As one of the two founders from Kiko, I can say that we had ideas for how to sustain the company and try different routes, but instead decided to shutter and move on to something else (which turned out to be Justin.tv). I think that scenario is actually a perfect example of what PG is talking about: a startup that possibly could have made it by iterating, but instead gave up b/c the founders decided to move on. Competition may have caused the depression, but the founders themselves loaded the shotgun and pulled the trigger.
Startups do die from competition. Kiko is one example straight out of PG's book.