Understanding the rise of the most powerful companies in the Internet age – Aggregation Theory

The rise of the FANG companies is no accident. They are all connected on one common thread – The Aggregation theory.

So how does this winning playbook work?…..

This is from one of my favorite strategy blogs – Stratechery. Here is a summary in 5 points –

1. The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users
2. How do you gain outsized profits in such markets? – Have a horizontal monopoly in 1 out of 3. OR integrate two of the parts so that you have a competitive advantage in delivering a vertical solution.
3. The internet has done two things possible
   1.  Made distribution of digital goods free ( this neutralized the advantage that pre-internet distributers leveraged with suppliers, e.g: content creators)
   2. Transaction costs zero (allow forward integration with customers at scale.
4. This means that the dynamics is completely different now. Distributors don’t compete based on exclusive supplier relationships with customers as an after thought.  Instead, suppliers can be commoditized leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience” The aggregators that provide the best user experience, win
5. Lets talk examples.
   1. Previously, publishers integrated content and advertisements. Facebook modularized advertisements by allowing advertisers to target customers directly, not via proxy
   2. Previously, book publishers integrated editing, marketing and distribution. Amazon modularized distribution first via e-commerce and then via e-books
   3. Previously, networks integrated broadcast availability and content purchases. Netflix modularized broadcast availability by making its entire library available at any time in any order
   4. Previously, publishers integrated publications and articles. Google modularized individual pages and articles, making them directly accessible via search
   5. Previously, taxi companies integrated dispatch and fleet management. Uber modularized fleet management by working with independent drivers.

As he says, every industry will discover that it has a critical function that can be digitized and commodified, precipitating this shift.

The bottom line, “Companies that win the user experience can generate a virtuous cycle where their ownership of consumers/users attracts suppliers which improves the user experience”

Such a brilliant way to understand powerful businesses in the Internet age and what sets them apart

Thoughts?

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Ranjani Mani

#reviewswithranjani

#strategy #technologiesofthefuture

#aggregationtheory