First-to-market is very overrated. Microsoft is never first-to-market on anything. However they achieve market dominance over time. As the saying goes "Pioneers end up with arrows on their back"! There are tons of examples of this.

Intuit is an amazing success story. Scott Cook founded Intuit after being a product manager at P&G. It is a great company to study, especially for product managers. I liked the book very much too.

Josh,

Good point. Scott Cook was a product manager at P&G before he came to the valley and founded Intuit. He is a big believer that Product Management should take a lead role in driving software companies, as well as in being very customer focused. I have attended a couple of his speeches - he has infectious energy!

'First mover' is definately one of the biggest myths in the tech space. Very surprising since most of the first movers really flame out.

I don't think Mosaic was the first browser, WWW/Nexus by Tim Berners-Lee was the first browser.

In fact, if you make the bar even lower, and just look at the *market leader* at a point in time vs. now, there's often no correlation. First big player in IBM PC compatible personal computers? IBM. Leader now? Dell. Big Kahuna in word processing then? Word Perfect. Now? Microsoft Word.

On the other hand: First microprocessor? Intel. Biggest microprocessor vendor now? Intel. Also note that the OS vendor selected for the original IBM PC is still the leader in the PC OS market. Sometimes being Johnny-on-the-spot *does* enable huge success.

So you have to ask, what's the difference? In some cases, the structure of the business or other constraints dictate that the first mover *does* have an incredible advantage, *if* they execute well. This is the case with Intel - x86 compatibility (including patents protecting it), combined with fantastic execution, kept them in the lead.

And the way to lose is to not execute well, either by not seeing where the market is going, or not being able to keep up with the market in your execution. This was the case for WordPerfect - they were well behind with a Windows version of their product, allowing MS Word to gain a foothold that MS then executed extremely well on. (Same story for Lotus - 1*2*3 became an also-ran very quickly when Lotus couldn't deliver a Windows version quickly.)

On the other hand, IBM left the PC space more or less on purpose. They saw it was turning into a commodity space, and selling commodity hardware didn't fit their business plan.

I agree with Nils. There are some areas where being the first-mover does have a huge advantage.

Take eBay for example. I'm not sure whether or not they were the first auction site, but they were definitely one of the first. Today they have a chokehold on that market, and by far the #1 position.

Competitors like Overstock, Yahoo, etc are so far behind in the auction space regardless of what they do - Yahoo even made their auctions free!

Hi Nils, Josh:

Excellent observations. Thanks for posting them.

My thoughts are as follows:

• Companies making products which can create strong network effects can indeed tap into legitimate 'first mover' advantages. Usually these products tend to be in:
  1. Marketplaces made up of buyers and sellers. Examples: eBay, Paypal
  2. Communication tools that can spread virally. Examples: AOL Instant Messenger, Skype
• In most of the other markets, I think if a competitor came in and out-executed the incumbent in ways that bring significant added value to customers - I believe the new entrant can overthrow the incumbent. Even just a few years back this played out with Siebel vs Salesforce.com - Siebel seemed to have an unassailable lead in CRM software and Salesforce beat them anyways. There are of course exceptions to this observation (monopolies being the most obvious!), but I think this is the norm in most high-tech markets.

What do you guys think?

Michael, That is a very interesting theory. Are there any other markets you can think of that lend themselves to network effects in addition to the two you have mentioned above? Why is the network effect limited to just these few markets?

Hi Josh,

There is one more market I can think of that lends itself well to network effects: Social Networks. Examples like LinkedIn, Friendster, Flickr, etc.

I'll write another blog entry to cover my thoughts on "Network effect" in more detail - thanks for the inspiration!

{Author's Note: Since this comment, a new article has been added to this blog to discuss "Network Effect"}

You are almost right. Nils is closest in discussing execution and compelling advantage (network effect) as both being critical in the early days. However, the notion of first mover is putting the emphasis on the wrong "first" attribute.

It is not the first mover that wins over time, but the first to own a relevant leadership position in the minds of the customer. If you do that, then execution and/or a compelling advantage can keep you there forever.

This is true not only in technology. Tide was the first to establish a leadership position for laundry detergent some 70 years ago. Despite commoditization of the category and a plethora of competitors knocking on the door, Tide still leads. Same for Coke. Same for Crest. The list goes on. The majority of the world's top brands have been on top for more than 50 years. Markets do like competitors (keeps the leaders honest, provides a consumer choice), so some times the second place product will approach a balanced share with the leader (e.g. Pepsi, although the Pepsi soft drink family is still in second place, although much hay was recently made about Pepsi, the company, recently passing the total sales of Coke, the company.)

You could reasonably ask why the IBM PC didn't hold its early lead in PC category sales, since they were the first to occupy the position of IBM PC - compatible, even owning the category name. The answer to this is relatively simple. The advantage that IBM introduced to the market was of a standardized architecture and OS platform. IBM thought they could maintain premium pricing because of their name, despite the primary category benefit being commoditization and therefore interchangeability. Dumb execution. Because anyone could build the architecture, and Microsoft owned the OS, PC dominance went the company that figured out how to build them the cheapest (actually Dell could be called a leader in supply chain management, rather that a leader in PCs. PC category leadership is an artifact of being able to sustain huge profitability by being the best in the world at managing suppliers, delivery, payment and working capital, just like Walmart puts pressure on its competitors by being the best at distribution, not at retailing.) But, Microsoft was given a huge advantage through control of the OS platform that enabled all the applications to run on that open hardware architecture, thereby establishing a network effect and executing very well (at least until they got distracted by antitrust dealings).

One of the key marketing things that creates and sustains early leadership is publicity (today called buzz). Old line companies think advertising is the way to build brand positioning, and still act this way to their own detriment. While a brand is establishing leadership, people look to opinion leaders, which is why word of mouth and stories in journals are much more useful and credible to buyers than any ad campaign. Once category leadership is established, and early buzz momentum subsides, advertising is much more important to maintaining the established market position (until some new disruptive innovation comes along). In as much as this is part of execution, choosing the appropriate marketing strategy at the appropriate time in the product and market lifecycle is also key.