Value in companies has shifted to those who control demand rather than distribution.
This section is to understand how businesses will evolve alongside the internet.
"Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way. 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."
-Defining Aggregators by Ben Thomson
A business needs three fundamental things to be considered an aggregator:
1. Direct relationship with users
Based on user accounts, subscriptions, payments, or regular usage.
2. Zero marginal costs to serve users
Traditional companies incur at least 3 types of marginal costs:
- Cost of goods sold: to produce the product or service
- Distribution costs: to send the product to customers
- Transaction costs: customer service or sales fees
Aggregators incur no marginal costs because of their digital nature.
- Software: free to create
- Delivered through the internet: free distribution
- Automatic transactions: self-served payment (ignoring fees)
3. Demand-driven with network effects
Network effects is the value of a product or service increasing proportionally to the number of people who use it. This newsletter is an example. It increases in value the more readers it gets.
Since aggregators are digital, they control demand from the abundance of supply.
For example, YouTube has an endless amount of videos due to its high network effect.
Endless content = new users attracted = advertisers and sponsors = incentive to create = more creators = more videos posted = endless content...into an endless cycle.
Why worry about aggregate businesses?
The world is starting to move to the cloud. San Francisco (which pioneered aggregators) is soon to be dethroned:
The next Silicon Valley will be the cloud. Aggregation theory serves as the template to find the next evolution of businesses, which will thrive in coming years (not to mention decentralized aggregators).