Do you find the news gloomy? I do. Not just in India, but across the world. Covid-19 cases are on the rise in India. The economy isn’t in great shape. Migrants are facing a terrible time. There are riots and protests across the United States. And wherever you look, the bigots seem to be the ones holding the microphone. Even animals aren’t spared. Just look at what happened to that poor elephant in India. Depressing.
If you have good news, do share. We all could use some.
Let’s dive in.
India’s accelerated rule of three effect

The argument of this week’s newsletter is simple. Here it is in two points:
- Several of India’s markets are evolving and displaying a “Rule of Three” effect. This is normal. Happens all the time.
- These markets are getting to this point faster, and will stay there longer. This is not normal. And indicates that something is slightly off.
That’s it. If you know what the “Rule of Three” is, you can stop reading because the rest of the newsletter is just supporting arguments. I’ve saved you 10 minutes to do more useful things. Seize the day. Bake banana bread. Do 20 push-ups. Forward this newsletter to your enemies.
If you don’t, I’ll explain.
So the “Rule of Three” has multiple variants. In its earliest form, Bruce Henderson of the Boston Consulting Group framed it thus:
A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest.
I prefer a slightly different variant. Jagdish Sheth and Rajendra Sisodia, in 2002, described it like this:
- A competitive market usually gravitates towards three major players. These three players are ‘generalists’, and control a significant share of the market – usually upwards of 70%.
- The rest of the market is composed of niche specialists with tiny market shares but strong financial positions.
- Any attempts by these specialists to become a generalist by increasing market share is risky, and can result in death.
Basically, you are better off being small and profitable or large and powerful. If you are in the middle, good luck. Sheth and Sisodia call this middle ground the “ditch of death,” and illustrate their point with the most amazing Windows Clipart image that typifies the early 2000s.

Do remember that I am grossly oversimplifying their paper. The authors, who made these conclusions based on a study of several markets in North America, go much deeper. I recommend reading the whole thing.
The important thing to remember is that the “Rule of Three” is a natural consequence of a mature market. There’s a reason why three is a stable equilibrium—it prevents any one player from becoming too powerful, because the other two can counterbalance it.
This is natural.
But Sheth describes two other facets.
The first is about how this market evolves.
Over time, as growth slows and the industry becomes mature, the forces of technological change, shifting regulations, market shifts and changing investor expectations may give rise to a “revolution” or revitalization of the industry. Through such periodic upheavals, the potential exists for the competitive landscape to be redrawn in a substantially different way. Savvy incumbents are able to sustain or improve on their leadership positions, while aggressive newcomers replace others.
The second is about how specialists can make the jump across the ditch.
Specialists can make the transition to successful full line generalists only if there are two or fewer incumbent generalists in the market.
I’d argue that both of these are questionable. Especially in India.
Here’s how.
First, the market equilibrium is happening faster than before in India
Take the automotive industry in India. It’s been around for decades. And despite some inherent problems, one can make an argument that it’s one of India’s most vibrant, and fiercely competitive industries. Sure, the largest player, Maruti has a market share of around 50%, but it still allows newer, smaller companies like Kia to emerge.
Something similar exists in the airline industry, which has been around for a couple of decades and still has at least 4-5 players.
This kind of consolidation isn’t unusual.
But it’s happening faster than before.
There’s an article published in the Harvard Business Review, back in 2002, which talks about the four stages of consolidation that any industry goes through. In it, they write, quite presciently.
Today, we predict, an industry will take on average 25 years to progress through all four stages; in the past it took somewhat longer, and in the future we expect it to be even quicker.
They go on to write about the final stage of consolidation as follows:
The industry concentration rate plateaus and can even dip a bit as, at this stage, the top three companies claim as much as 70% to 90% of the market. Large companies may form alliances with their peers because growth is now more challenging. Companies don’t move through stage 4; they stay in it. Thus, firms in these industries must defend their leading positions. They must find new ways to grow their core business in a mature industry and create a new wave of growth by spinning off new businesses into industries in early stages of consolidation. They must be alert to the potential for industry regulation and the danger of being lulled into complacency by their own dominance.

In comparison, let’s take the United Payments Interface (UPI) which was launched six years ago.
span style=”font-weight: 400;”>As of now, Google Pay, PhonePe and Paytm control over 90% of the UPI market share.
span style=”font-weight: 400;”>On the other hand, government-promoted BHIM and other third-party apps such as Amazon Pay, FreeCharge, MobiKwik and WhatsApp Pay (for select users) collectively have a little over 5% of the market share in the UPI ecosystem.
span style=”font-weight: 400;”>UPI processed 1.32 Billion transactions in February – highest ever in a month, Entrackr
Rule of Three.
In just six years.
One can argue that this is happening in other sectors as well. Take OTT video streaming, which is dominated by Disney+ Hotstar, Netflix and Amazon Prime. Or B2B e-commerce with Udaan, Ninjacart and Jumbotail.
One can reasonably argue this is happening faster in India’s youngest and hottest sectors. Something that used to take decades is now happening in a few quarters.
Second, duopolies are broken, but not by those you’d expect
Remember that Sheth wrote that specialists could make the transition to successful full line generalists only if there were two or fewer incumbent generalists in the market.
We’ve written about duopolies in the past. Right now, there are two major duopolies. Actually, three, if you include ride-sharing, which we’ll set aside for the moment. The other two are e-commerce and food delivery.
Let’s take e-commerce, which is dominated by two generalists, Amazon and Flipkart. Who is going to challenge them? Is it a new e-commerce player? Or a specialist?
Hell no.

Sure, you could argue that JioMart is a specialist because it’s doing groceries, but I’d argue that any company that bills itself Desh Ki Nayi Dukaan (The country’s latest store) is hardly being cautious.
Now let’s look at food delivery. Thus far, it was dominated by Swiggy and Zomato. Who is going to challenge them? Is it a specialist? Or a shiny, young, new startup that’s just raised VC money and built a better product?

What I am trying to say is that the third entrant into duopolies in India are usually well-funded, massive conglomerates with limitless amounts of capital and resources.
Not scrappy startups. Not specialists.
If they don’t enter, they invest
In markets where the rule of three already exists, or when the duopoly looks quite entrenched, what happens?
Big Tech simply decides to invest.
Take the Indian telecom sector, which we wrote about last week. It’s locked in a classic Rule of Three situation, with three major players, Jio, Vodafone Idea, and Bharti Airtel controlling the market.
Look what happened next.
Amazon.com is in early-stage talks to buy a stake worth at least $2 billion in mobile operator Bharti Airtel, three people with knowledge of the discussions told Reuters, in a move that could turbocharge India’s digital economy.
[…]
The discussions between Amazon and Bharti underscore the attraction of India’s digital economy for U.S. tech giants.
Over the past six weeks, Jio, the digital arm of Reliance Industries raised $10 billion from global investors including Facebook as it seeks to establish itself as a one-stop digital commerce platform.
Alphabet Inc’s Google is also exploring an investment in Vodafone Idea, a joint venture between Britain’s Vodafone Group Plc and India’s Idea Cellular, the Financial Times reported last week.
Amazon in talks to buy $2 Billion stake in Bharti Airtel, Reuters
This isn’t just an Indian phenomenon. Look at Facebook investing in Indonesia’s Gojek, where it operates in a duopoly with Grab.
Or Amazon choosing to collaborate with Slack in another duopoly market that’s dominated by Slack and Microsoft.
I think you know where I’m going with this
The Kill Zone is expanding
There’s a famous story that appeared in The Economist back in 2018 which describes something called a “kill-zone” for startups.
IT IS a classic startup story, but with a twist. Three 20-somethings launched a firm out of a dorm room at the Massachusetts Institute of Technology in 2016, with the goal of using algorithms to predict the reply to an e-mail. In May they were fundraising for their startup, EasyEmail, when Google held its annual conference for software developers and announced a tool similar to EasyEmail’s. Filip Twarowski, its boss, sees Google’s incursion as “incredible confirmation” they are working on something worthwhile. But he also admits that it came as “a little bit of a shock”. The giant has scared off at least one prospective backer of EasyEmail, because venture capitalists try to dodge spaces where the tech giants might step.
The behemoths’ annual conferences, held to announce new tools, features, and acquisitions, always “send shock waves of fear through entrepreneurs”, says Mike Driscoll, a partner at Data Collective, an investment firm. “Venture capitalists attend to see which of their companies are going to get killed next.” But anxiety about the tech giants on the part of startups and their investors goes much deeper than such events. Venture capitalists, such as Albert Wenger of Union Square Ventures, who was an early investor in Twitter, now talk of a “kill-zone” around the giants. Once a young firm enters, it can be extremely difficult to survive. Tech giants try to squash startups by copying them, or they pay to scoop them up early to eliminate a threat.
American tech giants are making life tough for startups, The Economist
This is what is happening in India, and is likely what’s leading to an accelerated Rule of Three across sectors.
Take the list of top 100 most well-funded startups, according to research services company Tracxn. Apart from CRED, a credit card payment platform, every other company on the list was established before 2018. This isn’t an accident. It’s no secret that companies like Facebook, Jio, Amazon or Google have pocketbooks deeper than the likes of Tiger Global, Sequoia, and others.
Add on to this the freeze on Chinese capital in India as well as the fall of SoftBank, and it leads to an inescapable conclusion.
You could launch a startup in India, but chances are you aren’t going to get successful and disrupt anybody anytime soon. The Rule of Three has been established. And it likely won’t go anywhere anytime soon. You could build a better mousetrap, but chances are the forest around you is going to be burnt down and nobody is ever going to find out.
Is there a solution?
I am not so sure about the Indian context, but I do keep thinking about what Scott Galloway, professor at NYU Stern, had to say about this.
“I think Facebook, Google and Amazon should all be broken up, and I think Apple’s App Store should be regulated. These companies have now become invasive species that prematurely euthanize big companies that tend to be good employers and good taxpayers, and also perform infanticide on startups. If you listen to CNBC or read The Wall Street Journal, you’d believe we’re living in an era of innovation. We’re actually living in an era of non-innovation: twice as many startups were being formed during the Carter administration than are being formed today. And the reason why is the fastest growing parts of our economy – tech hardware, social media, search, e-commerce – are controlled by one or two companies.
Try to raise money for an e-commerce company. Go into Andreessen Horowitz and say, ‘I’m going to start a social media firm.’ Go into Kleiner Perkins and say, ‘I have an idea for a search engine.’ These are enormous businesses that every year grow by tens of billions of dollars. This should be a massive area of growth for startups. The only places getting funding are sectors that aren’t controlled by a monopoly – things like AI, crypto, fintech or biotech. The sectors that have the largest dollar volume growth are controlled by one or two firms. We decided a long time ago that that’s bad for the economy, and we have a proud legacy of breaking these guys up. We seem to have lost the script around that. Antitrust is almost always great for all parties – shareholders, employees, the tax base. It’s only bad for one person and that’s the CEO who’s no longer reigning over all of Westeros, but just one of the realms.”
Scott Galloway
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