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AI To Disrupt The E-Commerce Scene (And Facebook Has A Competitive Advantage) Are you planning to invest in e-commerce? Discerning that a dot-com collapse is looming, and e-commerce as we know it will end due to disruptive AI, you should proceed with care.

By Muhammad Aljukhadar

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Are you planning to invest in e-commerce? Discerning that a dot-com collapse is looming, and e-commerce as we know it will end due to disruptive AI, you should proceed with care.

E-commerce is currently booming, with no sign of retreat. Americans will spend more than US$400 billion online this year, and this number does not seize growing. Meanwhile, Amazon is dominating, at least in the US and Europe, whereas the largest traditional retailer Walmart is trying to log on through what some refer to as "its last window of opportunity' to book a decent spot in the e-commerce world and face market share eater Amazon.

Worldwide, e-commerce stands now at $2.4 trillion and represents 10% of total commerce according to e-marketer. The 10% is marked by several analysts as a critical point- critical to traditional retailers and so far taken for granted as a healthy sign to Amazon and colleagues, an indicator of immense opportunity for both well-established e-tailers and startups.

To a great extent, one cannot but agree: E-commerce is steadily coming, and there is no way back. In fact, brick-and-mortar retailers are closing their stores at an ever alarming rate, Walmart is paying $ 3.3 Billion (yes, several billions, you got it right) for a one-year-and-a-half-old company Jet.com, and everyone else seems to invest in e-commerce or adapt their business model to it. The frenzy is here. And it is here to stay.

Alas, the second dot-com collapse is looming (the first one happened circa 2001). And AI and blockchain advancement tells it is imminent and will be a game changer– not only to brick-and-mortar retailers such as J.C. Penny and Macy's but to well-established, flagship dot-coms. This collapse, will nonetheless, give the opportunity to brick-and-mortar retailers to re-position and gain market share. Bigger e-commerce players– if unresponsive and ill-prepared to the disruptive technology– will find themselves less able to adjust and would be strongly hit, as the case with any disruptive event. Additionally, conventional online-advertisement models will be voided. Right now, it sounds that many are unaware of the e-commerce Uber and Uber-like model.

History repeats itself though in dissimilar fashion. Whereas, the first dot-com collapse resulted from cheerful speculations and over-optimistic valuations, this is barely the case for the next collapse. Porter's Five Forces model tells another story when applied to a 10-year e-commerce context:

  • Bargaining power of suppliers: No change.
  • Threat of substitutes: No substitute to e-commerce (Web-enabled trading) is foreseeable.
  • Industry rivalry: Amazon is dominating, but some big players are fighting. The rest of the market is fragmented (more than 500,000 e-stores are active worldwide).
  • Bargaining power of buyers: Low (unless a disruptive technology empowers them).
  • Threat of new entrants: Low (unless technology can disrupt the conventional e-commerce model).

Porter's model, with Disruptive Technology principles, highlights that AI is set to disrupt the current e-commerce model, similar to how a simple app (e.g., Uber, Airbnb) was able to disrupt well-established industries, and to puzzle policy makers. Yet it is different from the first collapse in that it is predictable and technological. Let's look at the following figure, which speculates the progress of marketing.

Image credit: Muhammad Aljukhadar.

While marketing in the last century has been driven by creating and stimulating consumer demand (via mass production aided by mass advertising), marketing in our century is largely driven by consumer wants. During our century, AI will advance to disrupt the e-commerce model, redefining the marketing paradigm and opening the window for an age of intense development.

Consequently, in the next century, marketing will become completely need based. AI will prevail, making recommendation agents more ubiquitous and smarter. The redefined paradigm, assisted by breakthroughs in neuroscience, will push for a nascent, terrifying phase (where machines are able to recognize a consumer's need and readily satisfy it by ordering the right product or even creating and printing it). We focus next on our century (the middle box), where e-commerce will be redefined.

The above analysis points out that AI will alter the current e-commerce model by empowering shoppers. This might happen in several forms. The next figure shows one of these. In the current e-commerce model, the consumer has to search for and evaluate product offers at all potential e-tailers. Nonetheless, advancement in AI will enable the consumer to just name the wanted product or place own requirements. Such technology will qualify the retailers to deal with aggregate orders (all similar orders placed by consumers within a timeframe) instead of having to deal with individual orders.

Image credit: Muhammad Aljukhadar.

The disruptive technology creates value by facilitating the effort of both consumers and retailers (its network has far less nodes than the current network, meaning that the increased efficiency is nonlinearly gigantic). Therefore, AI will shift the focus from advertising to order fulfillment and customer service. Because the disruptive model depends on the aggregation of orders, platforms that serve as a consumers hub are entitled to benefit. Social media networks, led by Facebook, have an inherent advantage in leading the change and becoming e-commerce facilitator.

Picture an AI-empowered shopper using Facebook while waiting for an emptier subway. Using an added Facebook feature (or a box embedded on the mobile screen if the technology was provided by the OS maker), the shopper provides the needed product, the maximum price the shopper is willing to pay, time leniency (whether the shopper can afford to wait for a week, few days, or want the product the next day), and place leniency (whether the shopper can pick up the product within metropole or a given mile-radius or want it home-shipped).

By pressing a "Negotiate & Buy' button, the money is withhold from credit card (or a cryptocurrency such as bitcoin) by Facebook. Within seconds, the AI negotiator of a potential seller recognizes the order and approves it as profitable. The product is now on its way to shopper.

Now picture e-tailer X. Each second, its AI negotiator considers an order made up of the aggregation of all product orders placed at that time by shoppers, plus accumulated orders not fulfilled yet. Based on several factors such as current order size and own prediction algorithm (which estimates for instance how many further orders will be received and how the order size influences supplier price and cost), the AI negotiator of e-tailer X decides to fulfill the order or not. Other e-tailers, whom negotiators are also assessing the order in real time, acknowledge the "first come, first served' rule, and their negotiators are in continuous learning.

In the future, AI will greatly benefit the consumer not only because it helps increasing shopping efficiency but also because it improves price fairness– although at times the price paid by some consumers is inferior to retail price or to the price paid by others. For the first time, AI will make a consumer order accepted by a retailer depending on several factors such as well-timed order and place / time leniency. AI will transform online buying to online negotiating and act on behalf of the consumer and the seller. The consumers are rest assured that if no retailers honored their purchase within a day, Facebook will release the funds withheld and they can reorder anytime.

Notably, the AI model gives Amazon, Jet.com, some-chinese-or-indian-retailer.com an equal chance of winning the consumer by approving the order. Their AI negotiators just have to deem the order "sustainably profitable.' Similar to our social networks, the pending e-commerce model is highly egalitarian.

Although the technology might putatively be developed by a firm that can readily and pleasantly aggregate consumer demand such as Facebook, there is still a possibility for this technology to organically evolve –much as the web did– and be controlled by nobody. A group of enthusiastic developers working on an open source AI would suffice to ignite an inevitable disruption to e-commerce.

Related: Beyond Robots: Reimagining Artificial Intelligence

Muhammad Aljukhadar

Assistant Professor, American University of Beirut

Muhammad Aljukhadar is an Assistant Professor at the American University of Beirut. He holds a PhD in Marketing from HEC Montreal and an MBA from Concordia University. His research interests involve electronic commerce applications and online consumer behavior. His research has appeared in numerous journals, including Psychology & Marketing, International Journal of Electronic Commerce, Information & Management, and International Journal of Information Management.


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