Among new-age companies,

Winner Takes All rarely happens in Revenues / Market Share. Even when it does, it does not lead to price gouging or suspension of innovation. Winner Takes All does happen by Market Cap and Economic Profits.

Finextra Post:

Often those are inspired by other tech sectors, where a “winner-takes-it-all” story is applicable, meaning growth at any cost (and being unprofitable) can be a strategy, till all competition has disappeared, after which prices can be increased and a switch to a sustainable business model can be made.

My Comment:

I totally agree that Winner Takes All does not happen in finserv because there’s no new product.

But I’m curious to hear your thoughts on whether it has actually happened in any other industry.

At least, I have not.

According to basic principles of Economics, even a monopoly can dictate only price or demand, but not both.

If last man standing tries to engage in price gouging, either the regulator can clamp down with price controls or the customer can always switch to a substitute or, if no substitute exists, exercise the option of buying nothing at all.

There are still many functioning search engines. Online sales is less than 10% of total retail sales, Amazon’s market share in online sales is 49%. Ergo, I disagree that Google Search and Amazon are monopolies.

But, for the sake of argument, assuming that they are monopolies, I see no evidence of “after which prices can be increased”. What prices have they increased? Not Users, not Advertisers.

Coming to Netflix, yes it was the only streaming video service at one point but, during that period, memory serves, it increased monthly fees from $9.99 to $11.99 or some paltry figure like that.

So, IMO, Winner Takes All does not happen by Market Share, at least amidst new-age companies. Even in the rarest of cases when it does, it does not necessarily lead to price gouging, as usually claimed by antitrust regs.

Despite all this, I have a theory for why VCs still promote Winner Takes All: It stokes the “Greater Fool Theory” and helps pump up the startup’s valuation, thus enabling VCs to fulfill their fundamental goal of achieving “multibagger returns in 2-3 years”. My related post: Fintech Shouldn’t Stop Chanting The Disruption Mantra.

Winner Takes All also happens on Economic Profit (= Profit – Charge for Capital used to get that Profit), whereby 20% of companies in tend to have 80% of Economic Profit. But this kind of Winner Takes All happens even in highly competitive traditional sectors in mature markets like Insurance, where a McKinsey analysis of economic profit of 209 insurers identified a power curve. So it has nothing to do with monopoly.

Extra Material:

Google Search has carried out a lot of innovation e.g. Featured Snippet, Q&A.

Android and iOS is duopoly. Both of them still carry out a lot of innovation by way of newer versions.

LinkedIn Post

China have 5 EdTech startups in Online tutoring space with valuations over $1Bn

Still the Chinese market is seeing new players emerging to disrupt the EdTech space and take a small pie, and investors are backing them with very strong conviction!

Here in India, we have only 1 Unicorn in online tutoring space, still I get to hear frequently about the space being very competitive!!

Isn’t competitive space a strong validation for problem?
Or are our investors risk averse?

My LinkedIn Comment

No, they’re not risk averse. You’re clueless about how VC Investment Model works. The Indian EdTech market has reached the stage where it has started showing the potential to drive Winner-Takes-All, which is the Holy Grail for VC. When that stage comes, VCs pour more money in existing startups until one of them becomes the Last-Man-Standing and simultaneously cut off investments in all other startups – existing and new – that have no chance of getting there. Had you been better informed about the VC Investment Model, you’d have spotted this best practice in action in Ecommerce, OTA, Food Delivery, Rideshare and other industries during the last 5-6 years. It’s now being put in action in EdTech. There’s nothing new.