A couple years ago, Ben Thompson created the term “aggregation theory” to describe internet companies with a unique set of advantages.
Aggregators have five characteristics:
- They focus on the exchange of digital information, so there are no marginal distribution costs like there would be if you were delivering physical goods to a customer.
- The fixed costs to create the platform are large, but the marginal costs after that are minuscule.
- Aggregators build networks, so they benefit from the network effect. Adding users (i.e. demand) onto the network makes the service better, which influences more potential customers to join. This is a virtuous cycle.
- Aggregators interact directly with their customers.
- There are zero transaction costs in dealing with customers.
What makes aggregators unique, though, is that thanks to the Internet they have zero transaction costs: for Google, or Airbnb, or Uber, or Netflix, or Amazon, or the online travel agents, adding one more customer is as simple as adding one more row in a database. Everything else is automated, from sign-up to billing to the delivery of the service in question. This is why all of these companies are global, often from day one
Thompson goes one step further in this piece and describes Facebook and Google as “super aggregators.” This means they also enjoy zero transaction costs when interacting with suppliers and advertisers.
Super-aggregators not only have zero transaction costs when it comes to users and content, but also when it comes to making money. This is at the very core of why Google and Facebook are so much more powerful than any of the other purely information-centric networks. The vast majority of advertisers on both networks never deal with a human (and if they do, it’s in customer support functionality, not sales and account management): they simply use the self-serve ad products
Other online networks do not have this luxury because most of their revenue is generated by relationships built by their sales teams (e.g., Twitter, Snapchat). Facebook and Google do not need human sales teams to attract advertisers.
Source: Ben Thompson at Stratechery: