Direct to Consumer, or DTC, is a fundamental platform shift, according to former AOL and Verizon digital properties CEO Tim Armstrong. “There have been a couple times in my career where there has been what is basically a fundamental platform shift,” noted Armstrong. “I felt like direct-to-consumer was something that was going to be a platform shift. Not for probably the obvious reasons, but some of the reasons that were less obvious, but things that I thought were important for the future.”

Tim Armstrong, former AOL and Verizon Oath CEO and current founder and CEO of The DTX Company, discusses how direct to consumer (DTC) ecommerce businesses represent a “fundamental platform shift,” in an interview with Recode’s Kara Swisher and Jason Del Rey at An Evening with Code Commerce in Las Vegas:

Direct to Consumer is a Fundamental Platform Shift

About a year and a half ago I started spending a lot more time just on where the underlying infrastructure in the world was changing around the internet and mobile and all the things that we’ve talked about for years. One of the things that stood out to me was there’s been a couple times in my career where there has been what is basically a fundamental platform shift. I felt like direct-to-consumer was something that was going to be a platform shift. Not for probably the obvious reasons, but some of the reasons that were less obvious, but things that I thought were important for the future.

One was data management, just in terms of things like GDPR and similar things that were happening. I think the power and data is going to shift back more towards the consumer side over the next 10 or 20 years. I thought that would fuel direct to consumer. The second is that the product development cycles that were happening at the direct the consumer companies were much faster and much deeper than what was happening in the normal channels of product development. I think that’s another thing that over a 5, 10, 15, 20 year period these companies are going to have a real advantage in terms of how they develop products and distribute them.

Customer Communication: Two Way or No Way

The third thing was just the two-way communication. At DTX we have a growing team, but one of the things we say is two way or no way. Two-way communication with the customer having a direct relationship with companies. The last thing is how the relationships between consumers and companies are going to change. This seems like a really important trend and probably there’s a really big opportunity here. There may not be but that that’s what got me interested in it.

What we’re doing right now is really kind of two simple things. One is we’re putting investments directly into DTC companies and we’ve done a number of those and we’ll do a few more. The second thing we’re doing is spending a lot of time on an acronym that I hear all the time now which is CAC, customer acquisition cost. Really, on the operating side of the business what we’re doing is not CAC, it’s CRAC, which is an unfortunate acronym, but it’s customer revenue and acquisition cost. Having the balance on the equation of those two things we’re going to be testing things in 2019, some experiences and and other things that will hopefully put the R back in the CAC equation.

DTC Might Re-Engineer the Entire Way Commerce is Done

All of my experiences and basically all the stuff I did on the media side was all two-way relationships. The more time I started to think about really what happened was the reason I thought about DTC’s. I started to go back to those memories based on meeting a lot of the DTC founders and of coaching CEOs for DTC founders. I started to think about things like GDPR and some of the things that are happening underneath the surface that I think is going to change long term. I thought wow, this might actually re-engineer the entire way commerce is done and this is a really interesting opportunity.

There are a bunch of spaces online now you can look at where people are piling money and where there’s probably over investment. But DTC overall, if you went product by product, category by category, industry by industry, in DTC, there are so many companies that you’ve never heard of and rightly so. The Casper’s, the Warby Parker’s, those are amazing companies and they get a ton of notoriety. There are also about 10,000 other categories. They don’t have ten people, they might have one or two, but they’re doing interesting things in them.

People ask us all the time, is there a DTC ceiling, these companies can only get so big? That may be true but I don’t think it’s true. What will happen is the aggregate of all these things together. If you have ten thousand DTC brands and they’re $10 million or $50 million or $500 million they may not have to look like Google and Facebook right now, but when you add up all of them together over time and what’s likely to happen with a condensing of the market in the next 10 or 20 years (it is significant).

DTC Could Be an Amazing Transformation

There are two things that stand out to me. One is every major press article around traditional commerce tends to be negative. Not all the time, but there’s so much angst around what’s happening in retail overall. A lot of it is deserved, but there are a lot of interesting things happening in traditional retail. The second one is the DTC categories that are super hot, the four or five super hot categories, get 90 percent of the coverage and press. What we’re seeing and we have people coming in offices all day doing DTC and there’s just an amazing amount of ingenuity, invention, and innovation happening in different categories.

I think again it’s one of these things you’re going to wake up 5, 7, 10, or 15 years from now and say, wow, this was like a really amazing transformation. It’s going to be for the reasons that these companies all talk to their consumers all the time. The amount of product innovation that’s happening is truly tremendous. If you take the Beauty category or any category and you dig into all of the DTC brands and micro categories within, if you went to a Procter & Gamble or Unilever and look at all of their products, each one of their products has multiple DTC companies trying to innovate that space.

I think you’ll end up seeing the recreation of really large consolidated companies. It may not happen for years, but I think it will happen. The reason is not because they were cheaper than what happens in the Unilever Procter & Gamble it’s because the product innovation is hard. Having spent so much time now with DTC companies, the amount of product innovation that happens at that those companies with direct consumer interactions seems to me to be deeper and faster than it is at most other traditional companies.