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.
The 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!
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