Aggregation Theory

From: https://stratechery.com/2015/aggregation-theory/ + https://stratechery.com/2017/defining-aggregators/

Aggregation Theory

3 parts to the value chain: suppliers, distributors, consumers

Before the internet, distributors tried to integrate with suppliers and the consumers were a background thought.

The internet has made distribution more scalable and instantaneous, so distributors optimize for consumers with the suppliers as a background thought.

These lead to winner-take-all effects because the more users a company has the better the user experience typically is for most modern companies, and regardless a company can scale infinitely when it is the best.

Aggregator Characteristics

1. Direct relationship with the user
2. Zero (or close enough in the long-run) marginal costs for serving users
3. Demand-driven multi-sided networks with decreasing acquisition costs

Types of Aggregators

1. Supply Acquisition (own their supply so are susceptible to deeper pockets)
   • Netflix
2. Supply Transaction Costs (incur transaction costs in bringing supplier on → usually in markets with regulatory concerns)
   • Uber and Airbnb
3. Zero Supply Costs (don’t own supply and doesn’t cost to acquire suppliers)
   • Google

Examples

Previous incumbents, such as newspapers, book publishers, networks, taxi companies, and hoteliers, all of whom integrated backwards, lose value in favor of aggregators who aggregate modularized suppliers — which they often don’t pay for — to consumers/users with whom they have an exclusive relationship at scale. For example:

Google

• Previously, publishers integrated publications and articles. Google modularized individual pages and articles, making them directly accessible via search
• Google integrated search results with search and profile data about users, enabling it to sell highly effective advertising

Facebook (and Ad Networks)

• Previously, publishers integrated content and advertisements. Facebook modularized advertisements by allowing advertisers to target customers directly, not via proxy
• Facebook integrated News feed ad inventory and profile data, enabling it to sell highly effective advertising

Amazon

• Previously, book publishers integrated editing, marketing and distribution. Amazon modularized distribution first via e-commerce and then via e-books
• Amazon integrated customer data and payment information with e-book distribution and its Amazon publishing initiative (the framework is clearest when it comes to books, but the integration of distribution and the customer relationship also applies to most of Amazon’s business)

Netflix

• Previously, networks integrated broadcast availability and content purchases. Netflix modularized broadcast availability by making its entire library available at any time in any order
• Netflix integrated content purchases and customer management, enabling a virtuous cycle of increased subscription demand and increased content purchase capability

Snapchat

• Previously, networks integrated mass-market advertising and general interest programming. Snapchat (and many other services) modularized attention
• Snapchat is integrating individually interesting content with mass market advertising inventory, giving brand advertisers a new way to reach a large audience efficiently

Uber

• Previously, taxi companies integrated dispatch and fleet management. Uber modularized fleet management by working with independent drivers
• Uber is integrating dispatch with customer management, enabling it to scale worldwide

Airbnb

• Previously, hotels integrated vacant rooms and trust (via brand). Airbnb modularized vacant properties by building a reputation system for trust between hosts and guests
• Airbnb is integrating property management and customer management, enabling it to scale worldwide