There has been a lot of talk recently about the myth of a first-mover advantage on the Internet. Who's been doing this? Mainly venture capitalists and industry analysts. Take, for instance, the all star panel of VCs who debated the issue of whether it's best to be first or second to market at a Churchill Club meeting in Palo Alto this past March.
We could get sucked into this debate by first trotting out the first-mover advantage Poster children: Amazon (AMZN), Yahoo (YHOO) and Ebay (EBAY) – oh yes, throw in MCI Mail (MCI), CDNow (CDNW), and any other anecdotal evidence you like. Then we'd argue about who was truly first in their category and who wasn't.
But I find it ironic that many of the VCs and analysts who are now "mythified" are the same people who earlier described the Internet as a "Gold Rush" and "Land Grab". With start-ups hearing that heavily promoted vision and possessing a healthy entrepreneurial spirit, who wouldn't want to be a trailblazer?
In fact, look at many past and present Internet startups and you can see that trailblazing instinct at work. "Boo.com will revolutionize the way we shop. It is a completely new lifestyle proposition," said Kajsa Leander, Boo.com co-founder and chief marketing officer. Or consider a recent press release that boldly proclaimed "eDestiny.com Captures First Mover Advantage Using Partnership With A2Aecommerce.com".
What's the Answer?
So is there a first mover advantage or not? The fact is that we really don't know and probably won't know for several years whether a given Internet company will really have a first mover advantage. That's because the verification of whether the first mover will have that advantage can only be determined over a long period of time.
But we can learn something about this question from distant history.
Have you ever heard of the following names? Fitch's shampoo; Chux disposable diapers, Reychler laundry detergent, Star safety razors, or Bright Star batteries? No? These were all product and market trailblazers at one time, and they're all gone.
Careful historical studies reveal that a lot of market pioneers fail; 47% is the estimate. Only a few of the ones that don't fail - 11% is the estimate - maintain a market leader position several years later.
Sure, these insights are based on businesses and products that were born before the net. But as I argue below, the Internet has put a large emphasis on intellectual property and therefore the long term first mover advantages on the Internet are likely to be even more elusive than before.
Have you ever noticed that the underlying analogy typically applied to the Internet as a Land Grab is flawed? Land, for example, is a physical object that can't be appropriated by someone else without permission. The web, however, is far more an intellectual or knowledge context.
In short, land and gold are not copyable properties, but intellectual property is often extraordinarily copyable – or at least can be leaked.
Protection of first-mover advantages in a context based primarily on intellectual property, even with constant innovation, will likely require more than pure possession; it will often require the courts and patents. As examples, witness the recent court case against Bidder's Edge who was culling data (i.e., intellectual property) from Ebay's computer system, or Priceline's (PCLN) patent on the reverse auction method.
Constant innovation could be a means of keeping a first-mover advantage. But if the innovations are based primarily on copyable intellectual property, the result could be more a boon for lawyers than Internet first movers.
What's The Real Issue?
Rather than focusing on which company is first or second in a category, I think it's far more useful for Internet startups to focus their attention on the problems of trailblazers. And there are many.
Number one: First-movers typically have to educate the market about their trailblazing ideas – and this takes a lot of money. Customers don't easily or quickly understand revolutionary concepts. Aside from all the technical problems with the Apple (AAPL) Newton, for example, most people needed to be educated not about Apple's Newton but with the more difficult concept of a PDA and why it might be relevant for their lives (remember this was way back in 1993!).
More recently, first-moving Internet companies were advised to spend heavily on advertising their brand name. But often it seemed they did this without really explaining the relevance of their brand name to potential customers.
Waiting in the Wings
Number two: Those who do educate the market successfully have another problem. After they demonstrate the market is a good opportunity, now firms waiting in the wings can easily walk in, and often can do so at a lower cost.
Take a look at Amazon for example. Recently some analysts have debated whether Amazon can make it. Could there be a brick and mortar company like Wal-Mart (WMT) who could buy up some assets and ultimately become the leader in e-tailing by free-riding on the millions Amazon spent successfully educating the market about buying a whole department store of stuff online?
Or now that Priceline has spent so much money educating the market about cheap tickets, could the old economy airlines successfully take over that market with Hotwire.com?
Could these things happen? Only time will tell.
Kinks and Sweet Spots
Number three: In focusing on speed to market, trailblazers often haven't worked out the kinks in their offering or business model. This isn't a big problem if they were the only game in town. But as I said, most of the ideas are based, at best, on intellectual property that is often easily copied. Buggy technology isn't new and companies like Microsoft (MSFT) have a history of getting away with it. But first-movers on the net don't have the clout or resources of a Microsoft.
Number four: First-movers often don't know the sweet spot of the market. For example, look at all the trailblazers in e-tailing that focused on lowest price and biggest selection and then got blind sighted by customers who abandoned their shopping carts in search of decent service or the ability to talk with a human being.
Where do Trailblazers Go?
Look at what's happening right now.
Petstore.com is selling off its assets to Pets.com (IPET). Craftshop.com is looking to sell its assets. Healthzone.com acquired Healthshop.com. Emusic.com (EMUS) purchased pioneering music-download site IUMA.com. Fashionmall.com (FASH) took over the assets of Boo.com.
While some of these acquired and failing firms might not have been "The First" in their category, they are surely some of the trailblazers on the Internet. I could say the idea that other firms picking over the assets of trailblazers is unique to the Internet or even modern business. But of course I'd be wrong.
In fact, none of this talk about the "myth of the first mover advantage" is particularly new.
If you think it is, consider the words of Karl Marx who very long ago commented on "the far greater cost of operating an establishment based on a new invention as compared to later establishments arising ex suis ossibus (from its bones). This is so very true that the trail-blazers generally go bankrupt, and those who later buy the building, machinery, etc. at a cheaper price, make money out of it."
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