Digital Duopolies

Two people working on laptops
Photo by Christina @ wocintechchat.com on Unsplash

The big news in the Indian tech space this week was the acquisition of Uber Eats by Zomato. Other than the fact that Uber Eats was the only food delivery app on my phone (which has now been replaced by Zomato), the acquisition was interesting because it effectively means that we now have a duopoly when it comes to food delivery apps in India with Zomato and Swiggy battling it out head to head.

The same story seems to be playing out at many tech industries. Uber and Ola / Lyft when it comes to on-demand transformation, Apple and Android on mobile phones, Chrome and Internet Explorer on browsers, Amazon and Flipkart / Walmart for online shopping, Expedia and Booking for online travel, Google and Facebook when it comes to digital ad spending.

I am sure this phenomenon is not unique to digital businesses, but it does seem to happen more regularly and faster for tech businesses than more traditional ‘offline’ businesses. For example, we still have multiple auto manufacturers, airlines, hotel companies, mobile phone manufacturers, etc.

This led to me think about why this phenomenon of the rise of duopolies plays out so frequently with digital businesses. These are my thoughts:

The inherent low levels of differentiation between competing companies – Product development being relatively very quick, it is fairly common to see digital businesses in the same domain quickly iterate and evolve their products such that they offer pretty much the same features and benefits as the others. When this happens, the choice of provider boils down to either personal preference (brand) or price.

Low costs of entry – The relatively low cost of entry means that, as soon as a new market opportunity opens up, many brands start up to compete for a chunk of the pie.

Consolidation – Initially, as the market grows rapidly, most of these new entrants are able to show decent growth and capture a decent share of the market. However, as the growth starts slowing with increasing industry maturity, some of these brands start to see a struggle in keeping up with the industry leaders. What causes some of these brands to surge ahead while other struggle at this stage is a topic for another article, but the result is that soon, the market throws up a few (typically 2 – 3) clear winners. At this stage, the rest have a few options:

  1. Continue with a smaller share of the market with low growth potential
  2. Shut down
  3. Merge with one of the market leaders.

One of the factors influencing the decision would be the key investors in the brand. If it’s a Venture Capital backed entity, chances are they would take the third option above to make some returns on their investment. Self-funded companies might take the first option. If it’s a branch of another business with larger interests in other markets, they might take the second option to focus their resources in their core business.

The net result of all of these stages (which could occur in the space of just a few years) is the emergence of duopolies. My guess is that, if there we no constraints, we would end up with monopolies. Till, that is, the market becomes so large and the incumbent so entrenched, that the time is ripe for disruption!

 

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