Aggregation (and Proprietary Platforms)

Aggregation businesses, when executed correctly, can provide large economic profits.

However, a successful aggregation business must develop proprietary standards and platforms in order to minimize the threat of becoming aggregated itself.

If iTunes were to have sold music files without setting up proprietary barriers and tools (e.g. iTunes software, iPods, etc...), there would be no competitive advantage. They would, instead, have to compete on price, rather than value.

You can buy music files from Amazon, Wal-Mart, and Napster, but none of them can compete with iTunes. They're all commodities. Aggregators aggregate the aggregators.

Some aggregation-based business models today see a lot of risk: Groupon.

While Groupon has seen quick success, its future success will diminish unless it can figure out a way to create more barriers to entry. Already, other sites like LivingSocial are giving Groupon a taste of real competition. Thousands of other sites with the same concept have emerged in the last year.

Once several big players have established themselves in the one-day-deal market, a host of other higher-level aggregators will emerge to aggregate the deals between the sites. Rather than subscribe to Groupon, users will subscribe to higher-level aggregators and see all the deals in one place. Higher level aggregators will eliminate the opportunity for differentiation, and incoming competitors to the one-day-deal market will give the store owners bargaining power.

Aggregators!