But there was one concept that was the basis of all principles in negotiation, which was understanding your leverage. What did you have that you KNEW the other side needed, and how could you position that to get what you wanted?

Recently, tech has shifted leverage in two very fundamental ways, both of which involve entities becoming larger than they currently are:

1. The movement of distribution platforms further upstream (aka. verticalization to decrease negotiations completely) as data becomes leverage.
2. The bundling of leverage from small players to increase their negotiating position.

In these cases, the tech is usually just a simpler process than what currently exists, which is how they develop the critical user mass to build that leverage. But over time, the convenience actually turns out to be a foot-in-the-door for the larger strategy of using that leverage to benefit the business itself (and in turn, the users too).

Verticalization

In the early days of e-commerce, the belief was access to customers was the necessary leverage to negotiate pricing and take rates. Now, distribution platforms are realizing that being middlemen between goods & services without a distinct differentiator is no longer an advantage. With lower barriers to entry for tech companies to become distribution channels, we’ve seen a glut of new competitors (as well as many failures who could not differentiate themselves) and more channels than ever for people to interact and buy goods — which decreases the leverage of sites that solely connect consumers with goods.

As the day of reckoning for distribution-only companies slowly arrives, we’re seeing the implementation of a few strategies to attempt differentiation.

1. Be the cheapest. This is hard to do when you’re competing with Amazon or others at scale and also lowers your margins considerably.
2. Have the most offerings (most available drivers, most variety of movies, etc.) — this is hardest to defend because the supply wants to sell on as many platforms as possible.
3. Lock people in with the subscription model and/or time investment (Prime, Netflix subscription, Spotify playlist building, etc.) but in most cases the switching cost still isn’t substantially higher.
4. Make something exclusive to your platform (music exclusives, original content, etc.)

The biggest shift in my opinion is number 4, where distribution platforms are now moving to the source of where these goods and services are created. Why negotiate with companies over pricing and take rates when you can own the goods and services themselves? And the reason these distributors have a major leg up in the content creation is because data is the new leverage. Where access to customers was once the tool used in negotiating, now understanding customer usage, taste, and patterns to inform product decisions is critical. House of Cards is an excellent case study here, where Netflix was explicit about their use of data to come to this conclusion:

“We know what people watch on Netflix and we’re able with a high degree of confidence to understand how big a likely audience is for a given show based on people’s viewing habits,” company communications boss Jonathan Friedland said. “We want to continue to have something for everybody. But as time goes on, we get better at selecting what that something for everybody is that gets high engagement.”

And beyond just knowing what to create in the first place, they also have the data to guide the correct users to the content

“We don’t have to spend millions to get people to tune into this,” [Steve Swasey, Netflix’s VP of Corporate Communications] said. “Through our algorithms we can determine who might be interested in Kevin Spacey or political drama and say to them, ‘You might want to watch this.’”

Owning the distribution channel AND the content doesn’t hurt, you know exactly who to serve your original content too. I’m sure it’s not an accident that the “Netflix Originals” section is twice as large as all the other sections in the home page.

Data becomes the leverage as distributors can now get a much better ROI on dollars invested in the creation of content, goods, or services by knowing for a fact that demand exists AND who exactly is a relevant audience (as opposed to having to pay for advertising). At that point, it makes sense that these companies are verticalizing, and they simultaneously make their distribution channels more valuable by having something exclusive that other channels can’t get. Nearly half of people considered original content when purchasing a Netflix subscription less than 3 years after the debut of their first original series. For more than a quarter it was a significant factor.

Some other companies this applies to:

Amazon: Amazon is moving into everything from Amazon Basics, to original Amazon content, to their own brand of packaged goods. Amazon has the ultimate consumer dataset to understand taste, and owns one of the most entrenched distribution platforms out there to funnel relevant customers to its own products. Birchbox is another commerce player using its customer preference data to launch its own line of goods.

Uber: Ride-sharing has essentially become a commoditized middle layer that connects drivers (supply) to customers (demand). Uber smartly has decided to move up the stack into the supply itself by rolling out its own autonomous cars. Uber’s key advantage is here is that it owns a lot of data about most utilized routes, has built out a very complex routing system (eg. uberpool) thanks to usage data, and has the distribution itself with many people having already downloaded the app. For now, Uber looks to be partnering with existing automakers instead of totally owning the cars themselves, but as long as they can partner with ANY automaker (probably the ones lagging behind in developing autonomous software) then they still provide the supply and in the future they could theoretically develop cars themselves.

Spotify/Apple Music: This is one area I think is still yet to develop, but we’re seeing some signs of this. Spotify has their “Spotify Sessions” and Apple/Tidal have tried going the way of exclusives but even those eventually end up on all platforms. The more radical move would be for one of these platforms to develop their own music label and begin to sign artists exclusively to them.

Oscar: This one seems a little different, but actually functions very similarly. Health insurance effectively acts as a middle man between the customer and care from 3rd parties (aka. in-network hospitals). Data is paramount here, and Oscar is employing the verticalization strategy by also becoming your doctor. This actually makes a lot of sense for Oscar since their leverage negotiating with hospitals is weaker due to it’s smaller consumer base (especially compared to giants like Cigna and Aetna). So rather than negotiate down prices with 3rd party health systems, why not just create your own care system, use data to triage patients that need care, and service the appropriate care (that Oscar owns) to the appropriate parties? This is a huge, capital-intensive bet, but it could pay off for them.

— — —

This trend will no doubt continue to increase. As the amount of data ingested grows combined with new analysis techniques, breakthroughs in machine learning and increased computing power to perform the analysis, this moat will only become bigger and the platforms that own the data will become increasingly defensible.

What will be particularly interesting to watch is the relationship between 3rd party sellers that rely on these intermediaries to distribute their product when they then begin to compete with each other. The pace of this verticalization doesn’t appear to be slowing, so eventually the existing “producers” of these goods will have to figure out a way to hit customers directly without using these channels. And they better do it quick, because there’s a new hit Netflix show for me to fall behind on pretty much every season.

Bundling

Verticalization + data focuses on the leverage shifts happening on the distributor’s end. But a developing strategy that some tech companies are beginning to employ involves the aggregation of leverage from consumers/small players.

Consider a small fish, like the minnow. In the face of a predator, this fish is easily picked off if alone. This is why minnows swim in schools, because they have proven anti-predator effects. The minnow are able to group their individual strengths and decrease the efficiency of predators.

Tech has the same ability to group the power of the little guy and use that aggregate leverage on their behalf. A few examples of this:

Airhelp: If your flight is delayed or cancelled you’re eligible for a certain amount of compensation. Most airlines don’t give you the full amount, knowing that an individual person generally does not have the time, resources or patience to force the airline to give them the full amount. Airhelp bundles all these individual claims under its purview, groups the leverage, and then forms a business with both the expertise and cumulative resources to essentially fight on the behalf of the individual to get them their due.

Blink Health: Drug pricing has become a very hot topic (thanks to some lovable twitter personalities). Blink Health aggregates the buying powers of its members to negotiate the prices down for the group as a whole. As one of the co-founders has said, “Using the power of Internet to aggregate — when we negotiate, we look to pharmacies like we’re 25 million people.”

Collective Health: Since healthcare pricing is so strongly based on negotiating strength, there are a lot of players employing this strategy but another I want to highlight is Collective Health. As more employers decide to self-insure, one of the tough issues smaller employers have is negotiating good prices with provider networks. If they aren’t doing it already, Collective Health can use the data and bargaining pool of its membership to negotiate on behalf of the group of self-insured businesses to improve coverage and get better prices.

Justworks: The “perks” (see what I did here?) of enrolling with a benefits manager is that they allow small businesses to give employees the buying power that large companies have by bundling them together. That means getting better 401(k)s, better insurance rates, and better perks for less cost than the small business could negotiate themselves.

Tech has the ability to change the story of David and Goliath, where instead David wins by finding thousands of other Davids and leveling the playing field (I mean that’s way more realistic than a lucky shot). These are companies that are using technology to prevent bullying and resource attrition as a reason why the little guy can’t win. Opportunity exists in almost any scenario where an individual or smaller entity feels helpless, because more likely than not there are others fighting too and it’s harder to break a bundle of sticks than one at a time.

These are a couple of ways that I see tech changing the landscape of leverage. If you have thoughts or comments feel free to reach out to me on twitter @nikillinit