One reason this works is because the established players will be afraid to compete directly with you because that would mean undermining their existing business.
Fun exercise- think of a large company- one whose products you know. What new product / package would terrify them? Not just show up as a competitor, but really make them sit down and say "well, we're going to have to reinvent ourselves, because this [whatever] makes our product completely obsolete." For software companies in particular it's not impossible to come up with a product that you could start working on now...
I have never really considered it in terms of shrinking markets. I guess what it all boils down to is how much of an affect your growth has on the competitor. Seems like if you are a small startup initially you would want the market to grow so you go unnoticed and then eventually shrink as you get enough momentum behind you, right or wrong? Any one else got other interesting market resizing points?
Seth Godin suggests (paraphrased) - Look at an industry as it exists currently.. Think of the Sacred Cows- "This industry ALWAYS....", and then question what would happen if they weren't there.
What would happen if "Enc. Britannica didn't need door to door salesmen to deliver a product"?
Microsoft expanded quite a few markets before it shrunk the encyclopedia market.
Whenever you shrink a market by creating wealth, you'll grow other completely unrelated markets. The money left in consumers' pockets is unlikely to simply remain in their pockets indefinitely.
That was a good post. All of the recent big "winners" have not only shrunk markets but redefined their industries altogether.