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when people ask me what I read"

— Norbert Lou

Aggregator Economics

This article about Hulu in the NY Times contained the following interesting excerpt:

Mr. Kilar [Jason Kilar, Hulu’s CEO] points to his company’s new profitability as evidence of the success of Hulu’s business model — collecting various types of video in one place and making it free, supported by ads. Revenue topped $100 million in 2009 and could reach that number this year by early summer, he said.

“Aggregation works for consumers,” he said. “It makes it easier to find and discover and enjoy premium content, and it works for advertisers, because with that aggregation you get greater reach.”

Once upon a time aggregators were called middlemen, and if they happened to be the wrong race or religion they often faced physical risk from those on either side of their middleman function. “We break our backs growing the crops but the grain wholesalers make all the money” and “Why, if that merchant doesn’t make any of the goods he sells, does he make so much money?” were (and in some corners still are) common refrains.

The answer is in Kilar’s succinct description of the double-barrelled economics of aggregators. A successful middleman aggregator offers consumers low searching costs to find a given product, be it food, dry goods, media, whatever. It correspondingly also offers suppliers the cheapest per-consumer exposure to their products, even if they have to share actual or “virtual” shelf space with other suppliers. As a middleman aggregator grows it benefits from economies of scale, which improve both barrels of the business model.

As the article notes, Viacom has taken its shows off Hulu. It’s the equivalent of a fashion designer refusing to supply its clothing to a department store and opening a standalone boutique instead. It will be interesting to see whether Viacom sticks to this strategy or capitulates and returns its content to Hulu or another aggregator.

Some of the best moats in business, in media but elsewhere too, are middleman aggregators of one sort or another. Google is the ultimate in modern media, Wal-Mart is the ultimate in modern retail. Before Google it was monopoly newspapers, which aggregated news and ads for readers at low cost, and aggregated consumers for advertisers at lowest costs. Before Wal-Mart it was the urban department store.

Even buildings can be aggregator middlemen. The Chicago Merchandise Mart, the jewel in the crown of the Kennedy family’s business interests for over half a century, aggregated wholesale goods buyers and suppliers from all over the country. The Brill Building in New York aggregated buyers and suppliers of music.

If you can spot a middleman aggregator moat in its early stages you can make a lot of money. The key is to look at Kilar’s two metrics: low discovery costs for buyers and high reach for suppliers.