The Employment Alongside Ben Thompson's 'Aggregation Theory'
May 20, 2019
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Ben Thompson, via his website Stratechery ('Strategy' in addition to 'Tech'), has made a holler for himself over the past times decade popularising the concept of 'aggregation theory'. I invite readers to cheque out his cloth straight for a fuller explanation, but inwards short, his declaration is that tech platforms have got cash inwards one's chips so powerful (and profitable or potentially profitable) because inwards the cyberspace era, the game has changed, in addition to it has cash inwards one's chips far to a greater extent than of import for companies to aggregate (and control) demand than to command furnish (the latter of which Ben argues was the instance inwards the past). Organisations that forthwith command demand are the ones destined to prosper, in addition to those companies are the large tech platforms.
Examples of demand aggregators are Netflix (that aggregates viewers of scripted content), Amazon (that aggregates buyers of (e)books in addition to full general online merchandise), Google (that aggregates cyberspace search, in addition to operates a toll booth redirecting traffic to the highest bidders), Uber (that aggregate people looking for taxi services) in addition to go in addition to airline ticket booking companies such equally Expedia, Booking.com, Webjet, in addition to AirBnB (that aggregate people looking to majority flights in addition to hotels/accommodation). The declaration is, people that command demand are forthwith to a greater extent than powerful than those that command supply, because if yous command demand, yous dictate what furnish is able to have whatsoever demand (i.e. what furnish has marketplace access), in addition to thence yous brand all the money.
Superficially, this theory seems to have got a lot of explanatory power. Take the illustration of hotel booking platforms. These organisations are able to centralize the demand of people looking to majority accommodation, in addition to direct that traffic to available sources of supply. If yous ain a hotel in addition to aren't on the platform, yous can't compass buyers whatsoever more, in addition to so your alone selection is to utilization the platform in addition to pay Expedia (for e.g.) a huge cutting ('take rate') to brand bookings on your behalf.
The occupation I have got alongside the theory is that it implies at that spot is something fundamentally novel or unique most the economic science of the brave-new-world of tech, when inwards reality, the one-time economical rules soundless operate precisely fine. This, inwards turn, creates the raw cloth to rationalize bubble thinking/valuations, instead of to a greater extent than level-headed analysis. The reality is that from fourth dimension immemorial, it has ever been the instance that sure enough points inwards the furnish chain brand to a greater extent than coin than others, reflecting differences inwards marketplace power. Porter's Five Forces, for instance, has long been used equally a framework for analysing where in addition to how much marketplace powerfulness exists, in addition to explaining in addition to predicting why around firms brand to a greater extent than coin than others. If your suppliers for e.g. have got a lot of bargaining power, all else held constant, yous tend to live on less profitable, in addition to vice-versa.
There isn't a lot that is novel most that insight, in addition to the truth is, opposite to what Ben argues, demand in addition to furnish have got ever been of equal importance, in addition to remain so. The existent ground sure enough platform companies have got cash inwards one's chips powerful is non because demand has cash inwards one's chips to a greater extent than of import than supply, but because inwards many cases, the demand side has cash inwards one's chips to a greater extent than concentrated than the furnish side, thereby giving it to a greater extent than marketplace power. Demand has thence cash inwards one's chips to a greater extent than 'consolidated' (an old-hat term which I prefer to the new-hat 'aggregated') on the demand side than furnish has on the furnish side, but this is non the starting fourth dimension time that has ever happened. Carnegie in addition to Rockefeller got rich past times consolidating their manufacture in addition to controlling the infrastructure that allowed both suppliers in addition to competitors to access the market. If yous 'aggregate' for e.g. all the railways that provide access to market, surprise surprise - yous volition brand a lot of coin (in this respect, 'aggregation' is precisely a synonym for monopoly). I also latterly wrote a weblog transportation most how PBMs (Pharmacy Benefit Managers), working inwards conjunction alongside wellness insurers, were getting rich past times controlling which pharmaceutical products were able to attain reimbursement (and hence have got marketplace access).
If nosotros consider the illustration of go booking platforms similar Expedia in addition to Booking.com, afterward years of mergers/consolidation (and inadequate regulatory antitrust oversight, equally the regulators have got non understood the importance of regulating 'platform' marketplace power), at that spot are forthwith fewer mainstream go booking sites than at that spot are hotel chains or airlines. Consequently, it ought to live on niggling surprise that booking websites currently wield greater marketplace power. People thought it was going that agency alongside Netflix equally good - yous had 1 organisation evidently destined to command demand/eyeballs, whereas at that spot was a larger in addition to to a greater extent than fragmented pose out of organisations supplying content.
However, non all tech sectors are similar that, in addition to nor is it inevitable that the supply-side volition ever remain much weaker than the demand-side inwards many other segments. An illustration of an manufacture that is different is music streaming. In the globe of music, furnish is soundless to a greater extent than aggregated than demand. Three major studios command virtually all commercial music, whereas at introduce at that spot are to a greater extent than than 3 major sources of platform demand (Spotify, Pandora, Apple Music, YouTube, in addition to Amazon), equally good equally conventional ad-supported radio. Because furnish is to a greater extent than aggregated than demand, music streamers aren't yet making whatsoever money, but the large music labels remain really profitable. In Ben Thompson's parlance, it could live on said that the ground is 'supply aggregation theory'. In conventional parlance, it is because the supply-side is the holler for inwards the furnish chain alongside greater marketplace power.
Furthermore, inwards competitive costless marketplace economies, at that spot is ever an evolving competitive jostle for a greater portion of the spoils, in addition to 'aggregation theory' implies a grade of structural permanence that I exercise non believe should live on automatically assumed. That, inwards turn, creates the adventure of a lack of vigilance most around of the risks of change. When 1 purpose of the furnish chain is profiting at the other part's expense, given plenty time, 1 or both of the next things tin happen: (1) the portion of the furnish chain that is existence under-remunerated has an incentive assay to conform in addition to improve its bargaining position, including via marketplace consolidation; in addition to (2) disruptive competitive pressures are also unremarkably eventually brought to affect points of the furnish chain that are over-earning relative to the flat of their value-add, in addition to 'new' platform businesses volition live on no to a greater extent than immune to this inwards the long term than 'old' businesses have got been (after all, inwards the long term, the novel becomes the old). And at present, many platforms are currently materially over-earning.
I listened to a podcast non so long agone where 1 of the tech-infatuated guests was argument that tech is taking over the globe in addition to increasingly supplying everything nosotros need, noting that on a recent see to Sydney, he booked his flying through Skyscanner (Expedia); took an Uber for carry from the airport; stayed inwards AirBnB accommodation; in addition to booked nutrient delivery through UberEats (if retentiveness serves). He also establish activities to exercise through TripAdvisor, piece booking restaurants through OpenTable. The implication was, how nosotros live, work, in addition to play is forthwith existence completely overrun in addition to serviced past times tech, in addition to so of course of written report tech stocks are increasingly conquering the world.
However, it doesn't accept much reflection to realise that it is genuinely the existent world, non the globe of technology, that is providing all these services. All those apps are doing is providing an algorithm that lowers search costs in addition to makes booking easy. Expedia didn't design, create in addition to hold the bird that flew him to Sydney; create or operate the airport; develop pilots; or find, produce, refine in addition to carry the necessary jet fuel to powerfulness the plane over its continental voyage. Uber didn't blueprint in addition to manufacture the machine used to carry him to his hotel; find, produce, in addition to procedure the raw materials that cash inwards one's chips into it (such equally steel in addition to aluminium); or genuinely drive him from the airdrome to his hotel. AirBnB didn't design, build, maintain, or create clean the identify he stayed in, nor furnish it alongside electricity. UberEats in addition to OpenTable didn't grow in addition to procedure whatsoever raw foodstuffs, or utilization them to prepare a meal, in addition to TripAdvisor didn't design, manufacture or operate whatsoever of the tourist attractions he visited.
In fact, all these companies did was write around pretty uncomplicated code that made matching buyers alongside sellers easier in addition to to a greater extent than efficient, in addition to the existent inquiry that should live on existence asked is whether these platform companies are extracting also much value from the furnish chain relative to their value-add, in addition to whether that is probable to live on a sustainable province of affairs inwards the long term, or volition invite potential disruption and/or an eventual supply-side/regulatory response.
Take Webjet, for instance - in addition to Australian flying booking company. The fellowship takes most $30-50 per flying booking, which tin easily live on 10% or to a greater extent than of the toll of the flight. Ask yourself, is Webjet genuinely providing 10% of the value add? What most the pilots in addition to flying staff; the maintenance engineers; the crude oil engineers finding, producing, in addition to refining fuel; in addition to the manufacturers of the aeroplanes, equally good equally their financiers (leasing cos)? The truth is, Webjet is genuinely providing something to a greater extent than akin to mayhap 1% of the realistic value add, in addition to so it is thence currently significantly overearning. It's similar a stock-broker charging a 10% committee on a trade. Stock brokers also used to accuse enormous commissions, but they were significantly overearning, in addition to the forces of contest thence lowered it over time, to levels that today are practically zero.
In capitalism, what is fair is irrelevant, however. Only marketplace powerfulness matters. It doesn't thing how much coin Webjet 'should' live on making - alone how much it is genuinely able to make. Because the airline manufacture is to a greater extent than fragmented than the go booking market, Webjet currently has to a greater extent than powerfulness - it has indeed 'aggregated' to a greater extent than demand than airlines have got managed to aggregate supply.
The inquiry that should live on existence asked at the moment, however, is what happens next? Is the electrical flow province of affairs sustainable long term? Or is it inviting disruption, alongside booking rates destined to live on competed downwards to levels closer to their existent value-add inwards the long term? There are many ways inwards which this mightiness happen. There volition of course of written report ever live on novel entrants attempting to go inwards Webjet's holler for inwards the furnish chain, in addition to provide a improve service at a lower cost alongside increased convenience. For instance, mayhap a novel start-up comes along that tin utilization AI to automatically majority yous a flying using voice-activated instructions (maybe an Alexa app) - indeed maybe Google or Amazon comes upwardly alongside such a service. If it's faster in addition to cheaper, Webjet volition rapidly live on displaced, in addition to it's fatty margins create a pregnant chance of anyone able to discovery a agency to successfully replace them.
However, around other potential machinery is for the supply-side to answer in addition to improve its bargaining position, so it tin recapture the value currently existence ceded to demand-side aggregators. This supply-side response has already begun inwards sure enough industries. In the traditional media industry, for instance, studios have got begun to aggregate furnish to struggle dorsum against Netflix. Several megamergers have got already happened, which have got reduced the pose out of organisations controlling scripted content production, in addition to content libraries. If they tin aggregate furnish inwards the trend the music manufacture has, piece also supporting choice streaming platforms, the powerfulness of Netflix volition live on undermined.
In short, aggregation theory doesn't genuinely add together a whole lot to the analysis, inwards my view, other than precisely restating the uncontroversial thought that the repose betwixt demand in addition to furnish matters, in addition to that the players inwards the furnish chain alongside the most marketplace powerfulness volition brand the most money. These are non novel concepts, in addition to at that spot are also many 'this fourth dimension is different' in addition to 'the one-time economical rules don't apply to tech' connotations to it for my tastes. This classify of thinking is what atomic number 82 to the 1998-00 dot.com bubble. It outburst in addition to people realised, genuinely the one-time rules soundless exercise apply afterward all.
It is going to live on interesting to run across how things evolve inwards coming years, but I would counsel caution most paying upwardly huge multiples for platform/booking businesses alongside seemingly assured futurity rapid growth in addition to prosperity. History shows that the futurity tends to surprise people, in addition to that today's sure enough winners oft evidence far to a greater extent than susceptible to marketplace forces/competition than is mostly believed during nail periods.
LT3000
Examples of demand aggregators are Netflix (that aggregates viewers of scripted content), Amazon (that aggregates buyers of (e)books in addition to full general online merchandise), Google (that aggregates cyberspace search, in addition to operates a toll booth redirecting traffic to the highest bidders), Uber (that aggregate people looking for taxi services) in addition to go in addition to airline ticket booking companies such equally Expedia, Booking.com, Webjet, in addition to AirBnB (that aggregate people looking to majority flights in addition to hotels/accommodation). The declaration is, people that command demand are forthwith to a greater extent than powerful than those that command supply, because if yous command demand, yous dictate what furnish is able to have whatsoever demand (i.e. what furnish has marketplace access), in addition to thence yous brand all the money.
Superficially, this theory seems to have got a lot of explanatory power. Take the illustration of hotel booking platforms. These organisations are able to centralize the demand of people looking to majority accommodation, in addition to direct that traffic to available sources of supply. If yous ain a hotel in addition to aren't on the platform, yous can't compass buyers whatsoever more, in addition to so your alone selection is to utilization the platform in addition to pay Expedia (for e.g.) a huge cutting ('take rate') to brand bookings on your behalf.
The occupation I have got alongside the theory is that it implies at that spot is something fundamentally novel or unique most the economic science of the brave-new-world of tech, when inwards reality, the one-time economical rules soundless operate precisely fine. This, inwards turn, creates the raw cloth to rationalize bubble thinking/valuations, instead of to a greater extent than level-headed analysis. The reality is that from fourth dimension immemorial, it has ever been the instance that sure enough points inwards the furnish chain brand to a greater extent than coin than others, reflecting differences inwards marketplace power. Porter's Five Forces, for instance, has long been used equally a framework for analysing where in addition to how much marketplace powerfulness exists, in addition to explaining in addition to predicting why around firms brand to a greater extent than coin than others. If your suppliers for e.g. have got a lot of bargaining power, all else held constant, yous tend to live on less profitable, in addition to vice-versa.
There isn't a lot that is novel most that insight, in addition to the truth is, opposite to what Ben argues, demand in addition to furnish have got ever been of equal importance, in addition to remain so. The existent ground sure enough platform companies have got cash inwards one's chips powerful is non because demand has cash inwards one's chips to a greater extent than of import than supply, but because inwards many cases, the demand side has cash inwards one's chips to a greater extent than concentrated than the furnish side, thereby giving it to a greater extent than marketplace power. Demand has thence cash inwards one's chips to a greater extent than 'consolidated' (an old-hat term which I prefer to the new-hat 'aggregated') on the demand side than furnish has on the furnish side, but this is non the starting fourth dimension time that has ever happened. Carnegie in addition to Rockefeller got rich past times consolidating their manufacture in addition to controlling the infrastructure that allowed both suppliers in addition to competitors to access the market. If yous 'aggregate' for e.g. all the railways that provide access to market, surprise surprise - yous volition brand a lot of coin (in this respect, 'aggregation' is precisely a synonym for monopoly). I also latterly wrote a weblog transportation most how PBMs (Pharmacy Benefit Managers), working inwards conjunction alongside wellness insurers, were getting rich past times controlling which pharmaceutical products were able to attain reimbursement (and hence have got marketplace access).
If nosotros consider the illustration of go booking platforms similar Expedia in addition to Booking.com, afterward years of mergers/consolidation (and inadequate regulatory antitrust oversight, equally the regulators have got non understood the importance of regulating 'platform' marketplace power), at that spot are forthwith fewer mainstream go booking sites than at that spot are hotel chains or airlines. Consequently, it ought to live on niggling surprise that booking websites currently wield greater marketplace power. People thought it was going that agency alongside Netflix equally good - yous had 1 organisation evidently destined to command demand/eyeballs, whereas at that spot was a larger in addition to to a greater extent than fragmented pose out of organisations supplying content.
However, non all tech sectors are similar that, in addition to nor is it inevitable that the supply-side volition ever remain much weaker than the demand-side inwards many other segments. An illustration of an manufacture that is different is music streaming. In the globe of music, furnish is soundless to a greater extent than aggregated than demand. Three major studios command virtually all commercial music, whereas at introduce at that spot are to a greater extent than than 3 major sources of platform demand (Spotify, Pandora, Apple Music, YouTube, in addition to Amazon), equally good equally conventional ad-supported radio. Because furnish is to a greater extent than aggregated than demand, music streamers aren't yet making whatsoever money, but the large music labels remain really profitable. In Ben Thompson's parlance, it could live on said that the ground is 'supply aggregation theory'. In conventional parlance, it is because the supply-side is the holler for inwards the furnish chain alongside greater marketplace power.
Furthermore, inwards competitive costless marketplace economies, at that spot is ever an evolving competitive jostle for a greater portion of the spoils, in addition to 'aggregation theory' implies a grade of structural permanence that I exercise non believe should live on automatically assumed. That, inwards turn, creates the adventure of a lack of vigilance most around of the risks of change. When 1 purpose of the furnish chain is profiting at the other part's expense, given plenty time, 1 or both of the next things tin happen: (1) the portion of the furnish chain that is existence under-remunerated has an incentive assay to conform in addition to improve its bargaining position, including via marketplace consolidation; in addition to (2) disruptive competitive pressures are also unremarkably eventually brought to affect points of the furnish chain that are over-earning relative to the flat of their value-add, in addition to 'new' platform businesses volition live on no to a greater extent than immune to this inwards the long term than 'old' businesses have got been (after all, inwards the long term, the novel becomes the old). And at present, many platforms are currently materially over-earning.
I listened to a podcast non so long agone where 1 of the tech-infatuated guests was argument that tech is taking over the globe in addition to increasingly supplying everything nosotros need, noting that on a recent see to Sydney, he booked his flying through Skyscanner (Expedia); took an Uber for carry from the airport; stayed inwards AirBnB accommodation; in addition to booked nutrient delivery through UberEats (if retentiveness serves). He also establish activities to exercise through TripAdvisor, piece booking restaurants through OpenTable. The implication was, how nosotros live, work, in addition to play is forthwith existence completely overrun in addition to serviced past times tech, in addition to so of course of written report tech stocks are increasingly conquering the world.
However, it doesn't accept much reflection to realise that it is genuinely the existent world, non the globe of technology, that is providing all these services. All those apps are doing is providing an algorithm that lowers search costs in addition to makes booking easy. Expedia didn't design, create in addition to hold the bird that flew him to Sydney; create or operate the airport; develop pilots; or find, produce, refine in addition to carry the necessary jet fuel to powerfulness the plane over its continental voyage. Uber didn't blueprint in addition to manufacture the machine used to carry him to his hotel; find, produce, in addition to procedure the raw materials that cash inwards one's chips into it (such equally steel in addition to aluminium); or genuinely drive him from the airdrome to his hotel. AirBnB didn't design, build, maintain, or create clean the identify he stayed in, nor furnish it alongside electricity. UberEats in addition to OpenTable didn't grow in addition to procedure whatsoever raw foodstuffs, or utilization them to prepare a meal, in addition to TripAdvisor didn't design, manufacture or operate whatsoever of the tourist attractions he visited.
In fact, all these companies did was write around pretty uncomplicated code that made matching buyers alongside sellers easier in addition to to a greater extent than efficient, in addition to the existent inquiry that should live on existence asked is whether these platform companies are extracting also much value from the furnish chain relative to their value-add, in addition to whether that is probable to live on a sustainable province of affairs inwards the long term, or volition invite potential disruption and/or an eventual supply-side/regulatory response.
Take Webjet, for instance - in addition to Australian flying booking company. The fellowship takes most $30-50 per flying booking, which tin easily live on 10% or to a greater extent than of the toll of the flight. Ask yourself, is Webjet genuinely providing 10% of the value add? What most the pilots in addition to flying staff; the maintenance engineers; the crude oil engineers finding, producing, in addition to refining fuel; in addition to the manufacturers of the aeroplanes, equally good equally their financiers (leasing cos)? The truth is, Webjet is genuinely providing something to a greater extent than akin to mayhap 1% of the realistic value add, in addition to so it is thence currently significantly overearning. It's similar a stock-broker charging a 10% committee on a trade. Stock brokers also used to accuse enormous commissions, but they were significantly overearning, in addition to the forces of contest thence lowered it over time, to levels that today are practically zero.
In capitalism, what is fair is irrelevant, however. Only marketplace powerfulness matters. It doesn't thing how much coin Webjet 'should' live on making - alone how much it is genuinely able to make. Because the airline manufacture is to a greater extent than fragmented than the go booking market, Webjet currently has to a greater extent than powerfulness - it has indeed 'aggregated' to a greater extent than demand than airlines have got managed to aggregate supply.
The inquiry that should live on existence asked at the moment, however, is what happens next? Is the electrical flow province of affairs sustainable long term? Or is it inviting disruption, alongside booking rates destined to live on competed downwards to levels closer to their existent value-add inwards the long term? There are many ways inwards which this mightiness happen. There volition of course of written report ever live on novel entrants attempting to go inwards Webjet's holler for inwards the furnish chain, in addition to provide a improve service at a lower cost alongside increased convenience. For instance, mayhap a novel start-up comes along that tin utilization AI to automatically majority yous a flying using voice-activated instructions (maybe an Alexa app) - indeed maybe Google or Amazon comes upwardly alongside such a service. If it's faster in addition to cheaper, Webjet volition rapidly live on displaced, in addition to it's fatty margins create a pregnant chance of anyone able to discovery a agency to successfully replace them.
However, around other potential machinery is for the supply-side to answer in addition to improve its bargaining position, so it tin recapture the value currently existence ceded to demand-side aggregators. This supply-side response has already begun inwards sure enough industries. In the traditional media industry, for instance, studios have got begun to aggregate furnish to struggle dorsum against Netflix. Several megamergers have got already happened, which have got reduced the pose out of organisations controlling scripted content production, in addition to content libraries. If they tin aggregate furnish inwards the trend the music manufacture has, piece also supporting choice streaming platforms, the powerfulness of Netflix volition live on undermined.
Other industries should acquire from this. Major hotel groups should merge and/or co-operate in addition to grade their ain hotel booking site, in addition to either withdraw their furnish from booking platforms, or (more realistically) cash inwards one's chips on to brand them available, but at higher prices than on their booking sites (easy exercise do past times cutting out aggregators' take-rates). Where applicable, they should also anteroom to have got archaic restrictions on the powerfulness of hotels to offering prices on their ain website lower than on external platforms. They volition in addition to then live on able to offering lower direct-booking prices to customers, allowing customers to discovery a room they similar on an external platform, in addition to and then majority the room straight in addition to to a greater extent than cheaply on their website.
In addition, novel tech organisations are probable to jump upwardly that provide booking tools that allow customers to to a greater extent than easily contract alongside independent operators without having to re-insert their credit carte du jour in addition to identification details each in addition to every time. If person could create an ID authentication/payment plug-in app that enabled one-click purchasing on a diversity of different merchants' sites, it would assist independents' websites disintermediate the aggregators (this is a major line of piece of work organisation chance for somebody out at that spot - I'm non going to exercise it so experience costless to pocket my idea).
Airlines should also bring together forces in addition to create their ain flying booking platforms, pose all their collective inventory on it, in addition to and then withdraw the furnish from external aggregators (or accuse Webjet et al pregnant toll premiums to deport the same inventory). They should in addition to then advertise their lower rates to customers. In reality, the suppliers ought to have got much to a greater extent than powerfulness than the aggregators, because Webjet doesn't have got whatsoever of its ain planes (unlike Netflix which tin self-produce its ain content). That the aggregators are making to a greater extent than coin than the airlines is stupid. The dominant booking platform should live on owned past times the airlines. If they were smart plenty in addition to got their human activity together, they could capture this value themselves - utilization their 'aggregation of supply' to crush out demand-side rent-seekers that are earning huge amounts of coin but adding really niggling value.
Different industries volition have got differing degrees of success alongside this, in addition to it won't hand quickly, but tech investors should non live on complacent. Tech platforms have got been disruptive, but the history of capitalism shows that it is non long earlier the distruptors cash inwards one's chips the disrupted. In the really long term, replacement cost is the best guess of value, in addition to many of these tech companies sport huge valuations despite having applied scientific discipline that is really easily replicated. In around cases network effects exist, that hateful the replacement cost is inwards fact really high (it would inwards fact cost hundreds of billions of dollars to sack Facebook's 2bn users past times paying them to migrate platforms, highlighting the powerfulness of the network effect), but alone a little minority of businesses autumn into this category. What's the replacement cost of a flying booking app? It's ultimately precisely a bunch of code.
It is going to live on interesting to run across how things evolve inwards coming years, but I would counsel caution most paying upwardly huge multiples for platform/booking businesses alongside seemingly assured futurity rapid growth in addition to prosperity. History shows that the futurity tends to surprise people, in addition to that today's sure enough winners oft evidence far to a greater extent than susceptible to marketplace forces/competition than is mostly believed during nail periods.
LT3000