This post about competitive dynamics has been stewing in my mind for months now and it’s still a work in progress.  At its heart is a framework for thinking about a common type of tech company:  the aggregator.   The aggregator takes disparate items, gathers them, and presents them as a unified front.

Aggregators can exist for both content, products, or services and there are thousands of examples across every category:  Google News (news content), OpenTable (restaurants), Expedia (airlines and hotels), Lendingtree (loans), SeamlessWeb (restaurant delivery), Digg (web content), Servicemagic (service contractors), Zocdoc (doctors), Admob (mobile ad units), AdWhirl (mobile ad networks), Pontiflex (marketing leads), GymTicket (gyms).

There’s often one key value that these aggregators offer: convenience.  They provide a one-stop shop for customers to find what they’re looking for without going to dozens of different places.  The ability to sort and compare items is also an important feature present in most aggregators. 

In almost every case there’s an interesting tension between these ‘aggregators’ and their ‘constituents.’  Let’s consider Google News.  Google news is increasingly the starting point for people looking for news on the internet. Newspapers hate that Google News is scraping their content and eroding their brand value — but at the same time, Google News drives a significant proportion of their web traffic.  They’d be stupid not to want that. As a member of an aggregator, they’re ensuring they get web traffic.  Unfortunately they’re helping build the Google News brand rather than their own.

Are they shooting themselves in the foot?

This issue arose in my post about Opentable.  One commenter wrote that restaurants participating in OpenTable build the OpenTable brand rather than the restaurant’s own brand. It’s very true, but what can be done when the aggregator has gained a critical mass?

Once established, the aggregator has the upper hand. All the individual entities/constituents act in their own self-interest and therefore will remain part of the network.  No single constituent can defect without suffering harm.  And widespread mutiny is unlikely — it’s unlikely that all the restaurants are going to band together and start their own version of OpenTable.  It’s a tragedy of the commons, and the aggregators benefit handsomely from the resulting lock-in network effect.

As an established aggregator, risk can come from only a few places:

1) Competition in the form of another aggregator

2) One or more constituents decide to sidestep you.

#1 is hard to avoid — dozens of flight and hotel planners compete for attention of the same travelers.  #2 is rare, but extremely interesting when it does happen.  One example of this is Southwest Airlines, which isn’t listed on any of the travel booking sites.  Similarly, Admob refused to serve ads through AdWhirl which was an ad network aggregator (and when that didn’t work AdMob bought ‘em!)

Occasionally the constituents themselves will ally:  One example is Hulu, a joint venture between NBC, FOX and ABC, which aggregates all their content into a single place.

And once in a blue moon a constituent will creatively embrace aggregation in their attempt to fight the aggregators.  For example, Progressive Auto Insurance proudly shows you the prices of their competitors alongside their own prices.  Fascinating strategy.

Screen shot 2009-10-23 at 12.04.15 AMThe more fractured and crowded the marketplace, the less likely a mutiny or rebellion.  Are the tens of thousands of restaurants on Seamlessweb suddenly going to unite to form their own online ordering system and destroy Seamlessweb?  Not likely.  But are the dozen or so large newspapers going to unite to rally against google news and demand to be de-listed or compensated better?  Absolutely.

As the number of constituents increases, the dependency on any one constituent decreases.  And as an aggregator grows its brand, it becomes extremely difficult for a constituent to break away.  Doing so requires an extremely strong brand and unique offering (like Southwest Airlines) and an alternative sales/delivery channel.

This is most important in the context of a offline company: Consider that Brick and Mortar stores like Walmart are essentially product aggregators.  Shoppers go to Walmart because they know it has a wide selection at great prices.  Suppliers don’t want to miss out on the huge volume that the Walmart sales channel delivers.  The more Walmart grows, the more crucial they become to their suppliers’ businesses.  And the more suppliers they gain, the more crucial they become to consumers.  At the end of the day, Walmart has incredible negotiation power in the form of pricing leverage over its constituent suppliers. There simply aren’t many alternative channels.  Suppliers are trapped.

I’m going to end the post here because it’s already way too long.  But please leave your thoughts and help me push this topic further.  Thank you!


9 Responses to “Framework For Thought: Aggregators”  

  1. 1 rdeichert

    Do you think that maybe the companies who are being aggregated are lazy?

    Take opentable, most restaurants have poor websites. No real information, they don't do much to advertise specials. I never go directly to opentable to find a place to eat, instead I'm plodding around trying to find a website that's poorly built.

    If you've got something superior you might be able to short circuit the aggregator.

  2. 2 Jonathan Wegener

    I don't think the constituent companies are lazy, there's simply economies of scale to being the aggregator rather than the constituent. Those economies of scale are partly marketing related and partially technology cost related.

    No restaurant is going to go build their own seamlessweb online ordering system. It would take a ton of money and time and that's simply not their core competency. Seamless has the solution already. But more importantly, seamlessweb has the brand. It's easier to advertise an aggregator and establish a brand like seamlessweb than a restaurant advertising itself. This efficiency difference = Seamlessweb's value and profit.

  3. 3 rdeichert

    I don't really need open table to book a reservation. I need to see menus, times, parking information, ingredients (I'm celiac and allergic to gluten). Some of the best restaurants aren't on those systems.

    There is definitely value from an aggregator standpoint, but I feel most restaurants fall down on the basics. Sure there is scale in advertising, but differentiation is tough.

  4. 4 aberzins

    Jonathan, your earlier post about OpenTable and this follow-on are fascinating topics. I represent Livebookings and our business model strongly disagrees with your assertion that aggregators always seem to get the upper hand and that constituents eventually lose. Unlike our main competitor, we do not use Livebookings as a consumer brand but instead focus on helping the restaurant build its own brand. We offer a reservation engine that goes directly on a restaurant's own home page (see http://www.acquavit.com as a great example) allowing the diner to book a table without leaving the site. In addition, we syndicate our restaurant inventory through many partner sites that are consumer focused (e.g. http://www.bookatable.com or http://www.restaurant-guide.com) and therefore offer added exposure for the restaurant. We believe we offer the best of both worlds to the industry – aggregation without taking away from the restaurants own brand.

    I would be interested in any further thoughts about this approach of solving the issue. We are just in the early stages in the US market right now, but the model is well proven in Europe.

    Andris

  5. 5 Jonathan Wegener

    Hey Andris,
    Thanks for the comments. I'd be curious to know whether you consider Livebookings to be an aggregator? Or simply a software solutions provider? If you partner with affiliate aggregators like bookatable and restauraunt-guide, do you pay them a per-customer referral fee? Have you also considered starting your own portal?

    Jonathan

  6. 6 aberzins

    Jonathan,
    Yes, we are an aggregator and our affiliates share in the fee per diner seated that we charge. The difference is we are an aggregator that does not compete with a restaurant's own brand, and we make the process of signing up and installing much easier. We still offer similar reservation management and table management features to restaurants and in that sense we are a software provider (Software as a service in our case, very scalable, think salesforce.com). Further, we can offer the leading restaurant guides and review sites such as urbanspoon.com, yelp.com and others the ability to add the online reservation feature on their sites without stealing from their traffic either. A win-win on all sides we believe :)

  7. 7 Jonathan Wegener

    Hey Andris,
    Thanks for the comments. I'd be curious to know whether you consider Livebookings to be an aggregator? Or simply a software solutions provider? If you partner with affiliate aggregators like bookatable and restauraunt-guide, do you pay them a per-customer referral fee? Have you also considered starting your own portal?

    Jonathan

  8. 8 aberzins

    Jonathan,
    Yes, we are an aggregator and our affiliates share in the fee per diner seated that we charge. The difference is we are an aggregator that does not compete with a restaurant's own brand, and we make the process of signing up and installing much easier. We still offer similar reservation management and table management features to restaurants and in that sense we are a software provider (Software as a service in our case, very scalable, think salesforce.com). Further, we can offer the leading restaurant guides and review sites such as urbanspoon.com, yelp.com and others the ability to add the online reservation feature on their sites without stealing from their traffic either. A win-win on all sides we believe :)

  9. 9 Tina

    Totally agree with your analysis. In the real estate context, Zillow, Trulia and the Realtors Property Resource are just a few examples of the “information aggregators.” Taking the market from these giants who are battling it out and spending tons of money in the process would not be easy. And since real estate brokerage is atomistic, no one firm will break off, the network lock in is too strong. But homingCloud hopes to challenge these aggregators by providing the search, match and social platform that allows buyer and sellers to create their own grass roots aggregator.

Leave a Reply