aggregation theory

7/26/2019 Aggregation Theory

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The fundamental disruption of the !nternet has been to turn this dynamic on its head% (irst,

the !nternet has made distribution *of digital goods+ free, neutralizing the advantage that pre'

!nternet distributors leveraged to integrate with suppliers% Secondly, the !nternet has made

transaction costs zero, maing it viable for a distributor to integrate forward with end

users/consumers at scale%

This has fundamentally changed the plane of competition: no longer do distributors compete

based upon e)clusive supplier relationships, with consumers/users an afterthought% !nstead,

suppliers can be aggregated at scale leaving consumers/users as a first order priority% -y

e)tension, this means that the most important factor determining success is the user

e)perience: the best distributors/aggregators/maret'maers win by providing the best

e)perience, which earns them the most consumers/users, which attracts the most suppliers,

which enhances the user e)perience in a virtuous cycle%

The result is the shift in value predicted by the Conservation of Attractive Profits% #revious

incumbents, such as newspapers, boo publishers, networs, ta)i companies, and hoteliers,

all of whom integrated bacwards, lose value in favor of aggregators who aggregate

modularized suppliers . which they dont pay for . to consumers/users with whom they

have an e)clusive relationship at scale% (or e)ample:

Google

#reviously, publishers integrated publications and articles% oogle modularized

individual pages and articles, maing them directly accessible via search

oogle integrated search results with search and profile data about users, enabling it

to sell highly effective advertising

Facebook and Ad Net!orks"

#reviously, publishers integrated content and advertisements% (aceboo modularized

advertisements by allowing advertisers to target customers directly, not via pro)y

(aceboo integrated ews feed ad inventory and profile data, enabling it to sell highly

effective advertising

A#a$on

#reviously, boo publishers integrated editing, mareting and distribution% Amazon

modularized distribution first via e'commerce and then via e'boos
https://stratechery.com/2015/netflix-and-the-conservation-of-attractive-profits/https://stratechery.com/2015/netflix-and-the-conservation-of-attractive-profits/


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Amazon integrated customer data and payment information with e'boo distribution

and its Amazon publishing initiative *the framewor is clearest when it comes to boos,

but the integration of distribution and the customer relationship also applies to most of

Amazons business+

Netflix

#reviously, networs integrated broadcast availability and content purchases% etfli)

modularized broadcast availability by maing its entire library available at any time in

any order

etfli) integrated content purchases and customer management, enabling a virtuous

cycle of increased subscription demand and increased content purchase capability

Sna%chat

#reviously, networs integrated mass'maret advertising and general interest

programming% Snapchat *and many other services+ modularized attention

Snapchat is integrating individually interesting content with mass maret advertising

inventory, giving brand advertisers a new way to reach a large audience efficiently

&ber

#reviously, ta)i companies integrated dispatch and fleet management% 0ber

modularized fleet management by woring with independent drivers

0ber is integrating dispatch with customer management, enabling it to scale worldwide

Airbnb

#reviously, 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

!ts interesting to consider the order of these e)amples: the pioneer of this model was oogle

which modularized content providers% !ts easy to see why this is the case: content has

always been monetized by pro)y, whether it be paying for newspapers *or advertising space


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in those newspapers+, paying for C1s, or paying for cable T2% The shift to digital has e)posed

these pro)ies for the rent'collection mechanisms they are%

(aceboo, though, has built in some respects an even stronger position: its suppliers are its

users, so while it, lie oogle, aggregates content that it gets for free, it also has e)clusive

access to that content% Snapchat and other user'generated content networs are similar%

The third wave are industries that dont have such an obvious digital component% Airbnb, for

e)ample, deals with vacant rooms3 what maes it wor is the way it has digitized . and thus

commoditized . trust% 0ber deals with cars3 it has digitized both trust and dispatch% 4ore

importantly, both have nailed the user e)perience in a way that incumbents have been sorely

lacing% -oth companies also sit in a sort of middle ground between (aceboo and oogle:

their suppliers are not e)clusive in theory, but increasingly are exclusive in realityas both

benefit from a virtuous cycle of more users leading to increased utilization of suppliers%

5hat is important to note is that in all of these e)amples there are strong winner'tae'all

effects% All of the e)amples ! listed are not only capable of serving all consumers/users, but

they also become better services the more consumers/users they serve . and they are all

capable of serving every consumer/user on earth% This, above all else, is why consumer

technology companies are so highly valued both in the public and private marets%

6ooing forward, ! believe that Aggregation Theory will be the proper framewor to both

understand opportunities for startups as well as threats for incumbents:

5hat is the critical differentiator for incumbents, and can some aspect of that

differentiator be digitized7

!f that differentiator is digitized, competition shifts to the user e)perience, which gives a

significant advantage to new entrants built around the proper incentives

Companies that win the user e)perience can generate a virtuous cycle where their

ownership of consumers/users attracts suppliers which improves the user e)perience

The 0ber and Airbnb e)amples are especially important: vacant rooms and ta)is have not

been digitized, but they have been disrupted% ! suspect that nearly every industry will

belatedly discover it has a critical function that can be digitized and commodified,

precipitating this shift% The profound changes caused by the !nternet are only &ust beginning3

aggregation theory is the means
https://stratechery.com/2014/uber-fights/https://stratechery.com/2014/uber-fights/

aggregation theory

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