innovation across the internet, challenging the dominance of closed platforms like those offered by Amazon and Facebook.

The company envisions a future where WooCommerce, Tumblr, and WordPress serve as gateways to new services currently not associated with Automattic.

Facing Formidable Competition

This is an ambitious undertaking, positioning Automattic for a competitive struggle against some of the largest and most financially powerful companies in the technology landscape.

Successfully executing this vision will require significant effort and strategic maneuvering.

The Evolution of WooCommerce and the Rise of Open E-commerce

can social and e-commerce transform the future of the open web?

WooCommerce originated as WooThemes, a modest design company akin to numerous others specializing in WordPress themes.

In 2011, the company broadened its scope to develop themes specifically for online stores.

Paul Maiorana, the current CEO of WooCommerce – a subsidiary of Automattic – explains that they identified a growing demand. A significant portion of their theme sales were geared towards commerce.

Consequently, they recruited developers working on a commerce platform, integrated them into the team, and this platform ultimately became the primary focus of the company.

Despite the plugin’s consistent ranking among the top 10 most popular for WordPress, WooCommerce’s impact remained largely confined to that ecosystem.

The 2015 acquisition by Automattic garnered minimal attention within the wider technology sector.

At the time, WooCommerce comprised a team of fewer than 100 employees, and the acquisition didn’t initially appear to be a substantial investment.

While e-commerce was demonstrably expanding, it hadn’t yet reached its peak growth phase.

Internally within Automattic, questions arose regarding the acquisition’s merit, the financial details of which were never publicly revealed but were reported to TechCrunch as Automattic’s largest to date.

“There was even debate at the board level about the wisdom of the purchase,” recalls Matt Mullenweg, founder and CEO of Automattic. “Many questioned whether we could realistically compete with Amazon.”

However, a contrasting viewpoint prevailed: the importance of Automattic establishing a comprehensive presence across all areas.

“We operate with exceptionally broad ambitions and maintain a long-term perspective,” Mullenweg stated.

Soon after, WooCommerce experienced rapid expansion, and the acquisition proved to be a pivotal decision for Automattic.

“I would characterize it as a defining moment, comparable to the arrival of a new child,” Mullenweg observes.

Amazon played a key role in driving this growth. Following the downturn after the dot-com bubble burst, Amazon demonstrated the viability of e-commerce.

Subsequently, it facilitated access for small merchants through Fulfilled by Amazon, proving their potential for success.

For e-commerce businesses of all sizes, the logical next step involved establishing a more robust, independent online presence.

This meant creating a digital storefront not entirely reliant on the conditions set by Amazon.

“The question becomes: how does Amazon’s success inherently create a need for balance? It’s a matter of yin and yang, light and dark,” explains Mullenweg.

“The triumph of one entity inevitably fosters an environment where alternatives can emerge and restore equilibrium.”

He continues, “Wherever you observe a highly successful, proprietary system, a significant opportunity arises, and the world will seek an open-source alternative.”

The Competitive Landscape of E-commerce Platforms

Initially, Shopify entered the online storefront market as one of many competitors. Established in Ottawa in 2004, the company gradually expanded its customer base, coinciding with the early growth phase of WooCommerce.

Shopify's profile was significantly raised when it became a publicly traded company in 2015, the same period during which Automattic was evaluating the potential acquisition of WooCommerce. Since that time, Shopify’s stock value has increased by approximately 47 times, establishing it as a rapidly expanding technology company on the public market.

Growth Fueled by E-commerce Expansion

Both WooCommerce and Shopify capitalized on the accelerating expansion of e-commerce. The COVID-19 pandemic provided a substantial boost to both companies as brick-and-mortar retail locations experienced closures and online sales volumes surged.

Data from the U.S. Census Bureau indicates a consistent rise in e-commerce, growing from roughly 7% of total domestic sales in 2015 to 11.4% by 2020. This trend culminated in a peak of 15.7% during the height of the pandemic.

Market Share and Revenue

Determining which company currently holds the larger market position depends on the metric used. Shopify generates considerably more revenue, reporting $3 billion in 2020, primarily from payment processing fees rather than subscription charges.

However, WooCommerce powers 28% of the top one million websites, compared to Shopify’s 20%, as reported by BuiltWith. Magento, owned by Adobe, occupies third place, trailing behind both in terms of website count, though it generally serves larger, more profitable online stores.

A Respectful Rivalry

At Automattic, the competitive dynamic with Shopify is viewed positively. Davies, Automattic’s CFO, expressed admiration for Shopify, describing it as “an awesome company.”

Rather than perceiving Shopify as a direct competitor to overcome, Automattic views it as occupying a similar position to Apple within the smartphone industry.

Davies stated, “We think, ultimately, there probably will be a couple different end winners. We think open source will be a winner in e-commerce, and Shopify may be the Apple.”

Shopify: Founded in 2004, experienced significant stock growth after its 2015 IPO.
WooCommerce: Gained traction alongside Shopify, powered by 28% of the top million websites.
Magento: Adobe-owned platform, targeting larger storefronts.

The Expanding Ecosystem of WooCommerce: A Challenge to Shopify

As competition with Shopify intensifies, Automattic is reinforcing its strategic approach. Maiorana, the CEO of WooCommerce, affirms that their objectives extend far beyond a simple product rivalry.

Automattic envisions the wider WordPress platform, which underpins Woo, as a catalyst for creating functionalities that are difficult, if not impossible, to duplicate within proprietary software environments.

Maiorana cites CraftPeak as an example, an agency leveraging Woo to develop websites for breweries. This illustrates the platform’s potential.

Prior to the COVID-19 pandemic, many of these breweries utilized their websites primarily as digital brochures. However, CraftPeak assisted them in expanding their online capabilities to include merchandise sales, physical product offerings, and, subsequently, beer delivery, brewery tours, and ticket sales.

These diverse functions deviate from the standard e-commerce purchase process, necessitating unique code or plugins for implementation—a breadth of functionality that Maiorana believes is more readily achievable within the WordPress ecosystem.

“WooCommerce isn’t about mirroring Shopify and offering the same products,” states Toni Schneider, former Automattic CEO and current partner at True Ventures. “It’s about enabling features like ticket sales and subscriptions, possibilities that aren’t as easily realized on other platforms.”

Similarities and Differences with Shopify

Shopify shares notable similarities with WordPress, positioning itself as a “retail operating system” that supports the installation of plugins and themes. A robust marketplace of third-party developers provides over a thousand purchasable plugins.

Startups like Shogun, specializing in advanced e-commerce storefront designs beyond Shopify’s standard offerings, have secured significant venture capital funding.

WooCommerce operates on a comparable model, though a substantial portion of its plugins are available at no cost, reflecting the open-source nature of the platform. It’s important to note that Woo itself functions as a plugin for WordPress.

However, WooCommerce currently lags behind Shopify in certain essential areas. Solutions for payments and shipping, for instance, are well-established within Shopify’s integrated system, which levies a transaction fee.

On WooCommerce, where commercial pressures are less pronounced, the development of these plugins is ongoing.

As observed in the first part of this series, Shopify has successfully created a more streamlined and comprehensive e-commerce solution, much like Wix and Squarespace offered simpler, albeit more limited, website builders in contrast to WordPress.

Automattic’s Ambitious Venture: Reimagining Tumblr for the Future

WooCommerce represents a central component of Automattic’s overall business strategy. What other areas, therefore, align with this vision?

A remarkably broad spectrum of possibilities. Executives within the company have identified sectors such as e-learning, online marketplaces, digital advertising, and crowdfunding as potential expansion avenues for both WordPress and, consequently, Automattic.

However, social networking may prove to be the most compelling area for growth. WordPress largely remained on the sidelines during the initial surge of social media, as the blogging platform’s influence on internet discourse was gradually overtaken by proprietary systems like Twitter. The 2019 acquisition of Tumblr signaled Automattic’s intention to alter this trajectory.

For those unfamiliar, Tumblr was established in 2007 as a fusion of blogging and social networking functionalities. The platform experienced rapid growth in its early years. Matt Mullenweg notes that in the early 2010s, many predicted Tumblr or Posterous would surpass WordPress in popularity.

Concurrently, Facebook was gaining significant momentum. Tumblr’s expansion eventually plateaued, despite maintaining a substantial and devoted user base. In 2013, Yahoo, under Marissa Mayer’s leadership, acquired the social network for $1.1 billion. Ownership then transferred to Verizon in 2017 with the acquisition of Yahoo.

A series of strategic errors and a lack of investment under both Yahoo and Verizon resulted in Tumblr’s decline. It was ultimately sold to Automattic in 2019 for a reported $3 million, largely as a financial write-off. The company was operating at a loss, and these losses were transferred to Automattic.

The announcement of Automattic’s Tumblr acquisition initially generated excitement, but no immediate improvements were observed. Tumblr’s team continued operations from its New York City location, and neither the platform nor its parent company offered a comprehensive outline of their future plans.

Tumblr’s future remains uncertain. The internet is replete with failed platforms, and few companies successfully recover from obscurity – examples include Friendster, MySpace, and Digg. However, there are instances of successful turnarounds, such as Reddit, which experienced a similar downturn under Conde Nast ownership. Its founders were able to revitalize the platform after regaining control.

“I find Reddit’s resurgence incredibly inspiring, particularly its unique position on the internet and its successful advertising model,” states Mullenweg. “If a brand once held affection by users, revival is certainly achievable.”

Automattic, and WordPress, have strong incentives to invest in Tumblr. The social platform provides something WordPress has historically lacked: an accessible entry point into the WordPress ecosystem for users of all technical skill levels.

“Upon learning of the potential Tumblr acquisition, I immediately conveyed to our growth strategist that it represented the last stronghold of the independent web,” explains Josepha Haden Chomphosy, the executive director of the WordPress project. “Integrating this platform into an open-source framework benefits both parties. Tumblr possesses a built-in social element. The inherent value of platforms lies in their low barrier to entry; minimal digital literacy is required. Users simply need to participate and create. This is not the case with the open web.”

Any substantial progress with Tumblr is anticipated to require several more years, as the site is currently undergoing a migration to the WordPress infrastructure, a complex and extensive undertaking.

A Vision of Universal Web Presence

Executives at Automattic are focused on a future where WordPress serves virtually any purpose online. The revitalization of Tumblr, for example, is envisioned as a connection point to a growing WooCommerce platform.

According to CFO Davies, Tumblr boasts hundreds of millions of users, a number mirrored by WordPress, with a significant portion being content creators. These individuals produce diverse content – music, writing, fashion, and art – yet often lack avenues for direct monetization beyond their own sites. Automattic aims to address this by integrating WooCommerce, offering payment processing, subscriptions, and sales capabilities, enabling creators to operate more effectively without needing to rely on platforms like Patreon.

Automattic’s strategic initiatives extend beyond WooCommerce and Tumblr, encompassing its entire product suite. Following investments from Salesforce in 2019 and a recent fundraising effort, the company has actively pursued both acquisitions and strategic investments.

In 2021, the company completed the acquisition of Parse.ly, a web analytics firm. Plans are underway to incorporate Parse.ly into WordPress as a standard service, though users will retain the option to decline its use or integrate it with other analytics tools.

WooCommerce has expanded its capabilities through acquisitions of companies specializing in email marketing and shipping solutions. Furthermore, a $30 million investment was made in August into Titan, a provider of whitelisted email addresses.

Davies explains that the goal is to broaden the product portfolio and enhance functionality for all customer applications. This is being achieved through continuous integration of complementary technologies.

Fortunately, the WordPress ecosystem presents a wealth of potential investment and partnership opportunities for Automattic. Despite the prominence of proprietary platforms during the previous decade, the open web remains remarkably vibrant and innovative.

Mullenweg believes that, in the long run, the web will be the most significant platform, even 50 years from now. He highlights its robustness, resilience, creativity, and freedom, asserting that the surge of innovation on the web is ongoing.

Successfully establishing a strong presence in both e-commerce and social networking will validate this perspective for Automattic. However, achieving this requires continued integration of its various teams under a unified structure, a topic explored in the fourth and final section of this TC-1.