The Consolidation Curve, how businesses move towards Oligopoly

Updated: Oct 24, 2020

Baruch Spinoza had said, “Big fish eat little fish with as much right as they have the power.”

Now isn’t this true?

Another analogy that applies in this case - in the beginning, there was the big bang. A lot many star systems collided in and out of existence. Then came stability and consolidation. Finally, equilibrium.

So what am I talking about?

Business, of course. Any business for that matter.

Have you ever noticed that in any business segment that ever opens up to the private sector, in the initial stage - there are a lot of players in the market with different offerings?

Then, there is a brutal fight of acquisition, consolidation, and knocking off the weaker opponents.

By the end of the bout, there are only 2-3 giants left. Be it telecom, retail, eCommerce – every business moves towards an oligopoly. That’s the harsh reality of the free market consumerism.

By the time, any sector reaches the stage of maturity – it is difficult for any new player to make an entry as the established giants would have built well-entrenched moats to protect their shares.

In the fight of David v/s Goliath, the Goliath wins. We, the consumers, let ourselves be dictated by the whims and fancies of the giants.

Let us look at the ‘Search engine’ sector. It is a Google-opoly out there. Google owns a consolidated market share of 90% of all internet searches, and it has held this share for more than a decade now. Bing, Yahoo, Baidu & Yandex RU has a marginal share when compared to the tech giant.

If we look at the telecom sector in India, it has undergone a drastic change over the years. In the era of fixed-line, there was only BSNL – a government entity that was mostly impervious to customer demand, and for which the motto ‘Customer is the King’ never existed.

Then the government threw open the telecom market to the private players in 1997, and mobile telephony emerged. GSM & CDMA, 2G & 3G – we had Anil Ambani’s Reliance Infocomm, Tata Docomo, Airtel, Idea, Vodafone (erstwhile Hutch), Videocon, MTS, Virgin Mobile, Loop Mobile, and lot more.

One by one, the players started getting knocked out. And when Reliance Jio made an entry, it upended the entire sector.

Just look at the below table from Wikipedia and observe a 2-minute silence for all the telecom players that no longer operate individually in the Indian market:

Image 1: List of Indian Telecom Companies

Now there are only 4 players in the market: Jio, Airtel, Vi & BSNL with Jio leading the game with the highest number of subscribers.

This scenario isn’t unique to the telecom sector in India. Any industry will go through this curve, a curve which is very creatively called ‘The Consolidation Curve’. It has one funda at its core: every new industry or sector is fragmented which consolidates as the industry matures.

Based on an HBR study on ‘The Consolidation Curve’ by Graeme K. Deans, Fritz Kroeger, and Stefan Zeisel – this is what the curve looks like:

Image 2: The Consolidation Curve

Any industry will go through these four stages: opening, scale, focus, and balance & alliance.

1) Opening:

Imagine any new carved out business sector or a newly deregulated industry. It starts with one private player, and quite suddenly there are many. During this time, the top 3 players have a combined market share of 10-30%. The only way to defend your position is by scaling fast and trying to develop a moat around your proprietary technology and idea so that it can become an entry barrier for others. The focus here should be on generating revenue, rather than profits.

2) Scale:

This is the stage where the feeding frenzy begins. When an industry reaches this stage, the dominant players would emerge and try to buy off their competitors. The top 3 players would be having a combined market share of 15-45%. This is where one needs to improve their merger-integration skill to avoid trying to fit a square peg in the round hole. Companies must learn how to protect their core as they absorb new companies and nurture the best talent of the acquired entity.

3) Focus:

At this stage, companies strive to expand their core business and continue trying to aggressively outperform their competitors. The top 3 players would have a combined market share of 35-70% at this stage. Companies at this stage need to focus on improving gross margins and hive off the underperforming assets.

4) Balance & Alliance:

Congratulations, you have arrived. Companies that have reached this stage should learn to cool off and not get into costly, bruising battles with evenly matched competitors. The top 3 would have a combined market share of 70-90%. Wisdom is to realize that you can’t move beyond this stage, as the industry is almost matured. At this stage, organizations need to diversify and invest in new segments that are into the early stages of consolidation.

Image 3: Consolidation of Car Industry

There would of course be outliers to upend the norms, but you have to know the rules to change the game. Those companies that survive through these circuitous and treacherous paths of consolidation are built to last.