Silicon Alley Insider Prognosticates About Google/Yahoo/AOL

There’s a dynamic in most industries called the Rule of Three: Most mature markets support three big “generalists” who together control about 70% of the market and a handful of focused “specialists” who each have less than 5% of the market. The generalists survive on economies of scale (volume), and the specialists survive by controlling a defensible niche. The companies that are screwed are the ones in the middle–a death-zone that academics charmingly refer to as “the ditch.”

Right now, Google, Yahoo, and AOL are clinging to their slots as the three big successful generalists and Microsoft–yes, Microsoft–is stuck in the ditch. Unless Microsoft buys AOL or Yahoo, it will likely never get out of the ditch (unless AOL simply disintegrates, which is a reasonable possibility). How do we know Microsoft is in the ditch? Because Google, Yahoo, and AOL are still printing money, while Microsoft is losing nearly $1 billion a year.

Playing the AOL (TWX), Microsoft, Yahoo Chess Game – Silicon Alley Insider