Platforms Vs Aggregators
Ex: Food Delivery
Hey Bheem,
Tax cuts are not proving to be the immediate interjection that we were all made to believe is required, I suppose. There is another make believe that the startup community propagates and my post today is all about it. In one of the previous posts, I wrote about how Zomato got cornered. This time, we will look at the crux of the problem and how one word makes all the difference.
People in tech use words that are mostly derived from the physical world. They only derive the word not the meaning of it, most times these words have fluid meanings that lead to a lot of confusion. One such word is ‘platform’. What is a platform in the physical world?
The actual meaning of a platform is any surface that is in a raised state, upon which certain activities take place, like Boarding and De-boarding a Train.
In tech, everyone uses the platform as an off-hand word. You have a website, it is a platform. You have a portal store, it is a platform. You have sellers and buyers on your website, it is a platform. But, none of these are platforms unless they satisfy a single cardinal rule. The rule is said best by the founder of the most valued company in the world, Bill Gates of Microsoft:
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.
The definition outlines a basic structure that anything claiming to be platform needs to achieve. A platform needs to enable the entities transacting through it to receive far greater value by using it compared to not using it. The economic value created should surpass the value accumulated by the platform. In short, it is looking to facilitate transactions between third party suppliers and their end users.
The best example for a Platform in digital world is Amazon Web Services ( AWS ). AWS provides cloud services for most of the startups and also the biggest companies in the world. It provides developers/companies to create digital assets by deploying their code on its servers. They take care of all the storage and hosting functionality. And all the money that the developer’s companies create using their offerings is left for them to take. You have companies like Slack, Twitter, Snapchat, Amazon and even our dear Zomato hosted on AWS. The value created and valuations of these companies are far greater than the valuation of AWS. The whole digital ecosystem benefits from AWS being the cloud service provider.
When we use Zomato, Flipkart, Netflix, Instagram, Twitter and Facebook all the money is going to these companies. And they pay AWS for hosting, storage and computing charges required to have their websites and apps up and running.
👆🏽 Suppliers are building their business on the platform and charging the customers directly. There is no interference of the Platform. The users can also be using the platform but the relationship between the supplier and users is direct. Hence, the platform takes the role of a facilitator.
Now, since we have understood what platforms are in the digital system. We can confidently rule out our food delivery apps as platforms.
So , you might think, what are they ?
They are Aggregators, these entities intermediate and control the transaction between the third party suppliers and end users. Aggregators’ main job is to commoditise the suppliers and to aggregate demand.
Users have direct relationship with the aggregator, not the supplier. To intermediate there is a fee levied that the user or supplier needs to pay, mostly the supplier.
Prior to the Internet and mobile technology , only the people who owned the supply and distribution channels used to have the scale to reach the customers, demand. With the advent of both these technologies , the distribution costs have become negligible.
Let me explain it with the example of Food Delivery business. The distribution of serving one customer and serving multiple customers for Zomato or Swiggy is the same, there is almost zero cost. All the user has to do is download an app and they are up and running. The fixed cost of maintaining their apps for one customer or 10 customers or 1 million customers is assumed to be almost same. This is not the case if a single offline entity has to provide service to 1 million customers, it needs to build the distribution network and the physical infrastructure.
To sum it all up and put in a concise way, you can correlate the Platforms as enablers and Aggregators as regulators. Now that we have these two definitions clarified, we will get back to our food delivery business.
To not make this post into a mammoth essay. I will limit the scope of this post to just defining the food delivery business and slotting all the entities involved into their respective roles. We will take up the task of finding the fault lines and what are the possible remedies in the upcoming post.
Outlining Food Delivery Business
Swiggy and Zomato got started with building the technology stack to track, monitor and order food. This includes an app for the user to order, an app for the restaurant owner to see the order and lastly another application for the delivery agents to deliver the order from restaurant to the user.
👆🏽 Elementary understanding and what both Swiggy and Zomato want us to believe is represented above. It looks as if the restaurant we picked for an order is the one that we wanted from the beginning and Swiggy / Zomato is just making that delivery happen for our convenience.
Alas, if only it was that simple. In actuality, there are multiple restaurants vying for the same user’s order as soon as you open the application. And there are many riders looking to deliver the same order. Swiggy/ Zomato are intermediating the relationship between the restaurants and users by being the destination of choice for ordering food.
👆🏽Actual working of the food delivery business resembles what i show above. This shows the subversion of the differentiation of restaurants as they get commodified among other restaurants being offered to the same user.
You might object that food is classified into cuisine, true, but all of that is obfuscated when multiple restaurants of the same cuisines are populated to you with a simple search of that cuisine. Then, the only metric you are vetting them on is the opaque and non-sensical ratings. As a user, have you ever bothered knowing how restaurants are rated ?
These food delivery businesses are focused on the demand side, users. Trying to make their apps a use of habit, they have invested in subsidising the costs involved for the actual transaction to happen physically. The cost to deliver the food and the cost at which it is offered ( mostly free) are not realistic. Meaning, their unit economics are skewed right from the start.
Whenever they try to vein off the subsidies, people or restaurants quit their service. One such instance is NRAI Vs Zomato stand off that i wrote about in the previous post. These companies are not in the business of food delivery but rather in the business of data management with food. Surprising, right ? The founder of Swiggy himself suggested this line of thinking.
Data is business, food is the means!!
Swiggy/Zomato want to gather data of food preferences from the users, gather the leading menus and dishes from restaurants, find out the optimum price that a user is ready to pay for a particular dish and what type of dish in a particular locality is favoured. All of which are proprietary, insightful and advantageous for the food business ecosystem. Yet, they are doing all of this using 3rd party restaurants, part-time riders and unsuspecting users. The best part is none get to benefit out of it except themselves. You see its called proprietary for a reason.
If they were so called platforms, this data would have been open to every stakeholder involved in the process. By making it proprietary, these companies are levying indirect fees and gaining significant advantage against their suppliers. The value created through either Swiggy or Zomato is not adding much to suppliers ( restaurants ) when they are hoarding data along with a percentage cut on transaction and aggressive push on discounting prices, all of which leads to commodification of restaurants. Add to that, what if Zomato / Swiggy decide to launch their own restaurants ? How skewed can things get with them having so much data ?
More on that in the following post to come about cloud kitchens, in-house kitchens and scale. Also, will finally layout why did these relationships go sour between suppliers and aggregators. Spoiler alert, incentives.
Regards,
Vivek
The Duologue is an effort by Vivek and Bheem to have a dialogue about varying topics.
If you liked what you read, you can subscribe to our newsletter.
Share it around if you find any of this piqued your interest or might be interesting for your peers.