What is the difference between an aggregator and a platform?
Defining aggregation, externalization, commoditization, and differentiation
Hi dotglum —
I answer your two questions below, as excerpted in order. This should serve as a useful reference for a lot of people who are struggling to understand tech and business strategy concepts like aggregators vs platforms; proprietary vs 3rd party; commoditized vs differentiated; internalized vs externalized network effects; substitutable vs complementary goods; plus modularization, atomization, and fungibility…
dotglum: “I tried my best to wrap my mind around why eBay is in the bottom right quadrant but could not get a satisfying answer. The troubling thing to me is; eBay does aggregate the demand — right… similar to Etsy & Amazon FBM though eBay also eBay stores. Can you help please?”
I hesitate to define “platforms” and “aggregators” too narrowly, for the same reasons I bemoaned Aggregation Theory’s missteps in the conclusion of my critique. At the same time, I haven’t dismissed the need for some definition. (I could have gone with the obligatory “I know it when I see it”!)
To wit, the most succinctly I’ve described these two constructs is as follows:
[W]e delineate between Aggregators and Platforms as the dualism for a product’s orientation to its supply chain (i.e. either an Aggregator with proprietary/internalized network effects or a Platform with 3rd party/externalized network effects per the Moat Map)
That said, I understand that this description is a bit abstract, however, my larger body of work discusses the platform vs aggregator dichotomy in greater detail. For example, with respect to your specific question, which one of the following two Amazons would you say most closely resembles eBay? From the “Three’s Company” article discussed herein:
[Aggregator:] Bezos’ team started by aggregating products that it procured from upstream suppliers — merchandise held in Amazon’s inventory; marketed via Amazon’s digital storefront; then sold by Amazon to downstream consumers… Amazon exclusively benefited from its original aggregation model (Ben’s “internalized network effects” with the economies of scale accruing to Amazon’s own bottom line independent of its suppliers’)…
[Platform:] Eventually, Bezos & Co launched a pseudo-platform, Fulfilled by Amazon (FBA)… FBA started to let Amazon redistribute some of those gains back into the supplier ecosystem (“externalized network effects” with Amazon’s economies of scale getting leased-back to its suppliers in a more co-dependent model).
eBay does not aggregate demand for internalized or proprietary means-and-ends — at least, eBay is no more internalized or proprietary than a farmer’s market, bazaar, or Amazon FBA. Instead, like a CMS or publishing platform (e.g. Wordpress), eBay is a tool atop which 3rd parties build — specifically 3rd party sellers unto whom the benefits are substantially externalized. Hence, eBay is a platform. (The strategic inferiority of that reality is discussed under “The Misjudgment of Solomon”.)
Mistaking eBay for a demand aggregator — as opposed to the platform that it is — speaks to the point I ultimately made in my conclusion therein:
My takeaway from this whole exercise is that the lower the marginal costs, the higher the propensity for aggregation, which is more of a synonym for consolidation than anything else… That clarification is particularly helpful in articulating the difference between the two ways everyone talks about aggregation…
1. Aggregation (as in Aggregation Theory):
We lump together a handful of modern tech companies who are characterized by this kind of low marginal cost markets in which aggregation wins (i.e. rapidly and rapaciously scaling thanks to a massive reduction in barriers-to-entry and frictions-to-scale);2. Aggregators (as in the Moat Map):
Separately, we delineate between Aggregators and Platforms as the dualism for a product’s orientation to its supply chain (i.e. either an Aggregator with proprietary/internalized network effects or a Platform with 3rd party/externalized network effects per the Moat Map)
Sure, you can refer to anyone who has customers or an audience as someone who aggregates demand, but that doesn’t make them an “aggregator” in the technical sense. In other words, calling eBay a “demand aggregator” is more accurate when referring to #1 (Aggregation Theory), as opposed to #2 (aggregator vs platform), but a lot of people conflate the two. Even Ben Thompson uses both connotations liberally, but an amalgam has accidentally slipped into our lexicon as the two distinct meanings devolved into a single interchangeable term, which is problematic for all of the reasons discussed therein.
dotglum: “And about commoditized & differentiated supply > what elements of the supply/supplier entails commoditization & differentiation?”
I also discussed the loose qualifications of “differentiated” supply and suppliers in Three’s Company (paraphrased):
[H]ighly differentiated [suppliers] are so niche/unsubstitutable that they can successfully operate destination sites. [The more] highly differentiated destinations [often have more direct] DTC relationships. They have significant brand goodwill, so [end-users/consumers/buyers] interface with him/her directly since his/her brand is already like a supernova with its own gravitational pull.
A good way to determine the degree of differentiation is to measure demand elasticity, as discussed in “The New News Bundle”:
To a point, [evangelist consumers] are relatively price agnostic when it comes to accessing these stars, who, again, are “destinations unto themselves”. This core audience would seek-out [differentiated producers] no matter how deeply [a] bundle were to bury his/her articles… or how obscurely the internet’s morass were to silo his/her standalone URL (were he/she to spinoff into his/her own operation). This is another argument for breaking-up the bundle, freeing-up [differentiated producers] to better price discriminate and/or find their own idiosyncratic equilibria. Here, again, [a] bundle is shown to have zero economic surplus [were it to incorporate highly differentiated product], with what little consumer surplus it may provide having been borrowed from its producer surplus — or, in this case, producer deficit[.]
In other words, the more differentiated supply/suppliers, the more inelastic their demand. The more elastic demand, the more commoditized its supply/suppliers. Elasticity isn’t strictly limited to pecuniary price-terms, but can also incorporate factors like attention, for which the “destination unto itself” criteria is a good test: If you stopped publishing your blog on Medium and moved to a self-hosted site, how much of your audience would hunt-down your new content and continue to engage with you at your newly disaggregated destination?
In contrast, at its own extreme, “commoditized” supply and suppliers are characterized by the following, from “The Four Winds of Modern Media”:
[T]he stuff we don’t want or need is perfectly substitutable; it’s fungible; and therefore it can usually be replaced with something free of charge — assuming we even have the bandwidth for it in the first place.
Commoditized supply and suppliers are often not only abundant, but also susceptible to modularization and atomization. That requires an understanding of economic concepts like substitutable and complementary products; rivalrous and nonrivalrous goods; multihoming and sticky services; barriers to entry and exit; integration and disintegration; economies of scale and scope; etc.
A differentiated app you can’t live without…
Annotote gives me a summary for everything I want to read and an annotator for anything I want to save or share. I don’t want to waste everything I read, and I don’t want to waste anyone’s time or attention, so Annotote is my antidote to information overload:
