july
your musings, thoughts & dreams; welcome here
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Okay, a head start is a head start, but when does a head start actually matter at the head start?
Michael Porter gets into this a lot, and while he's an academic, I guess ultimately my general feeling is that it depends on first movers where they enter the market and the technology that they're using. I think about the rate at which new customers will adopt new standards - essentially, how fast the market and the customers that are in it are willing to make purchases.
They have to arrive at some sort of conclusion internally or externally through their peers or through advertising that they have to switch or they have to buy this new thing or they have to try this new thing because the benefits of doing so are self-evident. So there's market adoption - a certain sort of rate of speed at which the market adopts the thing itself. For example, there are hundreds and thousands of stories of Oracle and SAP and ERPs and everyone hating their products, but the switching cost to doing so is so high that everyone will continue to use it. Salesforce is awful as a product, as everyone says, but there is a complete and utter unwillingness to switch off of it once you're on it. Because of the switching costs, market adoption is a real thing.
Then I think separately there is technological adoption. The technology essentially promises or provides some sort of value proposition and some capacity that it can do this thing that wasn't possible before but now it can because x, y, and z. But technological adoption means using tools today. How fast can incumbents essentially develop that technology as fast as possible to essentially enter the market? Obviously this will range from ChatGPT wrappers to SpaceX if you're building a reusable rocket; it's harder, but definitely not impossible, as evidenced by many Chinese space agencies starting to enter the reusable rocket space once that it's proven that it's possible to do so and there is a demand.
So when you think about first mover market advantage, it comes under this 2x2 of how fast/slow the market adoption is and how fast/slow the technological adoption can be for incumbents to compete in the space. If that's the case, first mover market advantage makes sense in certain kinds of situations where technological adoption is much more costly. Essentially, competing in the market is costlier than essentially using their service. For many firms, first mover market advantage doesn't work as well if technological adoption is easy because then if it's easily copyable or implementable, your moat is relatively small. Market adoption matters too because if you have a larger sales cycle, it's obviously going to take significantly longer to sell defense contracts or large government contracts vs. getting someone through distribution of an Apple app store to buy your iPhone app.
Also, the rate at which technology can be adopted is subject to other technologies. So there is an inherent non-linearity and dynamicism to this as well that one has to be aware of. And market adoption is obviously very nebulous. But I do think targeting vs. B2B vs. consumer, there's a very clear difference in how market adoption works.
More often than not, I think about companies that have also historically succeeded with first-mover market advantage. And if anything, it's usually because once again, the technology was really hard to develop and the market was very slow to adopt it. So if you run out of money before the market can adopt it, that's kind of a problem even if you own the technology or if the technology is copyable easily, then you also lose your first-mover market advantage and the market will settle towards the best product, not the first product. But obviously there are significant nuances to this overall. There's an element of capital efficiency vs. time horizon that one has to be aware of when entering a market to begin with, or else you're dead in the water.
Also, copyability itself is layered:
- Copying data sets (which are difficult to do if you have network effects)
- Copying if you have certain IP around how to make chips
- Distribution - once again, network effects are difficult to overcome (something like x/Twitter)
- Brand and credibility (such as Apple will not be privacy-seeking because inherently their business models are not around advertising)
- Google or Facebook/Meta they're not going to listen in on everything that you're doing and saying
In other words, I think first-mover market advantage doesn't matter as much in the longer run, partially because the timing has to be significantly more correct. I mean, you could be building an iPhone in the 13th century, and it could be the most advanced thing in the world, but no one would know what to do with it, no one would know what to build with it, there'd be no way to use it. So that is a very bad first mover and there's no advantage.
There's also an entire category of products that are not particularly reliant on the product itself but rely on a standard winning. Betamax vs. VHS comes into mind. Different standards will often champion different ideas, and standards don't always win out that are the best; it's sometimes what proliferates the most, what's easiest to access, what makes the most sense for the end customer is what ends up getting adopted by the market.
And I think a lot of this market timing comes from a loose feel around suppliers and downstream customers who are looking at your product. If suppliers are changing their tactics or if there is some essentially paradigm shift happening upstream, for example GPUs becoming significantly better at doing computation for certain things in the long run, you are then able to offer something that wasn't possible before at a cost that wasn't possible before. To identify it and to enter that market becomes a no-brainer.
Also, there's cracks between a lot of these large companies, classic innovators' dilemma, where for many large firms, it's not always the most important to enter smaller markets because they will essentially yield less because the market is too small. But over time they know that they're going to keep an eye on it because they think it's going to be big. And I think that's why you often get new companies that emerge whenever paradigm shifts happen and the rate of technology itself shifts and market adoption adapts.
I think generally first mover market advantage is pretty much zero in my opinion, or maybe it's sort of null in the sense that it's not the best metric. I think how I think about it is market winning path advantage - can you capture the market and win the market? What does that look like over a period of time? I think that's what ultimately significantly matters more because first mover market advantage only signals the beginning of the battle, but it doesn't tell you whether you won the war or not. Or if you even have the math, potential math, to be able to win it. 4 replies
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