You go to a flower market - there are tens of different vendors selling similar quality, similar product at the same price and at the same closed space. And they are doing fine.
Or look at a traditional marketplace - you have tens of farmers selling very similar product. And yet they are coming together to sell their fruits and vegetables. True, maybe there are different dynamics there, there are more buyers than vegetable stands and if the line is longer than 5 people you move to another stand.
But I believe the same works with software and Internet Businesses. It does not harm anyone if there are different tools doing similar things. Look at digital cameras - there are hundreds of them and there is a market for each.
A great example is Coca Cola and Pepsi. Pepsi was created because it was understood that with the market saturated with one product there would obviously be people who would buy Pepsi just because it's not Coca Cola.
Competition is a very sound and healthy environment to work at because you can perfect your product and narrow down your target audience. As @petercooper said: because you see that there already is a business that thrives, you save yourself a lot of trouble testing if anybody wants to buy such a product.
Now marketing is the key.