Essential concepts to understand platform business, Aggregator

“All happy families are alike, and all unhappy families have their own set of misfortunes.”

This sentence is famous because everyone has the same question.
'What makes successful people special?' 'Is there something in common?'

Many people wrote to get this answer, and that sentence was quoted a lot. Similar questions arise in the business realm.

With the advent of the Internet, the global economy/industry has undergone upheaval. The vanguard is star companies like Google, Facebook, Uber, Netflix, Tencent, and Alibaba.

These companies have exploded without owning large assets like traditional conglomerates.

Beyond growth, it changed the way industry stakeholders play.

What the hell do these companies have in common? What is the 'similar look of happy companies'?

What they have in common is that aggregator tech analyst Ben Thompson writes a newsletter called 'Stratechery'.

[caption id="attachment_5334" align="alignnone" width="300"] Ben Thompson[/caption]

He is known for his sharp analysis of the tech industry. While analyzing the strategies of successful tech companies, Ben discovers patterns and turns them into a structured framework.

The framework is 'Aggregation theory', and the company named it 'Aggregator'.

[caption id="attachment_5341" align="aligncenter" width="908"] Aggregation theory- Stratechery by Ben Thompson[/caption]

A concept similar to ‘aggregator’ but more familiar to us is ‘platform business’.

The term ‘platform’ is often used broadly to refer to an intermediary-based IT business.

'Platform' and 'Aggregator' are a little different.

‘Aggregators’ as Ben refers to some companies with special models among ‘platforms’.

(Actually, Ben defines the platform itself a little differently, but we will skip it for now.)

In other words, the aggregator can be seen as a subset of the platform business.

For example, Microsoft's Windows OS or Amazon Web Services is a platform business, but not an aggregator. condition of the aggregator

An aggregator is an aggregator if the following three conditions are met:

1. Direct Relationship with Users
2. Zero Marginal Costs For Serving Users
3. Demand-driven Multi-sided Networks with Decreasing Acquisition Costs

It's hard to say. Can we solve it easily?

(Condition 1) Owns the user interface.

The aggregator owns the interface for consuming the product/service and has a direct relationship with the end user.

It may be a relationship established through membership registration, a relationship through a payment method, a relationship through default setting, or a relationship simply due to habitual use

(Condition 2) There is little increase in cost when there is one more user.

*Marginal cost. The cost that increases when output increases by 1 unit

1. Cost of Goods Sold
2. Distribution Cost
3. Transaction Cost

1. Marginal Cost of cost. The aggregator deals with digital goods/services. There is no marginal cost of cost (although there is a fixed cost).

Companies such as Uber, Airbnb, and Grab provide intangible services such as ‘booking accommodation’, ‘calling for transportation’, and ‘ordering delivery’ rather than house, car, and food if you look closely.

Therefore, there is no marginal cost of cost.

2. Marginal cost of distribution Delivered through the Internet. Therefore, there is (almost) no marginal cost of distribution.

3. Marginal cost of transaction Transactions are handled by automated systems and payment companies.

There is no marginal cost in the transaction relationship. Aggregators have a characteristic that their marginal cost gradually converges to zero.

Neither Apple's iPhone nor Amazon's offline business are aggregators. Because if you add one customer, the cost increases proportionally.

(Condition 3) If you bring one person, it is easier to bring the next one.

Common sense is that the more customers you have, the harder it is to get them.

In other words, increasing acquisition cost.

This is because the initial customers feel the greatest value in the product/service, and the more customers increase, the less value the target customers feel.

In theory, selling the same product increases the cost and effort to acquire customers.

Aggregators are the opposite. As the number of users increases, the value provided by the aggregator increases as a network effect.

As the number of Google search users increases, Google searches become more accurate and the value of Google increases to users.

As the number of Uber users increases, the number of Uber drivers increases and dispatches become faster.

The value of Uber increases to users. As Airbnb's users increase, the landlord rating becomes more accurate.

The value of Airbnb increases to users.

Bringing one user makes it easier to bring in the next one, the aggregator.

As the number of users increases, a positive virtuous cycle occurs and becomes a source of competitive advantage that creates a gap with latecomers.

Industry change created by aggregators

(Change 1) The source of competitive advantage moves from supplier relationship to consumer relationship.

Let's say that there are suppliers, distributors, and customers by simplifying the stakeholders of the industry.

In the past, in business, the supplier-distributor relationship was primarily a competitive advantage.

Think of the print media industry like newspapers.

Media distributes content.

In the past, the relationship with suppliers that produce content for media was competitive.

The media used directly hired content producers (reporters) and established relationships with celebrities/company/writers/advertisers to differentiate themselves from other media and maintain competitiveness.

So did the hotel industry. In the existing hotel, the supply of accommodation (room, service) and distribution (host guest, reservation) were integrated.

Publishers have strong relationships with writers, broadcasters with content production, retailers with product producers, and taxi companies with taxi drivers and drivers.

Although there are differences in the degree of each industry, most of the competitiveness comes from the supply-distribution relationship.

There have been many strategies in which the distributor establishes an exclusive relationship with the supplier or internalizes the supplier. In economics, it is sometimes referred to as vertical integration.

But in the internet age, the rules change. Competitive advantage comes from your relationship with users (customers).

To summarize the conditions 1 and 2 of the aggregator, it is ‘direct relationship with users + scalability of the relationship’.

The ability to scale a huge number of user relationships without a significant increase in cost.

Aggregators leverage their huge user base to influence and monetize their suppliers without direct supply.

The standard of competitiveness has changed from how many good writers, taxi licenses, and rooms you have to how many user bases you have.

So the aggregator hits the provider and puts the user first. Enhancing user experience and customer relationships becomes important.

On the other hand, supply/production is externalized by outsourcing and crowdsourcing.

(Change 2) Segmentation/standardization/democratization of the supply market

When the aggregator gets stronger, three things happen in the supply market.

These are segmentation, standardization, and democratization.

First, what is modularization of providers?
The role of the supplier is split, and the aggregator takes the role that can be digitized.

Uber is bringing the ‘dispatcher’ function that the call taxi company had. Airbnb brings the hotel brand's 'guarantee of trust' role.

As a result, the role of suppliers is reduced, and the differentiation of the products/services they provide is reduced.

Second, standardization of suppliers means that suppliers change into a form that an aggregator can compare/recommend.

The most important function of an aggregator is to provide users with better matching through comparisons and recommendations.

In order to automate comparisons and recommendations, the aggregator enforces certain specifications on the suppliers.

Content producers optimize their web pages so that Google's algorithms can discover and compare them.

When a business creates a channel on Facebook, it must conform to the Facebook page format.

In front of shopping aggregators, shopping malls that would have sold products in their own form, standard, and process must enter prices and product catalogs according to the prescribed format

Democratization of supply means lower barriers to entry into the supply market.

Aggregators inevitably want to democratize the production of the products/services they deal with.

The lower the barriers to entry, the more competitive the supply market and the more aggregators can take away.

It may be more accurate to say that it is a perfectly competitive market.

Google created AdWords to be an advertising medium for anyone.

Amazon created Fulfillment by Amazon to help anyone start an online shopping business.

This is because the aggregator benefits by making the supply market more competitive.

But while it helps you get in, it doesn't allow the provider to directly build user relationships.

User relationships are the source of aggregator power.

When an aggregator emerges, the suppliers resist to not lose their power.

However, most of them over time succumb to the aggregator's user base and begin to lose their differentiation.

The degree of this phenomenon varies depending on the characteristics of the industry.

For example, Facebook/Google is most visible, while Netflix is ​​less visible.

In some cases, suppliers rarely lose their strength.

We will discuss this aspect in a later article.

(Change 3) A monopoly conglomerate is created.

The aggregator inevitably becomes a monopoly.

You said, ‘If you bring one person, it will be easier to bring the next one’. So, when the aggregator reaches a certain size, it draws a J-curve and grows rapidly.

[caption id="attachment_5336" align="aligncenter" width="1020"] J Curve[/caption]

Just like the physical law that the greater the mass, the stronger the aggregator's gravity. It sucks in users and providers like a black hole.

And it results in a winner-takes-all phenomenon (the degree of winner-takes-all phenomenon varies depending on the characteristics of the industry and environmental factors)

As a result, the aggregator becomes a monopolist with a majority of the market.

Summary

Google, Facebook, and Amazon are examples. Aggregators inevitably create controversy over excessive power and monopoly regulation. Shall we summarize?

There are three conditions for an aggregator.
(1) Own the user interface (contact point).
(2) When the number of users increases by one, the additional cost converges to zero.
(3) If one user is brought in, it is easier to bring in another user.

As a result, aggregators are changing the industry in three ways.
(1) Change the source of competitiveness from supplier relationship to consumer relationship.
(2) The supply market is segmented, standardized, and democratized.
(3) A monopoly conglomerate arises.

This is the summary of aggregation theory.
*All of the 'changes made by aggregators' are not Ben Thompson's claims.
Please understand that I have my own interpretation included.

Uses of aggregation theory

Almost every industry is experiencing innovation driven by the Internet. The word platform business has become a buzzword.

In fact, many companies we know are or are aggregators.

Thanks to that, with aggregation theory, we can understand various phenomena.
there is.

Why is the demand for UX designers so high in the 21st century?

Also, if you are an aggregator-oriented entrepreneur, you can get implications for strategy.

For example, something like this. To become an aggregator...
- Must have customer contact points.
- Invest generously in user experience.
- Externalize the part where marginal cost occurs.
- Network effects should be designed.
- Provides tools to lower barriers to entry in supply markets. and so on.

There are a few more topics that I haven't covered today. There are many interesting things about aggregation theory, such as classification of aggregators, types of user bases, types of network effects, etc.

We will cover more advanced content in future articles.