The First-Mover Disadvantage
Startup timing: why first movers shape the market, but fast followers change the game.
It's a common belief in technology that the first innovator inherently possesses a strategic advantage - a concept known as the ‘first mover advantage.’ It allows a company to establish strong brand recognition and customer loyalty before competitors enter the arena. However, being first isn't always synonymous with success.
First-Mover Failures
Remember Palm? Founded in 1992 by Jeff Hawkins and backed by notable firm Kleiner Perkins, the company produced the first PDA (Personal Digital Assistant). The PDA operated as the first smartphone and ushered in the wave of mobile computing innovation. Palm seemed destined to dominate the early 2000s, further diversifying its revenue streams by licensing its operating system, Palm OS, to other device manufacturers.
Despite its initial success, managerial mistakes and rapid innovation from competitors led to the company’s demise. Palm’s reliance on productivity over entertainment opened the door for Apple and Android to take market share - they offered better features, sleeker designs, and enhanced user experiences. Despite Palm’s best efforts to catch up, it was too slow to respond to changes in technology and consumer preferences. Hewlett-Packard bought the device maker in 2010 for $5.70/share, a far cry from its peak of $140.
Another example is Magic Leap, a tech company that’s raised over $3 billion in capital from the likes of Alibaba, Kleiner Perkins, and the Saudi Public Investment Fund, promising to redefine our lives with its groundbreaking mixed reality headset. Yet, when the product eventually launched, it didn't meet the grand expectations it had created. The technology was indeed impressive, but it wasn't transformative. Time will tell if Magic Leap failed due to poor execution or a lack of market appetite.
The Cycle of Innovation
This phenomenon isn't unique to Palm, Magic Leap, or the tech industry - the first mover fallacy is a recurring theme across startups. Facebook surpassed MySpace; Google beat AltaVista; Spotify beat Napster. The list goes on.
First movers face uncharted territories, unknown risks, and high development costs in search of product/market fit. These pioneers do the heavy lifting, identify the challenges, and open up new opportunities for those who follow. They kick off what’s called the Cycle of Innovation.
Disruption
The disruptor is often the first mover, introducing a novel product or service that can change market dynamics. During this phase, the first mover can shape the industry's evolution and secure significant market share while doing so. The disruption creates a new value network, potentially displacing established firms, products, and partnerships.
The search engine is a great example. Launched in 1995, AltaVista was one of the first search engines to index a large portion of the web. Indexing refers to creating a database that provides relevant results in response to a user search. The company was revolutionary because it allowed users to conduct natural language searches with unlimited bandwidth. AltaVista was widely popular and received millions of daily hits, offering add-on services such as email and hosting to attract more users.
Social media was a disruptive innovation, forever changing how information is shared between networks and people. MySpace led the initial charge as one of the first platforms to offer social features on a large scale, with a level of personalization unique among networking sites.
It’s important to note that disruption isn’t limited to a new product or service - new processes that alter how industries operate can be developed. Companies like Warby Parker and Casper disrupted traditional supply chains by selling directly to consumers, cutting out the middlemen (retailers), and passing the savings on to customers. Further across retail, dropshipping has enabled small businesses to compete without significant upfront investments.
Within IT, cloud computing has dramatically changed the industry's supply chain. Companies no longer need to invest in expensive hardware and infrastructure but can rent computing resources from providers like AWS, Google Cloud, and Azure. By lowering the barrier to entry for startups, much of the innovation we have seen in tech can be attributed to cloud computing.
Awareness
As the name suggests, this phase is characterized by growing awareness and acceptance of innovation among customers, businesses, and stakeholders. This awareness increases competition as more players enter the market, including "fast followers, " seeking to capitalize on the first mover's innovation. They often adopt the technology or concept, making improvements or refinements in the process. This is often the first test of the first mover's ability to maintain its initial advantage.
The success of AltaVista led to a range of companies entering the fold, notably Yahoo and Google. In social media, Facebook ousted MySpace by offering a more uniform and secure experience. Twitter focused on microblogging, LinkedIn targeted professional networking, and Instagram emphasized photo sharing.
Netflix was not the first TV streaming service - that honor went to Hong Kong-based iTV in the 90s. But weak infrastructure and frequent licensing issues led to iTV’s demise, making it a lesson for other telecom companies. The same streaming market is now crowded, with Hulu, Disney+, and HBO vying for pieces of the consumer pie.
Correction
Market equilibrium soon follows - the novelty of the disruption fades, and the industry stabilizes around recognized players. User preferences and behaviors also mature, leading to the ‘new normal’. In the case of social media, these norms are platform features (e.g., likes, shares, comments) and use cases (e.g., business promotion, personal branding, social activism).
Before Tesla, electric cars were known for weak power and inconvenient charging infrastructure. General Motors experienced this when it mass-produced the first EV in 1996. Yet consumers have widely accepted Elon’s vision for a sleek, affordable vehicle, and Tesla’s charging network is now widely adopted by other manufacturers.
This phase also sees consolidation, where the most successful businesses secure market positions. Facebook bought Instagram and WhatsApp, two other popular social media platforms. Uber acquired Postmates to expand its delivery footprint. Google diversified into email, video sharing (YouTube), and mobile operating systems (Android).
These companies have adapted to disruption and learned from the market's evolution, corrected earlier mistakes, and improved their product/service offerings through buying or building. As these players shift from unprofitable growth to cash cows, usually over 15 years, they become under pressure from shareholders and regulators. Bloated by bureaucracy and inefficiencies, they may even be in the crosshairs of new disruption. And so the cycle continues.
The Winning Formula
Companies can move through the three phases differently, influenced by factors like the nature of the disruption, competitive response, and the company’s strategies and execution.
Take Apple, the most valuable company in the world, as an example. While Apple is undoubtedly an innovative and market-leading company, it often lets other companies introduce new product categories first. Consider the iPod, iPhone, and iPad. These weren't the first of their kind; instead, they were significantly improved iterations of existing products. Apple succeeded not by being the first but by using its design and marketing prowess to dominate the market, building a consumer-obsessed brand that resonates with day-to-day lives.
And the company is doing it again. Last month, Apple finally entered the AR/VR space, announcing the Vision Pro Headset, a mixed-reality device that sets a new hardware and software development standard. Apple certainly isn't the first to delve into the market, which the company calls ‘spatial computing’. Still, given its history of reinventing established tech categories, it's hard to bet against it.
Takeaways
The first-mover advantage, while attractive, is only part of the end-all-be-all. Shouldn’t we be talking about the 'fast follower advantage?' As the most valuable company in the world, Apple has perfected this motion. It was not the first to introduce the PC, the MP3 player, the smartphone, or the tablet. Yet, it’s the leader in these spaces because it focuses on perfecting the user experience and ensuring seamless integration with its other products.
There's a sweet spot between waiting to learn from the first mover's experience and entering the market first. As history has shown us, being the first mover isn't always the winning move - it’s much better to be the last and close the door on your way out.
Cheers for reading.
Super interesting read – love the concept of the ‘fast follower advantage’!