(2017-10-05) Defining Aggregators

Ben Thompson: Defining Aggregators

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. 2015-07-21-ThompsonAggregationTheory

value has shifted away from companies that control the distribution of scarce resources to those that control demand for abundant ones; the purpose of this article is to catalog exactly what the latter look like.

The Characteristics of Aggregators

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.

Direct Relationship with Users

Zero Marginal Costs For Serving Users

Demand-driven Multi-sided Networks with Decreasing Acquisition Costs

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

This is in contrast to non-platform companies that face increasing customer acquisition costs as their user base grows. That is because initial customers are often a perfect product-market fit; however, as that fit decreases, the surplus value from the product decreases as well and quickly turns negative. 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.

Classifying Aggregators

different levels of aggregation based on the aggregator’s relationship to suppliers

Level 1 Aggregators: Supply Acquisition

Netflix

Level 1 Aggregators acquire their supply; their market power springs from their relationship with users, but is primarily manifested through superior buying power.

Level 2 Aggregators: Supply Transaction Costs

they do incur transaction costs in bringing suppliers onto their platform

Uber is a Level 2 Aggregator (and Airbnb in some jurisdictions due to local regulations).

Uber needs to undertake steps like background checks, vehicle verification, etc. that incur transaction costs both in terms of money as well as time

Level 2 aggregators typically operate in industries with significant regulatory concerns that apply to the quality and safety of suppliers.

Level 3 Aggregators: Zero Supply Costs

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

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.

Level 3 aggregators are predicated on massive numbers of users, which means they are usually advertising-based (which means they are free to users).

The Super-Aggregators

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

Regulating Aggregators

Given the winner-take-all nature of Aggregators, there is, at least in theory, a clear relationship between Antitrust and Aggregation. However, traditional jurisprudence is limited by three factors