The Death of Search: How Shopping Will Work in the Age of AI

a16z General Partner Alex Rampell and Partner Justine Moore discuss how AI agents are changing business and their impact on Google's business model, affiliate marketing, online shopping, and more.

Original text: The Death of Search: How Shopping Will Work In The Age of AI (a16z.substack)

By Alex Rampell & Justine Moore , a16z

Compiled by Felix, PANews(Edited and edited)

Why think about the role of AI in business?

Erik Torenberg: You've been thinking about the role of AI in business for a long time. Could you please start by talking about what inspired this article and how you came up with these ideas?

Alex Rampell: A long time ago, I started a company called TrialPay. I've actually been selling things on the internet for a really long time, even before the internet existed.

I was wondering, what will happen to Google first after the advent of AI? Because a lot of people are wondering this question: will search volume increase or decrease? Personally, my search volume is decreasing, but not commercial searches, but all non-commercial searches.

That's one thing, and TrialPay is one of the world's largest affiliate marketers. Affiliate marketing, essentially referring customers to others, is one of the oldest business models on the internet. It actually predates AdWords and AdSense. You refer someone to a certain place, and you get a share of the revenue, or a commission. But will the affiliate model truly become a driving force in new business sectors?

On the other hand, there are these very expensive items. You're using AI to do deep research on them. But without a federated model, how do you conduct commerce and transactions? So, first of all, the ontology of commerce is very interesting. Second, the whole federated model, does it still make sense? Because that seems to be where ChatGPT and other companies are venturing. And thirdly, just for my own personal experience, I probably use ChatGPT three orders of magnitude more than I use Google right now, which is interesting.

Justine Moore: There are several very large consumer markets, probably the largest of which is online shopping. But I think that to date, there have been relatively few startups trying to use AI to address this market, although there are more opportunities now because of these very smart language models and agents that can help you make better decisions than you could make yourself and even make purchases for you.

You would think that this would create opportunities for more people to package this content into products and offer it to consumers, but we haven't seen many people doing that yet. So I think this section is about digging deeper into why this system is so complex, what are the different types of purchases where AI can play a role, and what do we want to see when we think about the broader market?

To what extent will AI enable dynamic pricing?

Erik: Alex, can you imagine a world with extreme dynamic custom pricing, where you could see the same thing on Amazon, but it would charge you more, probably because you have more money?

Alex: Well, I mean, people have tried this many times. It's certainly a very clever world from an introductory economics perspective. Like, how do you capture consumer surplus? Consumer surplus is good for consumers and bad for producers. And obviously, Delta has tried this, or they've tried to.

This is like a poor person's scenario, for example, if you use an iPhone, you should pay more than someone who uses an Android phone because the iPhone is more expensive. This actually shows that your demand elasticity is different from those who have less money.

I think there might be regulatory challenges with this. Of course, there would be a backlash from the customer base, but some people have tried this. But generally speaking, it's a very difficult approach to succeed.

Why is the scale of e-commerce so small?

Erik: Before we discuss this, let's review previous platform shifts. E-commerce currently accounts for only 16% of total retail sales. If we had discussed and predicted the proportion of e-commerce in commerce 20 years ago, we might have thought it would be much higher. But why is this not the case?

Alex: It turns out that the demand curves for immediate and non-immediate services are different.

I once served on the board of a company called Wise, and while observing their remittance business, I discovered that the market for instant remittances and the market for remittances arriving two days later are two completely different things. Demand for remittances arriving two days later might not be as high. It's surprising that you only mentioned 16%, which seems very low.

Justine: I think that's a high number. I'm not questioning your research on the data. I think it's because I think there are a lot of cases where people do research online and then go to the store to buy.

Alex: Actually, the most difficult thing, which is also related to this topic, is attribution. It is everyone's pain point. For example, how do I assign attribution for Justine's MacBook sales?

And I think the most pervasive and corrosive business model on the internet is "last-click attribution." You give 100% of the credit to the last click. A lot of people fall into this trap, not understanding correlation from causation, and it's a business model I hate the most, like Honey. It's the kind of thing where you're already on a webpage, ready to buy, and it asks, "Do you want a coupon code?" Of course, why not? "10% off. Click here." You click here. It redirects you to an affiliate page, places a cookie on your device, and then redirects you back to the page you were on, effectively stealing attribution for that visit.

Why are e-commerce brands struggling?

Erik: Let's review the industry again. It seems like the biggest winners are at the aggregator level, like Shopify or Amazon, and independent brands like Allbirds or Casper. They seem to have achieved huge revenues quickly, but haven't been able to become the sustainable businesses they once were. Their performance hasn't improved as they've scaled. Can you talk about the overall situation in the industry and why this is the case?

Alex: It's probably because they don't actually manufacture the products; usually someone else does, which isn't a good business model. E-commerce brands are just resellers of goods, and I think that's the problem. Just like what happened in the Internet 1.0 era, the long tail of commodity retailers is basically starting to die out.

Justine: I think things like shoes and makeup, like Allbirds, are very dependent on trends, especially in the internet age. Nothing stays popular forever. For example, one year Allbirds is the hottest shoe, and the next year everyone's all over retro Adidas. Now On sneakers are all the rage again. For example, I was watching a TikTok video of the University of Alabama's Rush sorority this year, and every girl was wearing On sneakers, whereas last year they were all wearing Japanese-style New Balances.

Will AI threaten Google's business model?

Erik: Now let's get into the specifics of this. Which features will be taken away from Google? Which features will remain?

Alex: I think Google has always had a classic freemium business model, which is that they built a better search engine, and it was much better because of the way they linked.

When Google first started, most searches were free because commerce on the internet was still in its infancy, and all searches were free, all information. I remember using Google when it first came out, and it felt so much better than HotBot and everything else.

It was all free, with no profit involved. They essentially copied the Overture business model proposed by Bill Gross. It was a project at IdeaLab that eventually became part of Yahoo. That's how Yahoo ended up owning a portion of Google, and if you understand the history, it was AdWords that made Google the $2 trillion behemoth it is today.

What's happening now is that Google is starting to phase out some of the "free" aspects, but the "mium" (paid) aspects haven't diminished at all. Google is eliminating information queries like "Who won the Oscar in 1977?" These aren't monetizable queries, but people still want to know. People are now turning to ChatGPT, which has 800 million weekly active users, a massive number.

But the "mium," the paid portion of the freemium model, still exists at Google. How do I know? I can look at their financials. They're still growing, but we also know that search volume is actually declining. So, if they're not losing revenue, what are they losing?

Alex: I'd say the biggest threat facing the internet right now is that it's unhealthy, or rather, the World Wide Web is unhealthy right now. It's unhealthy because a lot of things that once existed on the open internet now exist in so-called "walled gardens." By the way, search has long been fragmented. This isn't caused by ChatGPT. For example, if you want real-time search, you have to go to Twitter or Platform X. If you want to search for your friends' information, you have to go to Facebook. These various "walled gardens" are one unhealthy factor. Another unhealthy factor is the commercialization of the internet, which isn't inherently bad. But the question is, if you're looking for the best sneakers, who are the people writing about quality sneakers? In 1995, if you had a blog, first, you hosted it on your own website. You installed Apache on a server you built yourself and did it purely out of love. Affiliate links provided a revenue model, but they certainly polluted the then-open internet.

It's like the top ten running shoes. You know what that is? To me, that means the top ten affiliate marketing revenue. Then I'd find someone to write a bunch of nonsense and optimize it to the bone to make money. Think about it again, before the internet. There was a publication called Consumer Reports, and the cool thing about it was that it was the only publication that refused to run ads. It was completely subscription-based, with the idea that you could trust the reviews. We really needed that model, but the whole business model just disappeared. A lot of content is blocked now, and the content that isn't blocked is filled with spam.

Justine: Honestly, I think the least spammy channel I've seen is video. When I want an honest review, I go to unsponsored YouTube videos, which usually get a lot of views. Amazon is actually a giant search engine. And it's also polluted. A lot of what Amazon does is arbitrage. It's like a polluted ocean of garbage.

Costco's business model

Alex: My favorite business model by far is Costco. I think Costco is the greatest company in the world because Costco refuses to sell inferior products. They refuse to charge high margins. Why they refuse to…it makes no sense.

Erik: Is it because they want to return the profits to the customers?

Alex: No, because it would reduce the value of membership. They make money from membership fees, so they charge you about $100 a year. If you look at their net revenue, it's basically the number of members... They have over 50 million members, which is a huge number, multiplied by the membership fees, and that's their net revenue. Everything else is nothing.

They started their own chicken farm because rotisserie chickens were too expensive. That's how they run their business, refusing to sell anything they're not happy with. Generic brands are just as good. So Costco is the best... Just like the business world we've talked about, like the pre-internet era, the internet era, the AI ​​era, Costco is immune to all of that because they're like Consumer Reports... They treat their customers incredibly well, and that's why this company is worth hundreds of billions of dollars.

Which shopping categories will AI eat into?

Erik: Let's talk about what businesses will be changed by AI? You mentioned several different types of purchasing behaviors that may be "eaten"

Justine: Yeah, so we looked at the range of impulse purchases and I think those purchases… I mean, they’re still like, like, the Coke, the Coke bottle in the aisle.

But now, many people will see something while watching a video, just like in the TikTok store, and think, "That T-shirt looks cool, I want to buy it," or even seriously consider purchasing items like a house, wedding venue, or car, which will cost you a large part of your income.

It's like a one-time or multiple purchase, where you do a lot of research. So I think both of those scenarios are going to be hard to disrupt with AI. I think impulse buying is when you don't research beforehand, and you don't go to any specific place to buy it. Essentially, you see it and buy it instantly.

Therefore, the algorithm will become more and more accurate in targeting you. For example, if a shirt with your dog's name printed on it appears in your TikTok dynamic, you will be more willing to buy it than other things. But this is different from the generative AI we are talking about.

Then there's the most important part of the purchase process. I think it's hard to fully achieve end-to-end AI because while you might start doing online research on ChatGPT, Gemini, or any of the new AI-native products that are emerging, the purchase is more significant and you're likely to want to have some kind of hands-on experience to see, touch, and experience it.

So, this means that within this entire category of products in the middle, we believe purchasing behavior could be disrupted by AI in several different ways. One obvious way is through research. For example, let's say, "My bag is getting worn out from all my frequent travels, and I need a bag that can hold my laptop, large water bottle, and everything else, and still fit in the overhead bin on an airplane..." If you're busy, you don't have the time to do all that research yourself. You could hire an AI agent to watch all the TikTok videos, read all the Reddit posts, gather real consumer feedback, and then make recommendations. You might also want to click through the options yourself. But I'd say in this case, if there's a good purchasing integration, you're more likely to do it through an AI agent.

There are also things you already know you want, like wanting the best price. So I think AI agents can do a lot with price optimization. For example, if you always buy a certain type of laundry detergent, it can search online and ask, where is the best price for that particular type of laundry detergent?

There's another type of purchase that I think can be mediated to some extent by AI, but also likely has some human influence. For example, with a bicycle, a sofa, or something slightly more valuable like a laptop, you want someone to take the time to truly understand all of your criteria and help you make the best purchasing decision. This is likely an item you'll use for many years, and it's important to you that it works well, is the best choice, and doesn't become obsolete quickly. Today, I think the only way to achieve that is through people digging into Reddit threads like the buyitforlife forum.

Or they have a really trusted brand, like Apple, and are willing to pay a premium. I think in the future it's going to be interesting to have an AI agent that really gets to know you so you can have a much deeper conversation about these kinds of things. Maybe even a phone call where they're dynamically asking you a bunch of questions, and you're providing them with the information they need to go back and research and make a decision. That's kind of how we're thinking about how AI is impacting purchasing behavior.

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