The Rule of Three

This is a marketing book based on the theory that all markets evolve into three major players.  Anything more results in a serious of mergers and acquisitions to stay competitive, anything less results in mass inefficiencies in valuation.

"Subsequent attempts to make the industry more efficient come from four key sources or events: the creation of standard, the development of an industry-wide cost structure as well as a share infrastructure, government intervention, and industry consolidation through shakeouts.  These four drivers force the industry as well as the players in it to become more and more efficient in order to stay competitive."

For a shared infrastructure:

• Sharable: it must allow for simultaneous access by many users.
• Ubiquitous: it needs to be where you want it, when you want it.
• Easy to use: it must be intuitive and require little or no training to use effectively
• Cost effective: it must be accessible and affordable to all

"...large companies in a competitive market do best when their market share does not exceed approximately 40 percent.  When they grow beyond that mark, they can start losing their profitability, run into trouble with regulatory agencies and experience the agony of no new growth.  Incremental markets and customers can be more expensive to acquire and generate less revenue."

Some examples of the rule of three...

1. Banks
1. Citigroup
2. Bank of America
3. J.P Morgan
2. Brokerage Firms
1. Merril Lynch
2. Morgan Stanley
3. Goldman Sachs
3. Credit Card Companies
1. Visa
2. Mastercard
3. American Express
4. Disk Drives
1. Seagate Technologies
2. Quantum
3. Western Digital Corp
5. Television Networks
1. ABC
2. NBC
3. CBS
6. Telecom
1. AT&T
2. MCI/Worldcom (now Verizon)
3. Sprint

I think its pretty evident that a rule of three exists and the rule can probably be extrapolated to natural systems (meaning species and populations).  In fact, I'd like to look for the rule of 3 within our system of racial divisions (in the U.S.), political power (its a little self-evident that our political 'market' doesn't work well because we only have 2 players...thus the rhetoric for a 3rd party).  One major takeaway is that when assessing markets, one need only look for markets with 2 players to initiate an opportunity to start a company.  The natural order of the system should be in the newcomers favor.  I also believe that innovative disruption has played huge role with the help of the rule of 3.  Perhaps these disruptive companies are really companies that took advantage of a two member system.  Large monopolistic companies now spend very little time buying smaller ones to stop 3rd parties from becoming a threat.  The response to some of these biz purchases (summly for example) seem so far fetched but the leaders of many of these markets know the nature of markets and buying a shit company for 30 million now is much better than fighting for a dominant market space 5 years from now.  After all, with 3 players relatively equally footed, well-- you're now looking at a war of attrition and extreme (and tiring) innovation.  Perhaps companies prefer to be lazy, but to do so, a company must kill small disruptive innovations before they become large ones.