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Men's title-holder Novak Djokovic eased into the last 16 but elsewhere there were surprises all over Melbourne Park with Williams the biggest victim and Federer fighting back from 4-8 down in a fifth-set tie-break with John Millman.
After recent bushfire smog largely cleared in Melbourne, the view is all too familiar with Djokovic and Serena, who is seeking a record-equalling 24th Major title, installed as the bookies' favourites.
Shapovalov, 20, needed just 70 minutes to brush aside world No. 7 Zverev, who lost his third straight singles before the year's first Grand Slam starting in Melbourne on January 20.
World number 11 David Goffin was another loser, along with Italy's Fabio Fognini, ranked one place below him.
Alexander Zverev and Stefanos Tsitsipas both crashed to defeat in their first matches of the year Friday as day one of the inaugural ATP Cup sprung some big upsets.
Tsitsipas was unable to claim his first major title at this year's Slams, two of which were won by the 33-year-old Nadal and two by the 32-year-old Djokovic, while the 38-year-old Federer came close to adding to his record 20 titles.
The 21-year-old debutant, the youngest of the eight qualifiers for the elite season-ender at the O2 Arena, displayed resilience and flair in equal measure to become the youngest champion since Lleyton Hewitt in 2001.
Earlier, Stefanos Tsitsipas shocked six-time champion Roger Federer 6-3, 6-4 to reach the final of the ATP Finals in his tournament debut.
The indomitable Spaniard delighted his fans in the 02 Arena as he recovered from losing the opening set to beat Tsitsipas.
Federer finishes second in Group Bjorn Borg, behind Thiem, who also beat Djokovic earlier this week. The Swiss will face the Group Andre Agassi winner on Saturday.