February 15th, 2010

Is First-Mover Advantage a Myth? (With Graphs!)

First-mover advantage (FMA, not to be confused with FML) is one of those things they teach you in business school as *doctrine*. Be first, or don’t bother. This leads to much malaise when, upon coming up with, say, a brilliant idea for a mobile coupon business, hopes and dreams are shattered when it becomes known that hordes of other entrepreneurs are working on the same idea.

I have been thinking about how FMA applies to web startups, and after some thought, I now believe first-mover advantage is a myth in the web world.

If the premise of FMA relies on the fact that a first-mover will gain resources and advantages that  later entrants will not be able to match, then these advantages have to be compelling enough to warrant fighting to be first. And I’m not sure they are any more.

Argument below. Thoughts/criticism welcome.  Put this together pretty quickly (and highly unscientifically) so I’m sure there are lots of holes.

1.  Moore’s Law and speed.

Moore’s law is one of those “golden rules” in the tech world. Everybody looooves to cite it. Moore’s law is to tech nerds what Foucault is to philosophy junkies.

It’s because there’s a lot of brilliance in Moore’s law.  As I understand it – the real brilliance here was the observation that technology progresses much quicker than people would think possible (or more accurately, that the number of transistors on a chip doubles every 24 months).

If you think about how this plays out in the consumer world, it means that consumers will become socialized to adopting more advanced technology faster.  So the amount of time it takes for a market to develop, hit a peak, and become saturated (say, photo sharing) is shrinking.

How does this affect first-mover advantage?  Take a look at my lovely graph below. If a technology markets develop more quickly, this will seriously reduce the potential upside for a first-mover. The top graph is what we think is FMA, the bottom is what I believe it really looks like.

If this is true, the potential upside you can gain from FMA is shrinking.

2.  Underestimated importance of initial users (adoption) and marketing.

I know a lot of entrepreneurs who have the “if you build it they will come” mentality. No one will admit to this, obviously.  They talk to you all day about marketing and user acquisition, but it seems like very very few web startups actually do this well.

I know I’m not alone here – Dave McClure wrote an excellent rant on this about a month ago.

Initial users are the ones that will evangelize your service and make it zeitgeisty and remarkable. I saw this great video last night on the importance of “first followers” and how they help to create mass movements.

Sharp marketing and committed users have nothing to do with FMA and seemingly everything to do with popularity and adoption.

3.  Zero barriers to entry, commodification of apps, low switching costs.

Have you noticed all of those “hey look at what I built in a weekend” links on Hacker News? The ease-of-use afforded by these new slick web frameworks like Rails and Django make it pretty easy and quick to build a site and enter a market.

Web sites and mobile apps are undergoing a process of commodification as they become easier and easier to make, and the move toward cloud-based apps makes the switching costs for the user nearly zero. It’s no longer enough to have a single hit with a single great app.

All of these trends are really cutting into the upside of being first.

4.  “Early is the same as wrong”. This is something I heard a lot in Silicon Valley. I don’t necessarily agree – if you are early but are smart enough about your cash to hold on until the market matures, then you’re not necessarily wrong. Seems like the emphasis on being first is flawed – it’s about timing.

The tough part is finding the trade-off. There’s this sweet spot between the first-mover land-grab and market readiness, but you have to hold on until the wave hits.  Everyone’s favorite example here is online video – there were plenty of video sites pre-YouTube but they were slow and mostly annoying. The strategic use of flash and rise in broadband internet in homes helped to make the market timing nearly perfect, though with the dominance window narrowing I think even trying to time the market is an exercise in futility.

Market Dominance in the Brave New Web World

So, if not from FMA, where does real market dominance come from?

I suppose in a way I’m making an argument for extreme iteration. But it’s more than that. I think the consumer web industry – similar to fashion and music – is incredibly driven by trends and timing.  If you can hit a curve at the point right before widespread adoption, and do this consistently, you will become more invaluable to your user.

See the graph below – the point here is that it’s no longer a single curve and a single market. Instead, the companies that will do the best, in my mind, are the ones that can take advantage of many markets consecutively.

The company that I believe does this best is Facebook. If they had stayed a profile -n- poke site, they’d surely be dead by now. Instead, each product launch happens right around the top end of a curve – photos, videos, Twitter-style-messages, and now talk of geo-enabled features and even “check-ins”.

While FMA as a concept is not dead to me completely – it can be incredibly helpful in many many other markets, to me in the app-driven world of the web (and increasingly mobile too) it just doesn’t seem all that important.

Conclusion: “someone’s already doing this” should be a crappy deterrent.

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  • http://www.HubSpot.com Dharmesh Shah

    Great article — and welcome to MIT Sloan (you'll have a great time)

    A few thoughts/points:

    1. I may be in the minority, but I don't think Moore's Law is really a law.

    2. You make some good points against the concept of “First Mover Advantage”. I think the real advantage these days is more of a “First Learner Advantage”. Successful web companies these days are those that can get something out there early, and iterate quickly. She who can learn the lessons first (not just move into the market first), tends to win.

  • Name

    Your analysis of Moore's Law seems somewhat off. Because the power of computers were doubling every 18 months (not 24) the FMA would target features that would be accessable when they hit market. So there was still a FMA for people who did their homework. Furthermore it had nothing to do with getting accepted by the public. You still have to develop a user base and this doesn't matter how fast your computer runs.

    Additionally people regularly say that Moore's Law is dead, as it it may have been true for those golden decades from the 1960's to about 2000 but it is not true now.

  • http://amandapeyton.com amanda peyton

    Thanks for the comment, Dharmesh.

    That is definitely a fresh perspective – I was just taught Moore's law in a class last Friday (they teach Moore's law and Metcalfe's law as the two almost biblical rules of the software business).

    Agree about iteration too. Falls in line with a lot of the “lean startup” principles that I've seen hyped quite a bit recently.

  • http://amandapeyton.com amanda peyton

    The point is not so much that speed of hardware is directly related to adoption, it was more that one side effect of the law is that people get used to adopting better technology faster.

    Yep – but they are still teaching Moore's law as if it's true. I've seen both sides argued well and am not sure I buy that it's dead completely as it will still have effects on the perception and adoption of technology long after the actual numerical law ceases to be true.

  • coder8

    Moore's law is still in effect… who is saying it is not? the difference is instead of clock speed we are doubling by using more cores… Take a look at the latest video cards

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  • AC

    I can't believe they are still teaching you this theory… specially if you are at MIT!!! The assumptions for FMA have been debunked as far back as 1996 by a series of debates at the The Academy of Management Review… http://www.jstor.org/stable/258991?cookieSet=1

    There are many technology books mentioning cases such as the Netscape (FMA and innovator) vs Microsoft (not innovative but managed to profit w/ Explorer) etc.

    You might want to review this teacher credentials, is he (she) tenured or just an adjunct?

    Best of luck,

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  • http://management.curiouscatblog.net/ John Hunter

    I agree that FMA is practically useless. I tried to convince my brother of this while he was at business school, but failed. So many companies fail to execute well. Think sensibly and execute well and you have a good chance.

    There are some businesses where it is difficult to dislodge an incumbent. People act like this is about them being first movers. It doesn't seem to me it often is.

  • http://moversdirectory.com/ moversdirectory

    it is more on things where  advantages is all at yours as you try  to make it and have it for sure move.