Umair Haque / Bubblegeneration

Thursday, December 08, 2005

Do Not Underestimate the Power of First Mover Advantage

I know that talking about FMA is somewhat verboten, since it's very 1999.

Consider this quote about Yahoo Answers:

"...This may not be terribly creative, as some critics have noted, but that isn�t really the point. The point is to win market share, and the �first mover� doesn�t always have an advantage (Exhibit A: TiVo). As lawyer and tech blogger Rob Hyndman observed recently, getting displaced in such a way is even easier in a world where technology changes rapidly, is either cheap or even free, and users are constantly looking for the next greatest thing. Is that good or bad? That�s difficult to say. But it does seem to be the new reality."

Unfortunately, the numbers tell us that there is a very real early mover advantage in network markets.

I have demonstrated the exponential relationship between market share and time of entry/time to scale quite a few times (RSS readers, microplatforms, and I will do the same for reconstructors soon), and it should be fairly intuitive, because network scale creates, in effect, a nice entry barrier in terms of cost advantage.

First, let's define it: advantage that flows from entering and reaching some minimum level of scale early. This implies two things that people often fail to consider: first, reaching scale is important, second, like other advantages, FMA decays. It's not forever - what it does buy you is a period of supernormal returns.

TiVo isn't really a relevant example, because it's not really networked; rather, it's simply a component in a system of complements.

If you're playing in Web or Media 2.0 markets, do not underestimate the power of moving early. I think you should consider it carefully; it's a key point of leverage.

Intuitively, you can think about AdSense, MySpace, Wikipedia, Bloglines - the examples are almost endless.

-- umair // 9:34 PM // 4 comments

Comments:

I think you're right about network effects having a tremendous amount to do with who succeeds and who doesn't, Umair -- but I'm not sure that makes first-mover advantage as unbeatable as all that. Before MySpace there was Friendster, before Flickr there was Webshots, and so on. Why didn't network effects help them? I think the question is a little more complicated than just who is first.

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Mathew Ingram // 5:46 PM

There are plenty of examples to support the benefits of being the First Mover and also of being the Fast Follower. So which is ultimately better? Well the answer of course is: it depends.

- But on what does it depend and how much?

- What factors can we look to in order to help guide the strategic decisions around being the First Mover or Fast Follower?

- How should the question be answered differently from a single product perspective, or from a company-wide perspective?

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niblettes // 6:34 PM

Here's a thought...

As change accelerates will it ever reach a point where First Mover advantage decays so quickly that the Fast Follower is actually a The First Mover in a new situation?

In this case, if its even possible, what's the rush? You'll alway be the First Mover.

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niblettes // 6:37 PM

FMA is massive. I'm constantly annoyed at people pooh poohing the concept. Look at eBay, Yahoo, Amazon, Google AdWords (which are different from Overture; which is still huge, btw), PayPal, etc.

When people start doing the comparisons, they invariably provide bad examples. MySpace is 1) not that similar to Friendster and 2) didn't make a lousy business decision to re-write its sysmte from scratch.

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pat // 8:52 PM