The Fallacy of the First-Mover Advantage

In a recent article in strategy + business entitled “the Value of Being Second,” Oded Shenkar, author of “Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge,” introduces an excerpt on the wisdom of entering markets after first movers from “The Art of Being Unreasonable: Lessons in Unconventional Thinking,” by Eli Broad.

The myth of a first-move advantage is something I’ve been thinking a lot about lately.  The tech industry is especially ripe with examples of innovation which was more successfully brought to market by second (or even third) entrants. In the excerpt quoted, Eli makes mention of how Netscape introduced the first Internet browser in 1994, but that it was Microsoft who ultimately capitalized on the innovation.  A few examples I think of: TIVO introduced the first plug-and-play DVRs system, but it was ultimately the telcos and cable operators whom successful brought these to market.  Apple didn’t invent (or even introduce) the first MP3 player, but it was the iPod that made the category.

I think there several reasons why the first movers don’t always have the advantage – especially in the tech sector. As Shenkar points out, imitators, “get a free ride, avoid dead ends, capitalize on the shortcomings of early offerings or tweak the originals to better fit shifting consumer tastes.” I think there are additional reasons why innovators lose out to second movers.

First, second movers are often incumbents.  So while they might have initially missed that their clients wanted a given innovation they don’t miss it for long.  Because of the existing (and at times extensive) relationship they have with their clients they are able to more readily deploy a new offering and capture the benefits of  a new innovation.  I think that has certainly been the case with DVRs.  Cable operators recognized the opportunity and seized it.  They deployed the technology successfully by including it as an option within their existing markets in a way that was consistent and familiar with what their clients knew. Innovators are often small relative to their incumbent counterparts. They don’t have the reach of incumbents and so incumbents are able to more quickly deploy a new technology or offering.

Secondly, second movers often bundle a new innovation with existing technology or offerings and in so doing offer the end-user a more seamless experience.  Sticking with the DVR example, cable operators were able to integrate the DVRs with the set-top box and IPGs familiar to their consumers.  They were able to offer the innovation without adding another piece (ie a set-top box) that needed to be integrated into the customer experience.  In other words, one of the key value-adds of second movers is that they take on (and hence remove) the burden of integration.

Third, when innovators bring forth a truly revolutionary idea they are often confronting existing thinking head-on.  This confrontation is often responded to by legal action. Because first movers are often smaller and have less capital, these legal responses can be extremely burdensome.  First movers might not have the expertise, bandwidth, corporate depth, or financial resources to successfully mitigate these legal responses.

There are first-movers out there still holding onto a lead within their respective markets. NetFlix helped define the OTT market and still has an influential position. Netflix ended the third quarter with 25.1 million U.S. streaming subscribers – roughly one-in-five U.S. households. Twitter is still dominate within their corner of social broadcasting.  Square created a solution to enable individual users and organizations in accepting physical credit cards payments. Time will tell if these and other first-movers can overcome the hurdles that lie before those how first define new markets.