Software and the internet create winner takes all or most market dynamics. Through zero variable costs, collapsing fixed costs, network effects, data and aggregation it creates one (or two) large winners, aggregators and hegemons. With a long tail of millions of smaller players in niche markets. There is one search engine, one private social network, one professional social network, one e-commerce giants and a one (or a few) leaders in every category. This can be defined as similar to a Pareto distribution and The Matthew Effect. It’s is my own Theory of Bifurcation. These forces bifurcate markets and destroy the middle.
This dynamic severely impacts market competition, go-to-market strategies, fundraising and customer acquisition costs. Startups and investors aim to define categories and compete in winner takes most/all stakes. Startups are now built faster than ever and, according to the research, spend 50% of their raised capital on Google and Facebook ads just to be able to compete under these dynamics. It’s why consumer FinTech companies often have unprofitable unit economics, terrible CACs and incredibly long break-even periods. This dynamic also has a severe impact on companies (and employees) found in the middle of the distribution curve. And the political and economic fallout because of it.
This mental model holds across most, if not all industries, as new technology (AI) accelerates its effects.
This cycle is repetitive, which means new technology (Blockchain) also has the ability to break network effects and decentralise these dynamics.