Business Opportunities and Aggregation Theory

 

Recently I wrote a  post was about how creators can leverage the changing market to find success. It’s not easy, but when has it ever been?

Naturally, I want to explore this question next:

 

So what does this same conversation look like for companies?

 

I’ve heard no better argument for a predictive theory for how businesses of today are dominating the market than Ben Thompson’s Aggregation Theory.

I would implore you to read his work on this topic. But, being that it’s a bit dense to understand, I’ve written out my own take, which is explained and then thought about through a slightly different lens.

 

So let’s start here. 

 

Businesses today that seek to disrupt industries, have the unique benefit of re-thinking an entire market through a new lens. That in which we live in a wolrd where everyone is connected through the internet. Of which, there are two huge disruptions. 

 

First, you can reach 1 million people essentially for free with your ideas. Meaning that distribution is both cheap and infinitely scalable. In the old days, businesses had to rely on, or break through distribution choke points. Like newspapers having only a few pages for advertising, or shelf space in a store. There was simply a lot of cost, and a lot of friction getting your product or ideas to people, becuase there were limited channels owned by gatekeepers. 

Second, adding more customers to a software business is often incredibly cheap.

 

For example, each new sign up to Facebook costs them less than cents, and requires no sales force. Digital goods, and software, are incredibly scalable. Once again, the friction of producing and selling ever more goods has become incredibly efficient. Your e-book can be bought 1 Million times without printing, packaging, shipping, and making it to the shelf. This removes massive barriers to scaling a business because it just simply doesn’t need the same infrastructure.

 

These two massive removals of friction have changed everything. And when we think about the opportunities of tomorrow, start here. 

 

Because with these two advantages, businesses are able to approach old industries with a new unique advantage. That of looking at the industry with fresh eyes. In every major industry built in the pre-internet era, we are able to rethink the value chain of the market. Because somewhere in that chain, a component has or can become digitized, and thus commoditized. 
 

One example, Airbnb — Breaking the leg of “Trust” in the hotel industry.

 

As Thompson points out in his Aggregation Theory, what was important to consumers in the hotel/bnb industry was trusting that the place they were staying would be a safe stay. And so brands in the hotel industry attempted to build up the trustworthiness of their brands through advertising. Brand meant everything in the hotel industry, because the rooms themselves were essentially commodities. As they joke, “every hotel looks the same when the lights are off.”

 

When Airbnb came along, they took something that was once supplied only by brands who had built large amounts of trust with their audience, commoditized that value by giving that opportunity to individuals. 

 

Breaking the “weak leg” of the hotel business, Airbnb gave anyone who wanted to rent a room the ability to become a “trustworthy” brand through their marketplace.

This was because of the feature created by Aribnb for a “rating system” which helped organize and commoditize trust. Then, Airbnb leveraged an utapped resource, previously impossible to discover, and impossible to trust before the internet: Vacant room space. Airbnb has no infrastructure aside from it’s technolgoy.

 

No rents. No room cleaners, no front desk clerks. What they do have, is an engine for the new capability given by Airbnb to everyday consumers: Become your own hotel. 

This empowerment, built by Aribnb, was the strike needed for the Hotel industry to compete on a global scale. Airbnb now has 3 Million available rooms. 


So the trick for the savvy internet entrepreuner with a big vision is to figure out which component an existing industry leader owns, that has now been made weak because of the principles above. Which leg in their chair has the internet made unstable?

That’s where you’ll find your opportunity. 

 

Gold
#36



Aggregation Theory