First Mover ... Advantage? or Disadvantage?

Investment Analysis Clubs Saul’s Investing Discussions
#1

Amazon got into this position by starting out first, call it “first mover advantage” or “path dependence.” Catching up is difficult because Amazon has built the network effect where “the more you sell, the more you sell.” Google has this advantage in search, Microsoft has this advantage in Windows and Office, but that does not translate into advantage in Cloud. Amazon conquered a virgin field. Google, Microsoft, et al, have to compete with a well established provider.

I want to ensure we separate First Mover Advantage from the Network Effect. First Mover Advantage is highly overrated and very often misattributed.

Microsoft was not the first mover on a GUI-based OS, nor were they the first to market with an office productivity software suite. Apple did not invent the MP3 player, the touchscreen phone or the smartphone. Google was most certainly NOT the first mover on internet search. Amazon was neither the first online retailer nor the first cloud storage provider. But they did “it” better … and often with the Network Effect.

These companies actually enjoyed a Second Mover Advantage. The second movers don’t have to create a technology, product or market from scratch. They can let the pioneers forage a trail into the wilderness, then come behind, learn from the pioneers’ mistakes, pave the trail and expand it further … because by that time the true pioneers have died from disease, arrows or some other malady featured in Oregon Trail.

That’s not to say first movers can’t be very successful and profitable; one can certainly list examples of those. But being the first mover provides no moat by itself; in fact, it can just as often be a First Mover Disadvantage.

The Network Effect, on the other hand, can be a HUGE moat. It often differentiates the first mover from the “first succeeder,” as JoeG described.

They call me,
MrTBS

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#2

The Network Effect, on the other hand, can be a HUGE moat.

Hi Mr TBS, Could you define what you mean by The Network Effect?

Thanks

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#3

Sure. The simplest definition (because I am a simple man) is when the value of a product is increased by the number of people using it. Examples include job/networking websites and dating websites.

A better, easily-found definition via Wikipedia (https://en.wikipedia.org/wiki/Network_effect)::slight_smile:

“Network effect is the effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it. The classic example is the telephone. The more people who own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter and Facebook becoming more attractive as more users join.”

So with that better definition in mind, let’s revisit the companies I (and others) have listed for specific examples:

Microsoft: The Office suite of products achieved a virtual standardization of format for documents, spreadsheets and presentations for businesses of all sizes.

Apple: They employed a more indirect network effect most effectively in the iTunes Store and the App Store. The more users of iPods, the more consumers of music in iTunes, the more artists and labels distribute their product in the store, which makes using the store more attractive/valuable to consumers. Same in the App Store.

Google: I’m a little more hard-pressed to make a network effect case for Google. They’ve done a lot of innovative things, and are creating the closest thing the internet has for a Single Sign On (one account for your email, your search, your document editor, your cloud drive, your YouTube account, even your Android phone); but that’s not the same as the network effect. Especially since they’ve designed so many of those applications to work seamlessly with competing products. Google’s effort to create a “traditional” social network (Google Plus) was a resounding flop. Can anyone else make a network effect case for Google’s dominance?

Amazon (retail): Similar to Apple’s iTunes and App Stores, Amazon’s Marketplace and user base have attracted more and more merchants, stocking/selling more and more products than any one company ever could alone. That makes Amazon more attractive to more consumers and (perhaps most critical to Bezos’s strategy) for more and more of their purchases. Which, in turn, makes the Marketplace more valuable to merchants.

Amazon (AWS): I have to rely on other posters’ expertise here, but I understand that it can be easier for businesses to integrate their systems and interact with other businesses’ cloud-based systems if they’re all on the AWS platform. So, if I’m a business owner, a larger “network” of businesses I want my systems to interact with are on AWS, that could make it more valuable to me. But I could be misunderstanding here.

They call me,
MrTBS

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#4

Google: I’m a little more hard-pressed to make a network effect case for Google.

I’ll take that one since I used to do SEO! Once Google had a large portion of the market it didn’t make sense to optimize for other search engines and since Google was producing the best results it didn’t make sense to use another search engine. What a moat!

Denny’s SEO Anthology

http://softwaretimes.com/files/dennys+seo+anthology.html

Denny Schlesinger

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#5

Thanks, Mr TBS. Now I understand what you meant.
Saul

#6

HI MrTBS,
I’ll take a shot at Google’s advantage as well. I am interested because I have read a bit about search engines in the past and they are fascinating (at least to me). The truth is that the search engine is really a prime example of the network effect.

In very simple terms (because that is all I know), Search engines work, not because they have a better true understanding of what you are looking for when you key in a search request, but instead because they have “learned” that when a person types in a request for “a”, they are looking for the website of “b”. The search engine learns this almost by trial and error, and the more search requests over time that allows the engine to learn, the better it becomes. How does it learn? Very simply, if it gives a list of options, from your search request, it assumes that the one you click on was the best match and this knowledge goes into its algorithms. The next time (very simplified), this link will move to the top of the list.

Further, if the searcher, comes back and searches again, it learns that the first list missed the mark and it learns again…

So if you think about it, the fact that millions and millions of searches have been done and the learnings are buried in the algorithms they use today, the Google search engine is the very network advantage you mention. A new search engine can be created but it would be difficult to be as good as Google’s without the massive past search data that Google now owns. Almost the definition of a first mover advantage.

The very interesting part to me is that the search engine needs to know very little about anything to be good. It doesn’t have to understand facts as we understand them, it only needs to learn what has worked and what has not… And millions of searches later, it becomes crazy good and you type things like “libary hours”, and it figures out that even though you spelled it wrong, you want to know what your local public library branch hours are for today and maybe the rest of the week…

Amazing, and very difficult to duplicate because everyday they get another 50 million searches to learn to be better… I really can’t see how anyone ever catches them…

Randy
Long Google

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#7

Of course, Google wasn’t first, or even close to the first.

http://www.whoishostingthis.com/resources/history-search-eng…

Page Rank was the key for Google’s superior results at the time.

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#8

The very interesting part to me is that the search engine needs to know very little about anything to be good. It doesn’t have to understand facts as we understand them, it only needs to learn what has worked and what has not.

Thanks Big Cat, That was a fascinating discussion.
Saul

#9

Thanks Saul, and interesting article Smorgasbord.

You are, of course correct. The page rank usage was the innovation that got them to the top. The algorithm learning is what has kept them there. In fact, something I read recently said that when you do a search on Google today, you may get any one of a number of slightly modified algorithm search engines. They are then doing results analysis of the modified versions to see if they do a better job than the present “baseline” version. If it improves results by giving people the link they desire higher on the list and/or returning for a repeat search less often, the modified version becomes the new baseline…and new modified versions are tested against the new baseline.

This way the search engine is continually improved by virtue of the many searches being done. In other words, the more searches done, the better they get and the more difficult it will be for someone to catch them.

But I was off in one fact, I had said 50 million searches a day. The article actually said there are 3.5 billion searches a day on Google… That is a lot of learning…

Randy
Still long Google…

And Merry Christmas and/or Happy Holidays to all!!

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#10

A little nit to pick: The fact that Google has the best search engine is not, per se, the network effect. It creates the net work effect by making users prefer Google and by making SEO practitioners concentrate on Google. The network is the users! If someone today came up with a much better search engine than Google, it would have a hard if not impossible mission of displacing Google, not on account of the quality of the search results but on account of the “switching costs.” Switching costs in this case would be retraining the network to use something else and having browsers change their default search from Google the new thing.

Newbies make the mistake of thinking that in technology the best comes out on top. Not necessarily so. To displace an entrenched technology you need a “disruptive” technology and being better is not disruptive enough. Read The Innovator’s Dilemma by Clayton Christensen.

A second nit: When Google showed upon the web (not the same thing as the Internet) web search was mostly directories. I discuss the difference between search engines and directories in one of my SEO essays. For all practical purposes Google was the first real search engine on the WWW.

Denny Schlesinger

The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail January 5, 2016 by Clayton M. Christensen

https://www.amazon.com/Innovator-s-Dilemma-Technologies-Mana…

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