The Rule of 3 or 1

In business there is a theory that says all markets will eventually become a market of 3 major players  or a monopoly.  The internet definitely follows this theory.   There are 3 big search engines.   Ebay is a virtual monopoly as is craigslist.   

The question these days is Social networking going to be a monopoly  or a pie split by 3 players?  I suppose it comes down to trying to how you broadly you define social networking.  Myspace is virtually unchallenged as is facebook in their respective markets.  It would therefor seem the only way new players to succeed is to create a new market as social networking will be a collection of monopolies, although they may be a series of successive short lived ones.

Looking at the long list of this and that clone being reviewed on techcrunch.com it amazes me how many people forget this simple "theory".  It is simply not possible for another calender App, RSS reader etc to exist when there are already 20 competitors only 1 or 3 will ever live even if they had a business model.

18 Responses to “The Rule of 3 or 1”

  1. Stuart Says:

    Good point Markus. I guess for most competitors it will come down to finding a worthwhile niche that can be exploited for some worthwhile benefit.

    While I agree with you that the industry may only support 1-3 competitors history has shown many times that the initial 1-3 may not be the current 1-3. Therefore, for businesses entering an industry they may actually succeed over the long term.

  2. Terence Pua Says:

    You can also do a localized language version or a version of the web app/service to a specific country.

    Facebook in Chinese or in Germany, etc…

  3. Paul Montgomery Says:

    I distrust the three-player part of that theory, it seems too glib to me. Not every market will drift toward oligopoly. Those that do drift that way are often only doing so on the way to monopoly, and are only stopped at the arbitrary number of three because that’s the socially acceptable minimum of suppliers to constitute a capitalist market, thus comforting those ideologues who believe in free market economics even though competition theory doesn’t work all that well at those levels.

    Weren’t there more than three dating sites when you started, Marcus? You’ve got to be in it to win it, as they say. Who can say which of the 20 calendar sites or Ajax startup pages will survive? Some small number will, it’s a calculated gamble.

  4. Brian B Says:

    Using the fact that there are three leaders in an industry as justification for not competing sounds a bit niave. If that were the case, there wouldn’t be any competition in an industry after its been around a few years. In America, the we used to have the “Big 3” automakers thriving in Detroit. I’m sure that Honda and Toyota are glad they didn’t pay attention to the Big 3 rule as they are the leaders in the US now and Detroit is struggling. Wasn’t Friendster the leading social network originally? MySpace has destroyed them. I grew up in the same city where Papa Johns Pizza was started. It was a ridiculous idea to compete in a market dominated by Pizza Hut, Dominos, Little Ceasar’s etc. Papa John’s pizza started with nothing and came out of nowhere to become the number two pizza chain in the US. The rule of the “Big 3” is just a good justification for being lazy, or justifying failure.

    Saying that there are a lot of imitators that are doing poorly is irrelevant to whether a new company can come along and make an impact. I think the biggest impact of having a “Big 3” is that the late comers to the marketplace better have a lot of cash to fund their entry into the market or they better add so much more value to the original idea that it quickly grows organically.

  5. RJB Says:

    Companies happily live under the radar making remarkable products or services. The rule of 3, i believe, is applicable only to pin-points, segments, niches, whatever. How many search engines are there? Lots. How may are successful? Lots. I guess you need to define success…

    It is more a matter of when competitors are doing the exact same thing and are going after the exact same target audiance. Look at Fuji water or Splenda… Both industries were dominated by big companies, but they target a completly new audiance that was being ignored.

    Papas Johns is a great example… It is not just the idea… It is the implementation of that idea.

  6. Tom Says:

    Generally it is better to avoid crowded space for business. For example, currently web2.0 is just way too crowded. Sure, there will be winners emerging from competition in the future and number of winner could more or less than 3🙂 But in general, it is not easy to win just being a “follower”.

    On the other hand, no 2 companies are competing in the exact same market since every company is unique.

    Some ones said competition is bad because it is harder to win; Others said competition is good because it shows that there is a market.

    I think as long as you can provide something other can not, you will have a chance to win. No matter it is a new product/service or old product/service with better quality.

  7. David Krug Says:

    Markus,
    Take the tabloids in the supermarket there’s like 40 of them. If you define a niche you can win like tabloids you don’t worry about your competition you just hope your one of 40 and there’s enough demand.

  8. Stevux Says:

    Most common functions on the web like shopping, search, networking, dating are saturated due to the low barrier of entry costs. pretty much anyone with a pc and coding skills (or a couple hundred bucks for the right scripts) can startup their own match.com, amazon or whatever…

    unless someone comes through with something totally innovative there WILL be a monopoly of 3 or so because thats who people will know…

  9. PR Blogging » The Google Pyschology and Competitive Intelligence War (or Scaring the crap out of the competition) Says:

    […] Remember, even the little guys are making up lies, and calling it spin. It’s really just Competitive Intelligence + Public Relations Spinstering. Why aren’t you doing it? […]

  10. Mike Says:

    Interesting model Markus, when you look around it indeed turns out to be true, but can’t there be two major players? Like windows and linux.

    Lots of people just don’t understand the majority of online ideas and big web things are just one time runners. Same goes to all the digg clones, myspace type sites, milliondollarhomepage clones etc.. these ideas only work once.

  11. Kevin Says:

    “Like windows and linux.”

    + Macs = 3. Regardless of whether or not you like them, they are there, and they are a percentage.

  12. Raphie Frank Says:

    Well, Marcus, here’s how I figure it. I’d like you to be one of the 3 bcause I hink you would use your power wisely, as I believeI would also if ever I can get my “Business Artivism” ideas off the ground.

    Tell you want Marcus, go to my blog and take a look at Ana Crisan. She is fighting for 20 Homeless People in Toronto who are actually Homeful to the extreme.

    Let’s show the world that a few good people can make a difference. Ana is hot, by the way, which makes her like the pretty girl at the ball who no one thinks needs a helping hand. Well, guess what? She DOES.

    Marcus, you want to change the world? Here’s a great opportunity. The cause is right because, while there are plenty of good fish in the sea, we can’t afford the loss of any good ones willing to fight for those with less power than they.

    Help Ana Marcus. You’re in Canada and so is she. It’ll be great PR, but, guess what, good causes SHOULD get good PR, don’t you think? If you agree, then help Ana help the Homeful 20. If not, I would love a response, but I’m quite sure you are busy…

    Best,
    Raphie Frank

  13. Raphie Frank Says:

    sorry for the typos, feel free to fix them and delete this…

  14. Raphie Frank :: business artivist » The Homeful 20 on Flickr Says:

    […] plentyoffish blog […]

  15. waarneming en verandering » Social networks Says:

    […] The rule of 3 or 1 Over at Plentyoffish I read this thought concerning soical networking sites: “[…] Looking at the long list of this and that clone being reviewed on techcrunch.com it amazes me how many people forget this simple ‘theory’. It is simply not possible for another calender App, RSS reader etc to exist when there are already 20 competitors only 1 or 3 will ever live even if they had a business model.[…]” […]

  16. Web 2.0: un concepto, no una tecnología » Says:

    […] En estos momentos existen 3 grandes actores en la Web: Google, Yahoo, Ebay. Los cuales durante el último tiempo han protagonizado una seguidilla de compras de empresas que proveen servicios vía Web (ej. la compra de Writely por Google, Flickr por Yahoo ), incluso han comprado empresas que no están directamente ligadas a la Web, pero cuya tecnología propietaria muestra un gran potencial de apalancamiento para otros servicios Web (Ej. la compra de Keyhole por Google). Está demás decir que la mayoría de las compras tienen un gran potencial desde el punto de vista Web2.0, pero… pq todas estas compras? Siempre ha existido la posibilidad de que cualquiera de estos tres grandes desarrollen su propio software, en especial si ya se conoce lo que se desea… una copia de Flickr, o Writely, por ejemplo. Sin embargo hay otro factor, la externalidad de red asociada a aplicaciones de este tipo, una cosa es comprar el software de Flickr, pero otra muy distinta es comprar la “cartera de clientes” de Flickr. Esencial en este punto resulta calcular el valor de la red de usuarios de Flickr. Tradicionalmente el valor de una red se evaluaba según la ley de Metcalfe, la que propone que “el valor de una red de nodos es proporcional al número de conexiónes que existen entre ellos”, la cual crece según N^2. Sin embargo, para valuar redes del tipo Web2.0 parece ser más correcto usar la ley de Reed , la cual propone que “el valor de una red de nodos está dado por el número de subconjuntos que se puede formar en esta”, la cual es mucho más congruente a la idea de “comunidades” y “subcomunidades” que circundan la Web2.0. Una red de Reed crece 2^N lo cual es un número mucho más grande que N^2, sin embargo 2^N considera “todos” los subconjuntos que se podrían formar, lo que claramente es una sobre valoración de la red, pero refleja una dinámica de crecimiento claramente más interesante que el tradicional N^2. Luego viene otro problema, desde que punto de vista es correcto valorar la red? desde el punto de vista de Flickr? o desde el punto de vista de Yahoo? Debido a un tema de escalas, es claro que esos N usuarios de Flickr tienen un mayor valor para Yahoo que para Flickr. Por este motivo, el solo hecho de mover los usuarios desde Flickr a Yahoo crea valor por la externalidad de red.Finalmente, en negocios hay una teoría, la que dice que en virtualmente cualquier industria, en el largo plazo, converge en un mercado con tres grandes players o un monopolio. Al parecer la Internet no se queda afuera de esta regla. Los grandes no dejarán que aparezca otro más a competir, lo más probable es que sea comprado antes. Así, si una empresa nace de una buena idea, y además es capaz de crear una red o comunidad de usuarios considerable, será una gran candidata a ser absorbida por uno de los 3 grandes. […]

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  18. journey Says:

    nice post

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