Aggregation Theory and beyond.

Editor's Note

Hello from London!

We've seen aggregation across multiple industries as the Internet has matured. Arguably, Spotify offers a full catalogue of music and dominates. Netflix is kind of in a similar boat with TV, but doesn't have a full catalogue. The term Aggregation Theory was coined by Ben Thompson who I have referred to a number of times in the newsletter. Aggregation Theory essentially hypothesises that the Internet has changed the underlying economics in business, particularly in reference to the supply chain:

1. Direct Relationship with Users

2. Zero Marginal Costs For Serving Users

This means that it's easier, cheaper, and scalable to grow businesses, which is the inherent premise of the Internet. Uber modularised fleet taxi services by working directly with customers and drivers. The same can be said of Airbnb filling homes and rooms around the world with travellers.

The scalability upwards has been clear, but what happens in a downturn? The comparison between Spotify and Netflix is interesting. Spotify is at the mercy of record label royalties and has increasing costs. Netflix has fixed licensing. So, you'd expect that Netflix would be an overall healthier business. But post pandemic, Netflix has tanked in value.

This week Thompson wrote another article comparing these two companies in detail. The deep dive is suitably interesting for those interested in the mechanics of business models. This paragraph was a highlight:

This does, to be clear, make it easier to achieve a direct profit: because Netflix pays a fixed cost for content it can earn a surplus without having to pay anything extra to the content producer, whereas Spotify can only eke out profitability from its subscribers by reducing its operational costs. The real opportunity for an Aggregator, though, is building a business model that is independent of supply and instead predicated on owning demand. Here Spotify is better placed than Netflix — although the latter is finally making moves in that direction.

Aggregation aside, where does this leave the scaleup business as it grows? And what next with multiple layers evolving through to the metaverse and beyond. Business Models are often thought of as a simple concepts but with technology or evolving change we often fine that the landscape evolves or that the company evolves. Invariably, it's difficult to foresee how businesses will scale and what hurdles we might see. We are also now in the realms of further uncertainty, both for traditional businesses, for businesses spawned from the Internet - and the ones I like to call new era businesses. We may be in a crypto winter - but is it a result of wider uncertainty or a new type of cyclical trend that we are not quite ready for? Ill leave you with that thought as we move into the second half of 2022!

Stay Curious,

Onward! - Rahim

PS What kind of stupid?

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