Economics: More Competition Leads to Less Competition (the rule of three)

The Rule of Three by Sheth and Sisodia

today’s selection is a (very old post) dated 2006, taken from this very blog …

… in which I was commenting on a book entitled “the rule of three”. I realise that this analysis is still – or maybe more than ever pertinent – and therefore I decided to revive this post, update it significantly, and submit to my readers again today.

Have you ever wondered why most markets – when they are mature enough – end up being dominated by 3 players? Sheth and Sisodia (2002 – buy it from Amazon; note that there are second hand books available from as little as £0.49!) have carried out a study about this and their book is available in electronic format too (buy an kindle version here for £9.99). 12manage.com comments that this is not applicable to Europe. On the contrary, it does apply to Europe too, or any other area for that matter, provided local markets are open to fair and unbiased competition and transparent (I know, this is a paradox, fair competition leads to less competition in the event).

For instance, if you apply this rule to the telecoms market, it is very likely that you will find that the rule applies in each country/zone of influence individually (multi-national markets). It’s not that the rule is false. It’s just that those markets are heavily regulated and therefore, keep introducing new devices to revive competition at regular intervals.

In the US, the situation is different though; a few decades ago, AT&T was broken into small companiesby the regulator, but the rule of 3 applied in the end nonetheless (Stephen Colbert described this phenomenon in a classic pitch, click the Colbert picture below to view an extract). The process of introducing more competition ended after that though, it is not the case in some European markets in which new devices are still being introduced to fuel competition and lower prices (transparency : I work for a Telco, my comment is and will remain neutral for obvious reasons)

Where globalisation has already happened (for instance in the fast food market), the rule will apply across Europe with Mc Donald’s, Quick or Burger King and the rest of the niche players for instance. Does that mean that the ultimate goal of open competition is … less competition? Eerie isn’t it?

A final comment is that not all markets, even in the high-tech sector, are truly global. Whereas the IT market is for instance (same brands, strong consolidation, same products sold from one end of the planet to the other etc.) others aren’t. Besides, a multi-national market (i.e. an addition of heavily idiosyncratic markets in many countries) isn’t really the same as a global market. In multi-national markets, many discrepancies persist, even when the brand itself is global.

Zipf’s law

Seth Godin described this phenomenon in a different way, in his famous opus entitled “unleashing the idea virus“. Here is the passage about what he calls “Zipf’s law” (the book is rather old too, but it doesn’t matter anyway, what Seth described then is still valid now).

There’s a name for this effect. It’s called Zipf’s law, after George Kingsley Zipf (1902-1950), a philologist and professor at Harvard University. He discovered that the most popular word  in the English language (“the”) is used ten times more than the tenth most popular word, 100 times more than the 100th most popular word and 1,000 times more than the 1,000th most popular word.

It’s also been discovered that this same effect applies to market share for software, soft drinks,automobiles, candy bars, and the frequency of hits on pages found on a website. The chart above shows actual visits to the different pages at Sun’s website [editor’s note: in 1996] .In almost every field of endeavor, it’s clear that being #1 is a lot better than being #3 or #10.There isn’t an even distribution of rewards, especially in our networked world.On the Net, the stakes are even larger. The market capitalization of Priceline, eBay and Amazon approaches 95% of the total market capitalization of every other consumer ecommerce stock combined [editor’s note: still in 1996]. Clearly, there’s a lot to be gained by winning.

Booz Allen Global Innovation study shows rising R&D investments in 2011 … what about 2013?

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The global innovation report is a yearly report showing R&D spendings across different industries. For reference, I have included the 2009 results by industry and the 2011 version below. The sectors which invest in R&D do not differ much from one year to another.

Although the report states that R&D investments doesn’t always mean that innovation is produced, or that this innovation is performing better than other products investments diluted across other budgets, there a precious few metrics that make it possible for us to measure how innovation is faring. So we’ll have to make do with this.

image_thumb[5]What the report shows as well is that rising investments mostly happe in America, whereas Europe was already deep in recession at that time. I can’t wait to see what the 2013 report will show.

At last, the report shows a strong correllation between sales and R&D investments. One could read this either of two ways: when sales are good, R&D investments grow, or … when R&D investments grow sales are better.

An interesting question would also be to wonder what is actually meant by R&D spending and whether all product development efforts are measured under that umbrella. I have seen a lot of companies in which R&D is kept as a separate effort and doesn’t represent the main area for product design and development ; this is significant in a world in which innovation is driven by vendors’ offerings, mostly in the Computing & Electronics world, the first sector for innovation in that study.s

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R&D Spending Returns to Pre-Recession Levels, Finds Booz & Company Global Innovation 1000 Study | Innovation Management

key findings from this year’s Global Innovation 1000 study:

  • The three industries with the greatest R&D investment were computing and electronics, health, and automotive (28 percent, 21 percent, and 16 percent of the total Global Innovation 1000 spend, respectively).
  • Two-thirds of the $53 billion increase in R&D spending between 2010 and 2011 came from the computing and electronics, automotive, and industrials sectors.
  • 75 percent of companies increased their R&D spending from the previous year in 2011, up from 68 percent in 2010.
  • This year Amazon joined the top 10 “Most Innovative” companies pushing out Facebook. For the third straight year Samsung rose in rank on the list (to fourth place, up from seventh place last year), and Apple, Google, and 3M took the top three positions, respectively, also for the third consecutive year.
  • Regionally, companies based in North America grew their R&D spending by 9.7 percent—just above the global average of 9.6 percent—while Europe and Japan grew theirs at below-average rates of 5.4 percent and 2.4 percent, respectively.
  • India- and China-based firms again increased R&D investment at the highest rate overall across regions (27 percent on average), although from a small R&D spending base.

via R&D Spending Returns to Pre-Recession Levels, Finds Booz & Company Global Innovation 1000 Study | Innovation Management.

The love-hate relationship of Governments with “cyberspace”

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A few weeks ago I started contributing to the innovation generation blogs, an initiative sponsored by Alcatel. Here is my first piece entitled: Governments Ease Into Cyberspace.

In October 2012 I took part in the Conference on Cyberspace, an event put together by the Hungarian government on behalf of the international community. The conference hall was packed with ministers, dignitaries, and ambassadors, as well as a few business people like myself. My pitch was about the importance of the digital economy, and I learned that approaches can differ greatly depending on countries.

The conference title is eye opening. I hadn’t heard the term “cyberspace” since the beginning of the 1990s. Today, 81 percent of the UK population is using the Internet; we all spend our days in cyberspace, so it doesn’t need to be called that anymore. My hunch is that governments still perceive the digital economy as something on the side that they need to embrace — maybe reluctantly. I also know of too many businesses that still see the Internet in that manner. They are the ones that won’t be there in a few years.

[the digital economy and the public sector are, sometimes, worlds apart]

Developing markets are where things will happen and are already happening. Tunisia, Morocco, Egypt, India, and even Albania are among those showing the most progress. The effort Albania is putting into digitizing schools and government institutions and procedures is amazing. The country went from nothing in 2005 to a situation where “all possible government services are pushed online” in the words of Genc Pollo, its innovation and ICT minister.

Similarly, India’s conference representative showed determination and poise. In India, information technology and the Internet are clearly seen as big opportunities, not just for business, but also for national development. Yet I couldn’t get the same feeling of passion from the more developed countries’ presentations. Western economies have a lot to worry about at a time when industrialization is faltering and the digital economy already weighs so much.

My peers on the panel about the digital economy and growth agreed with me that there is a serious disconnect between politicians and business people. This is not a matter of scorn or disregard. What it means is that we are not on the same wavelength. Most policy makers wish to foster growth and seduce innovators and entrepreneurs. Unfortunately, the language they use is often incomprehensible to the business community.

Living and breathing open data
Governments speak of open data as a goal, but we have lived and breathed open data for years (more than a decade, in fact, for many of us on that panel). Sharing information has always been a staple of Internet marketing. Our Websites must contain what Vincent Flanders calls “addictive content.”

The European journal ePractice said in a 2011 report that governments are coming to grips with this, but too often the rubber doesn’t meet the road, due to “the closed culture within government, which is caused by a general fear of the disclosure of government failures.” Not only can citizens benefit from open data, but businesses can, too, by proposing services and applications based on such data.

Control and ownership is probably one of the most difficult issues for government authorities. All governments want to embrace the openness of the Web and its promise of a porous global economy. At the same time, an unfiltered democracy in which all expressions are allowed is a serious challenge. There was a precedent for that debate with the eG8 forum that took place in Paris in 2011.

It’s hard to tell whether the Conference on Cyberspace will change the way governments and their citizens use the Internet or if our efforts to promote the digital economy will prove successful. It also seems that the Web grew organically from day one. Then citizens, governments, and businessmen embraced it and broke a few laws en passant. Then regulations were put in place, and all moved to the next thing. This chaotic yet pragmatic way of enforcing innovation has proven very efficient. I’m certain it will remain the case.

Chinese Internet: the global battle has begun (1/2)

In a previous series, Alban Fournier, a young French professional who fell in love with Asia warned us that China was the next worldwide International giant in the making. In this piece, he is expatiating on this previous report and delving into the details of what makes Chinese Internet players stand out from the crowd.

[this report is published in instalments, type http://bit.ly/albanchina2 to put all the pieces back together]

alban qq inter 2010

Fournier: the man who prefers QQ ID: 1557637787 to his Twitter handle

What is currently planned at Alibaba, Tencent, Sina, and Baidu is worth further investigation, hence this sequel to my initial piece on Chinese Internet. My duty is to continue the story published last year and called “Chinese Internet industry ready to grow beyond borders”.

People were quite sceptical in 2008 when I announced that China, as a country, was good at disruptive innovation following a trip in Beijing. At that time, I placed my bets on a Chinese Internet becoming almost the only alternative to its American predecessor. Who would have imagined that change would accelerate so much at the very beginning of 2012?

China: already an Internet giant

China has the world’s largest Internet traffic thanks to its population, the world’s biggest with more than 1.3 billion people. With the strong increase of its Gross Domestic Product, extraordinary engineering talent, plenty of venture capital, Chinese entrepreneurs and large firms now have the necessary resources to compete worldwide.

Baidu Yi

[Baidu : screen capture by Alban Fournier]

From a social behaviour point of view, there is a fundamental difference between American and Chinese people: in the U.S.A. (and in Europe too) a majority of online users are “spectators” while a majority of users in China are “creators”[1]. China is therefore much more active market and its users generate a lot of UGC (user generated content) every day. This discrepancy is one of the reasons behind the success of QQ games, a Tencent service dedicated to free online gaming.

Now that Chinese Internet players are giants at home, aren’t we just about to see them thrive beyond borders?

Strategic investments before 2012

In 2011, Tencent formed several strategic partnerships in China: among them, Kingsoft Corporation Limited, an Internet security software editor and eLong, Inc, a leading online travel service provider in China. Outside China, in addition of being active in the U.S.A., Russia, India, Vietnam, Thailand, Tencent acquired a majority stake in Riot Games, a Los Angeles-based developer and publisher of online video games. [2] In 2010, Tencent invested $300m in Digital Sky Technologies (DST) of Russia, bringing two internet powerhouses of the emerging markets together in a long-term strategic partnership.

Alibaba prepared the future of Alipay reaching an agreement with Yahoo!, and SoftBank. Alipay is a leader in China in providing payment processing services. Alibaba also developed operations in the U.S.A. and formed a partnership with Turkey’s Logo Group to reach Turkish companies.

Among others, Renren and Dangdang are listed on the New York Stock Exchange. We can expect more US IPOs by Chinese companies. There are at least 10 Chinese Internet companies which have made confidential filings through the Security Exchange Commission. Those Chinese tech companies aiming at an IPO are also growing their business through innovation.

to be continued …


[1] http://blogs.forrester.com/gina_sverdlov/12-01-04-global_social_technographics_update_2011_us_and_eu_mature_emerging_markets_show_lots_of_activity

[2] http://usa.chinadaily.com.cn/epaper/2011-03/01/content_12095412.htm

Red tape is good for business!

Today’s selection is…

An article published in the “briefing” section of Time magazine dated November 14, 2011 (“The Deregulation Myth: Ignore the rhetoric, nations with more rules grow faster).

Time Regulation diagram

In this article, Time magazine have produced their own info-graphic from data taken from the World Bank, OECD and the IMF.

Their diagram (thumbnail picture on the lefthand side, buy a reprint for details) shows that it’s easier to do business in many countries in which it is customary to say that it’s not easy to do business.

Beyond the obvious first two contenders (US and UK) we find countries not always hailed for their lack of regulations like Saudi Arabia, Australia, Germany, Japan… And France!

Despite what whingers are saying, it is therefore easier to do business according in those countries. The criteria set by Time magazine used to determine this index are a mix of  tax code, loan availability, and numbers such as “the number of days to build a warehouse”; this index is set against the growth of GDP.

From this diagram we can conclude two main things:

  • Firstly that we have to debunk the myth about deregulation is making it easier for people to do business. There are other criteria in fact. If it takes “311 days to build a warehouse” as in does in China for instance, deregulation might not be very helpful to you. There are other factors such as corruption ,
  • Secondly, it shows that the the ease of doing business is in fact, even if this is counter-intuitive, not really conducive to important increases in GDP. Another way of looking at it would be to say that the countries in which growth is slowing down need to make it easier for people to do business, but those which are doing well don’t.

As a conclusion, entrepreneurs may be reassured that going through the red tape may in fact be probably good for their own business.