Defining Aggregators (09.26.17)

Author: Ben Thompson in Stratechery URL: https://stratechery.com/2017/defining-aggregators/ One-line: A formal, evergreen reference defining what makes a company an aggregator — three required characteristics and a Level 1/2/3 taxonomy by supply cost. Aggregation Theory Evergreen Notes

Not a typical Stratechery article — no over-arching narrative or news hook. The primary goal is to provide a future point of reference. Evergreen Notes

Key claims

• Aggregation Theory describes how platforms (aggregators) come to dominate industries in a systematic, predictable way — a guidebook for aspiring platforms, a warning for distribution-controlled industries, and a primer for regulators on the antitrust endgame.
• Aggregators have all three of these characteristics; missing any one can still mean a very successful business (e.g. Apple) but not an aggregator:
  • Direct relationship with users — payment-based, account-based, or simply regular usage (Google and non-logged-in users).
  • Zero marginal cost for serving users — across COGS, distribution costs, and transaction costs.
  • Demand-driven multi-sided networks with decreasing acquisition costs — abundant digital supply means users reap value through discovery and curation; once an aggregator gains some end users, suppliers come onto its platform on its terms, commoditizing themselves, which attracts more users in a virtuous cycle. Customer acquisition costs decrease over time → winner-take-all. Any business that creates its customer value in-house is not an aggregator (acquisition costs eventually cap growth).
    • “If you build it they will come.”
• Examples: Apple’s App Store and Amazon’s Merchant Services qualify as aggregators (owned user relationship, zero marginal cost serving the user, a supplier network passing marginal costs to suppliers) — even though Apple and Amazon overall are not aggregators.

Classifying aggregators

• Level 1 — Supply Acquisition: acquire their supply; market power springs from the user relationship but is manifested through superior buying power. Slower to build, more precarious; operate where supply is highly differentiated; susceptible to deeper-pocketed competitors. e.g. Netflix.

  Kyle: How do you think about incremental costs when you start creating original content? Not necessarily directly correlated to user growth / acquisition cost.

• Level 2 — Supply Transaction Costs: don’t own supply but incur transaction costs onboarding suppliers (background checks, vehicle verification), which limits supply and therefore demand growth. e.g. Uber.
• Level 3 — Zero Supply Costs: don’t own supply and incur no supplier acquisition costs. Google is the prototype: websites are accessible by default and ==actively make themselves more searchable (an entire SEO industry exists to get suppliers onto Google more effectively).== Social networks are also Level 3 — initial supply comes from users themselves, then professional creators add content for free.

  Kyle: Optimal place to be in is when people are actively building to optimize themselves on your platform at no cost to you.

• Super-Aggregators: operate multi-sided markets with at least three sides — users, suppliers, and advertisers — with zero marginal cost on all of them. The only two examples are Facebook and Google, which add self-serve advertising with no corresponding variable cost (unlike Twitter and Snapchat, which rely more on sales-force-driven ad sales).

  Kyle: Why is Twitter’s ad model so much sales-force driven?

How it connects

• Aggregation Theory (07.21.15) — the founding essay this formalizes; Kyle read both on 10 June 2020.
• Aggregation Theory — the concept page.
• Netflix (Level 1), Uber (Level 2), Twitter (sales-force ad model) — the worked examples.
• Ben Thompson / Stratechery — author and publication.

Verbatim source notes — restored from Roam, 2026-09-21

• Then, once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle.
• Level 2 Aggregators do not own their supply; however, they do incur transaction costs in bringing suppliers onto their platform. That limits the growth rate of Level 2 aggregators absent the incursion of significant supplier acquisition costs. e.g. Uber ($UBER)
• Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way. Aggregation Theory should serve as a guidebook for aspiring platform companies, a warning for industries predicated on controlling distribution, and a primer for regulators addressing the inevitable antitrust concerns that are the endgame of Aggregation Theory.
• (Note: this is not a typical Stratechery article; there is no over-arching narrative or reference to current news. Rather, the primary goal is to provide a future point of reference) Evergreen Notes
• The Super-Aggregators
• Level 2 Aggregators: Supply Transaction Costs
• Transaction costs, that is the cost of executing a transaction for a good or service, providing customer service, etc.
• One additional note: the aforementioned Apple and Amazon do have businesses that qualify as aggregators, at least to a degree: for Apple, it is the App Store (as well as the Google Play Store). Apple owns the user relationship, incurs zero marginal costs in serving that user, and has a network of App Developers continually improving supply in response to demand. Amazon, meanwhile, has Amazon Merchant Services, which is a two-sided network where Amazon owns the end user and passes all marginal costs to merchants (i.e. suppliers).
• This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers. This further means that aggregators enjoy winner-take-all effects: since the value of an aggregator to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones.
• Level 1 aggregators typically operate in industries where supply is highly differentiated, and are susceptible to competitors with deeper pockets or orthogonal business models.
• Zero Marginal costs for Serving Users
• Level 1 Aggregators acquire their supply; their market power springs from their relationship with users, but is primarily manifested through superior buying power. That means these aggregators take longer to build and are more precarious in the short-term. e.g. Netflix
• Level 1 Aggregators: Supply Acquisition
• The cost of goods sold (COGS), that is, the cost of producing an item or providing a service
• Level 3 Aggregators do not own their supply and incur no supplier acquisition costs (either in terms of attracting suppliers or on-boarding them).
• Super-Aggregators operate multi-sided markets with at least three sides — users, suppliers, and advertisers — and have zero marginal costs on all of them. The only two examples are Facebook and Google, which in addition to attracting users and suppliers for free, also have self-serve advertising models that generate revenue without corresponding variable costs (other social networks like Twitter and Snapchat rely to a much greater degree on sales-force driven ad sales).
• Because aggregators deal with digital goods, there is an abundance of supply; that means users reap value through discovery and curation, and most aggregators get started by delivering superior discovery.
• Google is the prototypical Level 3 Aggregator: suppliers (that is, websites) are not only accessible by Google by default, ==but in fact actively make themselves more easily searchable and discoverable (indeed, there is an entire industry — search engine optimization (SEO) — that is predicated on suppliers paying to get themselves onto Google more effectively).==
• Social networks are also Level 3 Aggregators: initial supply is provided by users (who are both users and suppliers); over time, as more and more attention is given to the social networks, professional content creators add their content to the social network for free.
• This may be a payment-based relationship, an account-based one, or simply one based on regular usage (think Google and non-logged in users).
• Generally speaking, any business that creates its customer value in-house is not an aggregator because eventually its customer acquisition costs will limit its growth potential.
• Level 3 Aggregators: Zero Supply Costs
• Aggregators have all three of the following characteristics; the absence of any one of them can result in a very successful business (in the case of Apple, arguably the most successful business in history), but it means said company is not an aggregator.
• Distribution costs, that is the cost of getting an item to the customer (usually via retail) or facilitating the provision of a service (usually via real estate)
• Uber needs to undertake steps like background checks, vehicle verification, etc. that incur transaction costs both in terms of money as well as time. This limits supply growth which ultimately limits demand growth.