The collision of simultaneous TAMs
A second error appears when many businesses each calculate a TAM independently. The same household or institution can appear inside hundreds of theoretical markets. Yet all those markets draw on the same budget, time and attention.
Σ theoretical TAMᵢ can greatly exceed realizable aggregate expenditure
Imagine 100 services each claiming that 100 million households could reasonably pay $20 per month. Each service independently sees a $24 billion annual market. Summed mechanically, the markets imply $2.4 trillion of household expenditure. But the same household cannot be assumed to purchase every service simply because each service is individually affordable.
Substitution is broader than direct competition. A streaming service competes with another streaming service, but also with games, books, social activity and sleep. A professional camera competes with smartphones and with the decision not to produce professional imagery. A productivity tool competes with another tool and with a workflow that eliminates the need for the tool.
This is why the economic question must eventually return to a portfolio of human needs rather than a catalog of vendor-defined categories. Technologies frequently monetize gaps created by prior technological arrangements. When the gap closes, the product category can disappear even though the underlying human need remains.