We talk about the big tech companies all the time, but the sheer scale of them can be hard to comprehend. Google currently runs the most popular search engine, the most popular web browser, and the most popular mobile operating system (on a worldwide basis, at least). Amazon hired 427,000 people this year, bringing its global workforce to well over 1 million. In its most recent quarter, Facebook brought in an average of $230 million in revenue each day. Entire books have been written about how each of these companies clamored to the top, and there’s a lot that’s unique to each one — but there’s also something bigger going on. How did these companies get so powerful so fast?
The best answer we have is Aggregation Theory, a term coined and developed by Stratechery’s Ben Thompson. The basic idea is that the internet led to a sea change in how products get distributed — or more precisely, how they get from the people making them to the people buying them. For most 20th century products, distribution was controlled by the manufacturer (think Ford dealerships and Apple Stores), but that changes with the internet. Suddenly, you have intermediaries like Amazon that wield a lot of their power by controlling the supply of consumers. Producers are now competing just to get on Amazon’s front page since that’s where all of the customers are. In general terms, it’s not that different from a department store like Macy’s, but it’s happening on a scale that those earlier intermediaries could never achieve.
How did these companies get so powerful so fast?
There’s a lot more detail to the theory, so you should read Thompson’s posts if you want to get the gritty details. (Our video above covers the basics.) It’s a detailed and compelling case for why internet-era business is different from what came before, with a lot of implications for anyone doing business with them.
But over the past few weeks, there’s been a surprisingly heated debate about what aggregation theory means for the antitrust movement. The argument started with a post from Columbia Law professor Tim Wu, trying to carve out a place for antitrust action into aggregation theory’s broader story about tech companies competing to better serve consumers. Thompson responded a few days later, and the result has been a remarkable back-and-forth between the two men, getting into the details of switching costs and the mechanics of how Google, in particular, enforces its dominance.
So far, it’s just an argument between two thinkers, but it could have significant consequences in court. Google is currently fighting an ambitious antitrust case from the US Department of Justice, and skeptics in Congress are pushing similar arguments against Facebook, Amazon, and Apple. But those antitrust cases argue that internet companies got so big by using market power to drive out competitors through acquisitions, predatory pricing, or other exclusionary deals. It’s a much simpler case than aggregation theory and a much scarier one.
Wu is primarily concerned with the various ways Thompson’s theory could be used to fend off active antitrust prosecutions like US v. Google — but there are difficult questions waiting as regulators start to look for concrete ways to unwind the alleged monopolies. If the lessons of aggregation theory really do apply, those questions may be even harder than they look.