Video Vault: Breaking Down Aggregation Theory

What is aggregation theory? You may already know the term or have heard it mentioned. Still, it’s one of the most under-exposed phenomena in an otherwise buzzword-happy business environment (omnichannel, anyone?). It’s a common attribute of today’s tech-giant dominance and defensibility.

First devised by Stratechery’s prolific Ben Thompson, aggregation theory is the topic of our latest featured video which is embedded below. But first, let’s break it down a bit…

Demand Leverage

In short, aggregation theory confers power and leverage to entities that are able to aggregate consumers en masse on a given platform. That can be said for Facebook’s social graph, Google Search, Apple hardware ownership, and Amazon’s go-to status for ordering basically anything.

It may sound like an obvious concept, but aggregation theory represents an important shift in supply/demand dynamics. Put another way it emphasizes demand over supply. Build demand first to gain leverage for whatever your revenue model is — advertising, affiliate revenue, etc.

One key tenet of aggregation theory is that product quality is foundational. That may sound like another obvious statement, but given that attracting consumers (and locking them in) is the impetus, it means that years of building quality and trust is often the only path to gaining aggregation leverage.

UX is Everything

Consider Uber. The taxi industry was previously based on supply aggregation. Taxi companies and their dispatch logistics held all of the leverage in that they supplied a given need — in this case ground transportation. As a side note, that supply leverage caused them to let product quality slip.

Uber conversely went straight to the demand side by offering a much slicker product and UX. You know the story… no more hailing cabs, no more “broken” credit card machines, better quality standards and “just walk away” payments. That attracted users which then attracted drivers.

Of course, it’s more complicated and there’s a slow-moving step function when supply and demand need to ratchet up together. But it starts with the demand side of the equation, which necessitates more focus and priority on UX. The latter is where aggregation theory’s biggest “virtue” lies.

Switching Costs

Quality is a loose term though, as usage can be sustained by things like switching costs or a lock-in effect. When this exists, quality can erode as a given platform overly relies on those factors. At that point, it becomes supply leverage. Facebook is arguably in this boat, as is Google to a lesser degree.

For example, rebuilding your social graph is a switching cost, as is migrating away from Gmail, Drive or any of Google’s loss-leader products that indirectly support its search cash cow. But to give credit where it’s due, Google search, mapping and other core products do have a hard-fought quality lead.

“Hard-fought” is where aggregation theory begins to get contentious. Do dominating platforms deserve to have such massive power and leverage? They have worked hard to build user bases… and done so through quality (for the most part). The question is if they’ve used that leverage to stifle competition.

Thought Exercise

And that’s where we are today with antitrust scrutiny bearing down on big tech (political motivations notwithstanding). So that brings us to the present. To understand what’s going on in antitrust suits against Facebook, Google and others first requires understanding aggregation theory.

Of course, there’s a lot more to it… the legal nuances, we don’t pretend to fully understand. But some of it starts with aggregation theory — hopefully a good thought exercise for a Tuesday afternoon. For more, see the video below and stay tuned for more entries in Localogy’s Video Vault series in 2021.

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