Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google dominates online searches, but its attempts to challenge Amazon (NASDAQ:AMZN) in the e-commerce market have largely fallen flat. But over the past few months, Google rebooted those efforts with several aggressive strategies. In April, it stopped charging commissions for Google Shopping listings in the U.S. and expanded those commission-free listings to shoppable ads on Google Search in June.
In late July, it eliminated commissions from its "Buy on Google" payment platform and allowed merchants to link their stores to third-party payment services like PayPal and Shopify, instead.
Google clearly wants to gain ground in the e-commerce market by undercutting Amazon's commissions and offering a more open and flexible platform, but is it too late for the search giant to challenge the e-commerce behemoth?
Reviewing Google's e-commerce missteps
Google Shopping was originally launched as a price-comparison tool called Froogle in 2002, then rebranded and integrated into Google's core search engine as Google Product Search in 2007. The platform's searches organized publicly listed prices, and merchants weren't charged for the listings.
But in 2012, Google rebranded the service again as Google Shopping and started charging merchants for ranked listings. That abrupt change sparked an exodus of merchants from Google's ecosystem, especially smaller ones that lacked the marketing budgets of larger retailers.
By December 2012, shopping results appeared in just 5% of Google's search results, down from 20% at the beginning of the year, according to Searchmetrics. In other words, Google overestimated its clout in the e-commerce market and its ability to monetize Google Shopping.
Google continued to expand Google Shopping with new services, including the same-day and overnight delivery platform Google Express but remained far behind Amazon in product searches. Last year, a study by CivicScience found that 49% of U.S. shoppers start their product searches on Amazon, compared to just 22% who start on Google.
Meanwhile, Amazon's dominance of product searches turned it into the third-largest online advertising platform in the U.S. after Google and Facebook, according to eMarketer.
In that context, Google's e-commerce expansion seems like a defensive move aimed at widening its ecosystem's moat against Amazon, instead of a serious attempt to actually beat Amazon in online shopping.
Reviving its original strategy
The elimination of Google Shopping's commissions suggests Google recognizes the mistake it made nearly eight years ago. It's likely too late to win back all the merchants it lost after it shifted to paid listings, but nixing its commissions and opening its platform to Shopify, which serves over a million businesses, and PayPal, which hosts over 281 million consumer accounts and 24 million merchant accounts, is a good start.
Amazon generates most of its marketplace revenues from commissions and fulfillment fees, so it probably can't match Google Shopping's zero commissions. Meanwhile, merchants who already use Shopify and PayPal can smoothly transition their digital storefronts to Google Shopping without being forced to use Google's own payment-processing platform.
The two problems with this plan
Google Shopping's latest changes mark steps in the right direction in its ecosystem war against Amazon, but investors shouldn't get too excited for two simple reasons.
First, the elimination of commissions indicates Google will operate Google Shopping at a loss to attract merchants. Alphabet's adjusted operating margin already dipped year over year in the first quarter, as ad purchases slowed down throughout the COVID-19 crisis, and the elimination of Google Shopping's commissions could slightly exacerbate that pressure.
Second, Google Shopping's changes target merchants instead of shoppers. Google still isn't offering shoppers any compelling reasons to start their product searches on its search engine instead of Amazon -- and the lack of new shoppers could prevent merchants from coming back.
The key takeaways
Google's aggressive new e-commerce strategies shouldn't be considered a threat to Amazon. Instead, they're testaments to Amazon's strength, which expose Google's soft spots in the product search and advertising markets.