Stratechery.com is a blog by Ben Thompson, a business, technology, and media analyst. One of the important contributions made on the site was the concept of Aggregation Theory. Aggregation Theory is a framework to understand how the big digital platforms of nowadays leverage their power, to increase their power.
Thompson has written many pieces on it, explaining the nuances and building on his original theory of 2015. I recommend anyone that is interested in deep diving into the topic to read the blog posts about it (and in general I recommend taking a look at the blog itself; it’s packed with great reflections, insights, and analysis).
There are also other authors publications adding to the topic, and sometimes showing its weaknesses.
Aggregation Theory is complex. I just want to offer a simple explanation of it, that will help you understand it better.
In short, Aggregation Theory describes those companies that have virtually no marginal extra cost per new customer, a direct relationship with the user, and “demand-driven multi-sided networks”, with decreasing acquisition cost.
Lots of fancy words, but bear with me; it’s easy to understand.
How it came about
So, supply chain has 3 elements to it: suppliers, distributor and consumers. The entry barrier for both suppliers and distributors was always high (more so for getting into the big leagues), therefore the number of both was relatively low.
That made the main challenge for the distributors to control the suppliers, and the main challenge of the suppliers to control the distributors. And it made the marginal cost of acquiring a new customer something that you had to consider.
Take movies. If you as a distributor had the best suppliers of movies, you were looking good. Did you lose access to those scarce suppliers, you had a problem.
Same for the suppliers; good relationship with the best distributors, good results. Bad relationships with the best distributors, bad results.
With internet, the entry barrier massively lowered, so consumers have A.) a lot of suppliers to choose from B.) a lot of distributors to choose from.
Now the scarcity is the time of the consumers, so whoever controls where consumers choose their products, and what they choose, controls the party.
That’s where the aggregators come in. Your Google’s, Facebook’s, Netflix’s, Amazon’s, Twitter’s, … They are the place costumers go to for the supply.
And precisely that makes the Aggregators more attractive to suppliers, increasing the variety of choice that the Aggregators can offer the costumers.
And precisely that makes the Aggregators more attractive to customers, increasing the amount of customers suppliers can have access to.
And precisely that makes the Aggregators more attractive to suppliers…
You get the idea.
As offer increases, demand increases, and vice versa. That’s why aggregators are so powerful, they slowly but surely construct a monopoly.
Aggregators consolidate demand to gain power over supply.
Definition
Back to the definition. As I said, there are 3 parts to it:
- Virtually no marginal extra cost per customer. Everything is digital, so I don’t have to create something for each additional customer, I just have to give access. (We’ll talk about the “virtually” a bit later)
- A direct relationship with the user. The aggregator is the place you sign up to as a consumer.
- Demand-driven multi-sided networks. Demand-driven, because, as we saw before, as demand increases, so does offer. Multi-sided, because the aggregator facilitates the interactions of various suppliers with various customers. Network, because it’s a Network. Duh.
Types
Not every Aggregator is exactly the same, you can divide them in 4 main types:
- Level 1: they have to pay for the supply, so they have a cost when acquiring. Netflix is the best example (fix cost, both when buying from a supplier or creating their own).
- Level 2: they don’t have to pay for the supply itself, but they do incur costs when they acquire new supply. Like Uber (background checks, licenses, vehicle verification, etc…).
- Level 3: they have neither of the above. No primary costs when acquiring suppliers, no secondary costs when acquiring suppliers. Like Google. Or Social Networks.
- Super aggregators: a bit different here, because apart from operating with suppliers and customers, they also bring advertisers into the equation. Like, again, Google. Or Facebook.
If you think that Level 1 and Level 2 look very similar, it’s because they do. I believe the main difference is the Industries they act in. Level 2 aggregators will work in those that have a lot of regulatory concerns, protecting both safety and quality. Yes, Netflix will do some checking when they buy the rights for a show, but as long as it’s not one of the few banned movies in the country, they are doing fine. Compare that to all the legal ass-covering Uber has to do whenever they get a new driver, and you get a good idea of the main difference.
Now, there are, as with every theory, some issues. The most obvious one: the marginal cost is not virtually zero. Servers are not cheap, and money transactions have costs too. There’s a big part of budget that will go into building and maintaining digital infrastructure.
Still, when it comes to marginal cost, it’s not as high as non-digital companies, and it provides a very big advantage to these companies.
Other argue that the idea is nothing new. As before Aggregators, offer and demand still reign the market, and those players that get the power over both are the ones winning.
Thompson’s point is that the main difference now, is that the power is by those who are able to centralize the demand, instead of the supply.
All in all, Aggregation Theory is relatively sound and has come to stay. It helps to explain the power of many digital companies, and will keep being a part of the conversation in the future.
Here’s a link to Thompson’s original post, so you can check it out: https://stratechery.com/2015/aggregation-theory/.
leo burghaus 
Leave a comment