Stratechery: Aggregation Theory

The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era the latter depended on controlling distribution.

such as book publishers (distribution capabilities integrated with control of authors), video (broadcast availability integrated with purchasing content), taxis (dispatch capabilities integrated with medallions and car ownership), hotels (brand trust integrated with vacant rooms), and more. Note how the distributors in all of these industries integrated backwards into supply: there have always been far more users/consumers than suppliers, which means that in a world where transactions are costly owning the supplier relationship provides significantly more leverage.

First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.

this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.

Google Previously, publishers integrated publications and articles. Google modularized individual pages and articles, making them directly accessible via search Google integrated search results with search and profile data about users, enabling it to sell highly effective advertising

Airbnb Previously, 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

Facebook, though, has built in some respects an even stronger position: its suppliers are its users, so while it, like Google, aggregates content that it gets for free, it also has exclusive access to that content. Snapchat and other user-generated content networks are similar.

Airbnb, for example, deals with vacant rooms; what makes it work is the way it has digitized — and thus commoditized — trust. Uber deals with cars; it has digitized both trust and dispatch.

What is important to note is that in all of these examples there are strong winner-take-all effects.

The Uber and Airbnb examples are especially important: vacant rooms and taxis have not been digitized, but they have been disrupted. I suspect that nearly every industry will belatedly discover it has a critical function that can be digitized and commodified, precipitating this shift.