Marketplaces Are Aggregators Dressed As Platforms

Chamath Palihapitiya, now CEO of a venture capital firm Social Capital, was previously at Facebook where he was in charge of the Facebook platform. When raising money for Facebook from Bill Gates he said Bill dismissed the platform for not being a platform at all.

“A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”

Bill Gates

Marketplace sellers paid Amazon $31.88 billion in third-party fees in 2017, close to $10 billion more than the year before. Sellers additionally spent $4.6 billion on advertising, bringing the total value captured by Amazon to more than $36 billion. But in doing so sellers generated more than $100 billion in sales the same year.

The question is then - in the most simple terms - did the sellers capture more than $36 billion in value themselves.

There are 20,000 sellers on Amazon worldwide with sales exceeding $1,000,000 a year. The natural outgrow of a platform is the number of strong and durable businesses built on top of it; these millionaire sellers are that. That number has been increasing every year as the Amazon marketplace grows. But the long-term sustainability of those businesses is not clear, mostly because so much of their future success is in the hands of Amazon. Various fees charged to sellers have been changing over the years and will continue to do so, potentially rendering some of these businesses no longer viable.

This is the problem with Amazon being a platform - they are the ones who at the end of the day own the customer relationship. Amazon.com had more than 2 billion visits last month, far more than any other retailer in the country. This attracts third-party merchants to the platform, but also allows Amazon to set the rules. Sellers have no choice but to follow the Amazon’s dictates if they wish to reach those shoppers.

“This is ultimately the most important distinction between platforms and aggregators: platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users; aggregators, on the other hand, intermediate and control it.”

Ben Thompson, Stratechery

Amazon is a platform for sellers by being an infrastructure provider. It allows sellers focus on making or sourcing products, while taking care of advertising, fulfillment, and by being a storefront. But they control the most important part - the customer relationship. By controlling the customer relationship Amazon captures the vast majority of the overall ecosystem. Customers don’t come to buy from a seller, they come to buy from Amazon.

Amazon is an aggregator who aggregates sellers - which they pay for except for the fees - to customers with whom they have an exclusive relationship at scale.

It is not clear what Amazon wants to be in the future. During the last decade they have launched dozens of infrastructure services to sellers like Fulfillment by Amazon (FBA) and advertising, and also a standalone cloud service AWS. All while continue to both be a retailer and even expand into owning dozens of brands. They have all the building blocks to be a true platform company, but now seem to be balancing multiple competing strategies.

The answer to the question who captures the most value on Amazon is, unsurprisingly, Amazon. As a platform for sellers they allow tens of billions of dollars in profits to be captured by those small businesses. But Amazon captures their share of the value in means beyond dollar terms. The customer relationship is more valuable than all of that. It drives the Prime memberships, brand recognition, and long-term growth for the company.

All marketplaces then are aggregators dressed as platforms.

Share it:

Join the conversation on Twitter or Facebook.

You can also join our mailing list to get new articles straight to your inbox.

Juozas "Joe" Kaziuk─Śnas

Founder of Marketplace Pulse, Joe wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

Get Data-Driven Insights About Online Retail