Aggregators won the 2010s, Infrastructures will win the 2020s
Winning in digital ecosystems without serving the consumer
A lot of current thinking around the platform economy is built off understanding the success of BigTech players. But such thinking frequently runs into two key issues:
Most BigTech platforms succeeded by aggregating consumer demand and organizing B2C markets. Their case studies may offer little structural guidance to firms building out B2B platforms in a part of the value chain away from the consumer.
Most BigTech platforms kicked off their dominance through monopolistic ownership of a consumer use case. While aspirational, that is an ambition unlikely to play out for all businesses. Most firms will instead play in ecosystems by leveraging their core value chain position and mapping an ecosystem strategy around that position.
Our Ecosystem Innovation Playbook addresses these issues. It lays out different plays across an ecosystem and lays out an approach to map an evolving ecosystem and set up positions across it.
In particular, the report looks at three key models: aggregators, integrators, and infrastructures.
We’ve covered all positions in a framework essay and also covered a deeper analysis of aggregator strategies in another post.
Through this essay, we dig deeper into the contrasting choices between aggregator and infrastructure positions.
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A new game in the platform economy
In an earlier essay introducing the framework, I explained the difference between aggregator and infrastructure plays in an ecosystem, summarized in the framework below.
The 2010s saw the rise of the aggregators, which profited by creating bottlenecks on consumer access. The largest technology companies of the past decade - Facebook, Amazon, Netflix, Apple, Google - established their dominance first as aggregators.
The 2020s will see the rise of the infrastructures - the as-a-service ‘shovels’ that capture most of the profits while the rest of the economy scrambles for gold.
In the as-a-service economy, every capability is a shovel. And infrastructures bundle multiple services and serve them to producers. Every function in the value chain can be modularized and provided as-a-service. While everyone joins the digital transformation ‘gold rush’, the vast majority of value will accrue to the ones selling the shovels - the infrastructure providers.
Infrastructures include operating systems like iOS, compute infrastructures like AWS, commerce infrastructures like Shopify, coordination infrastructures like the Autodesk Construction Cloud, or data infrastructure like Google’s DeepMind.
The Amazon-Shopify trade-off for merchants
In any ecosystem, producers need to determine their participation strategy across aggregators and infrastructures. Consider an online merchant who can gain consumer access through the Amazon marketplace (an aggregator) while increasingly becoming dependant on its policies, or can run an independent store (and take on the risk of gaining market access) by building on Shopify (an infrastructure).
I’ve explained this merchant dilemma in an earlier essay:
Aggregators standardize the transaction, and in doing so, commoditize the merchant producer. The more commoditized the producer, the better an aggregator can control the transaction.
The promise of the web as a distribution medium is not just in discovery of the long tail but in enabling the long tail to build influence (brand, following, reputation etc.) and level-up through this influence. Aggregators enable the former but discourage the latter.
Infrastructures, on the contrary, enable levelling-up through influence. The more you level up, the more infrastructure you are likely to consume.
While the economics of aggregators encourages standardization of the transaction, the economics of infrastructures favours producers who scale up, and as a result, consume more infrastructure over time.
This is the classic Amazon vs Shopify trade-off. In serving consumers by standardizing the transaction, Amazon increasingly commoditizes the merchant. The intense competition for the Amazon Buy Box is just one example of this dynamic.
Shopify’s revenue model, instead, benefits from the merchant levelling-up rather than getting commoditized. A merchant who levels-up demonstrates:
1) Higher infrastructure needs, requiring upgrade to a higher subscription tier
2) Need for additional financing, a key component driving Shopify’s land-and-expand revenue model, and
3) Need for a wider scope of solutions, provided by Shopify’s application partners.
This is also why Shopify invests in a merchant success program. In general, infrastructure providers scale infrastructure adoption by investing in the success of producers building on top.
One of the key drivers for Shopify's growth has been the Merchant Success Program. By creating a repeatable playbook for driving merchant success, Shopify helps a select group of merchants scale up, which in turn increases infrastructure usage and creates greater lock-in over merchants.
Amazon, of course, also has a comprehensive aggregator play in logistics, which I’ve written about in detail in the past.
Apple vs Google - Healthcare ecosystem wars
The contrasting strategies of Google and Apple in the healthcare ecosystem also demonstrate the two options of aggregating demand through an aggregator play vs enabling supply by providing infrastructure.
In Theme #4 of the State of the Platform Revolution, I talk about these contrasting plays in detail.
Two key shifts - increasing data interoperability and improvements in AI and machine learning - are driving down coordination costs, leading to the rise of platforms in healthcare.Â
Apple, for instance, is pursuing an aggregator strategy centred around the Apple Health Record. Apple’s Health Record aims to be the central health record for users, combining data from acute care - currently stored in EHRs - with data from a variety of wellness and disease management devices and services, using FHIR-based integration. Apple’s partnerships with health systems and EHR vendors enable it to integrate EHR data with the Health Record. Apple also partners with Health Gorilla, a clinical data API exchange, to integrate diagnostic data.
Google is pursuing an infrastructure position, which involves provisioning clinical and operational infrastructure that underpins production across healthcare operations, diagnostics, drug R&D, surgery, and claims management. Google’s DeepMind enables access to diverse, siloed data in a standardized format, enabling a wider scope of data elements to be analyzed for clinical decision making. Google's infrastructure also includes capabilities like DeepVariant, which provides an open-source deep learning tool for genomic analysis, aimed at the life sciences industry.Â
Dive deeper here:
Infrastructure plays for asset-heavy firms
Asset-heavy firms which operate far from the consumer and lack the engagement chops to aggregate consumer demand can instead focus on infrastructure plays and selectively partner with aggregators to gain key positions across the ecosystem.
Reliance Jio provides a great illustration of this strategy as explained earlier in this essay.
Jio’s aggressive investment in telecom infrastructure monopolized 4G infrastructure in India, unleashing data consumption across the country, which now is the second largest internet market in the world after China and also the one with the lowest data tariffs. Jio subsidized voice calls as well as data tariffs, triggering a price war that consolidated the industry and accorded Jio the leadership position at that layer.Â
With its infrastructure play in place, Jio then opened out its cap table to attract strategic investments from aggregators. Google, now with a seat at the cap table, would help build out a low-cost smartphone, enabling domination of the OS and device . Facebook, another investor, would provide user-facing services and position Whatsapp as a ‘super app’ within which all apps would sit.Â
Read the full case study here.
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How to launch infrastructure business models
Infrastructure businesses start out as traditional product businesses, selling infrastructural products and services to producers.
However, as they gain producer participation and lock-in, they expand into additional business models, which connect producers to different types of third parties.
Infrastructures typically launch as traditional SAAS businesses and scale out through a land-and-expand model, where they make the initial scale with an entry-level option and scale up client adoption through further upsell and increasing lock-in. The greater the workflows connected and operated through the infrastructure and the value delivered through enterprise data, the more likely is an infrastructure business to succeed at upsell and client lock-in.
As an example, Autodesk leveraged its market leading position in building design and modelling software to launch the Autodesk Construction Cloud as an infrastructure to manage the end-to-end building lifecycle across design, construction, and operations. As it serves more integrated workflows across the end-to-end construction lifecycle, industry producers get further locked-in to the Autodesk ecosystem.
How to monetize infrastructure business models
Infrastructure businesses start out as traditional product businesses, selling infrastructural products and services to producers.
However, as they gain producer participation and lock-in, they expand into additional business models, which connect producers to different types of third parties.
For instance, Shopify charges fees on purchases on the Shopify Exchange marketplace where shop owners offer their shops (built on Shopify) for sale.
Infrastructure pricing improves with scale as infrastructure business models require significant upfront investment, which can be better amortized across a larger user base.
As unit economics improve for new users coming on board, it becomes increasingly difficult for a new infrastructure provider to compete, as their pricing is likely to be inferior. Infrastructure providers may bundle multiple services and cross-subsidize some of them to compete with individual capability providers.
Pursuing infrastructure strategies as an incumbent
Aggregators won the 2010s, Infrastructures will win the 2020s. As the platform economy moves forward and an increasing number of industries get reorganized as ecosystems, incumbents will need to strategize towards new infrastructure positions. Here, we highlight 3 key strategies:
ABSORB PRODUCER FUNCTIONALITIES OVER TIME
Infrastructures can gain greater control of the value chain by absorbing common producer functionalities over time.
Infrastructure providers progressively expand their functionality set to capture common functionality required across financial institutions. This increases their competitiveness against other infrastructure providers while also increasing their negotiating power with customers.
LEVERAGE DATA ADVANTAGE TO GAIN INFRASTRUCTURE LEADERSHIP
Ant Financial provides the Alibaba's cloud services - Aliyun - as infrastructure to banks and payment wallet operators. It also uses its AI powered risk engine AlphaRisk and other AI capabilities to serve fraud mitigation and credit scoring capabilities to financial institutions that build on its infrastructure. These AI capabilities are built on data captured across Alibaba's operations in China, and enable Ant Financial to gain infrastructure leadership through a data advantage that most other infrastructure providers do not have.
BUNDLE COMPLEMENTS TO INCREASE INFRASTRUCTURE ATTRACTIVENESS
Infrastructures benefit from scale economies but may eventually be commoditized, if they do not set up attractive complements.
Complements make the infrastructure more attractive.
In the healthcare ecosystem, Google bundles key complements with its Google Cloud for Healthcare infrastructure.
These complements include:.
Complementary datasets captured through research programs run by Google.
Diagnostic services that aid clinical decision making e.g. DeepMind's Streams app.
Data capture tools like Google’s MedicalDigitalAssist which uses speech recognition to transcribe conversations and digitize notes directly into Google Cloud
Incumbents should similarly consider adding datasets, data ingestion complements, as well as prediction models that help support product provisioning for producers.
Strategize your ecosystem play
Ecosystem analysis is particularly useful when considering asset deployment and partnership strategies.
Should a retailer divest its locations?
Should a company’s IP be open-sourced?
Should a logistics firm manage fleets or just license fleet management software?
All incumbents face such questions when playing in ecosystems.
Understanding value layers in your ecosystem and strategising across those value layers is critical in determining where to own assets and where to divest them. Over the past several years, we’ve advised a wide variety of firms on their asset-heavy ecosystem plays, across ecosystems as diverse as smart mobility, decentralised energy, logistics, construction, education, healthcare, and consumer goods.
If you’d like to learn more about our work here, check out our Advisory page or request our Advisory kit to get more details on our analysis and approach.
The Ecosystem Innovation Playbook
For a comprehensive overview of all ecosystem strategies, download our ecosystem playbook:
