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.