Is First Mover Advantage a Myth? When The Last Mover Takes It All

In the business world, it is usually believed that the first to market will retain a long-term advantage due to branding recognition, economies of scale, and switching costs. However, business history shows examples of tech companies that took over markets even though they were not first-movers, but latecomers (see Google and Facebook as reference).

A business myth busted

When you get into business school, one of the first principles they teach you is about the story of the first-mover advantage. As the story goes, when you’re the first to enter a market; things like branding recognition, economies of scale, and switching costs allow the first player to retain that advantage for a long time.

This is the conventional part of the story business professors like to teach so much. There is another part of it, which makes less noise and might sound less appealing but in the real business world is more accurate than the conventional first-mover advantage story. I’m talking about the last mover advantage. My argument is that – first movers not only are not supposed to win, but they might have a few drawbacks that make their moves very risky. This makes the last comer, who makes the last move in the position to dominate the market. In this article, we’ll see why and how.

Timing can make or break your business

As specified by Tech Crunch:

Segways, and websites like Six Degrees or services like Webvan, we saw the stumbling start of great ideas that were ahead of their time. We learned that when starting a company being right and too early is the same as being wrong.

When you’re the first mover, you’re seen as bold. This isn’t a chance. In fact, you’re taking a huge risk. Indeed, if you failed to gain traction and conquer market dominance, chances are you’ll be kicked out by the last comers. Not only that. But also market dominance isn’t enough if you’re not able to capture enough profits to be able to acquire or kick out the latest comers. Think about Google. When he got in the search market, it wasn’t the first. In fact, in the 90s Netscape held 90% of the browser market. Only to disappear by the turn of the century. Why? Well, Google arrived last, but it built a monopoly able to capture most of the market value. Who can afford to compete with that?

Why Metcalfe’s law like so much the last mover

As techopedia.com explains:

Metcalfe’s Law is a concept used in computer networks and telecommunications to represent the value of a network. Metcalfe’s Law states that a network’s impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10 * 10). The end nodes can be computers, servers and/or connecting users.

This means that when the last mover arrives on the market, it has one of the most important assets you can have in business: your competitors’ mistakes. In fact, if you are entering the market, you can do it by looking at what your competitors have done wrong. At the same time, you can also look at what they’ve done right to copy it! In this scenario, when growth picks up the effect of it will be more than exponential. So the first mover that seemed a giant will soon become the dwarf.

Peter Thiel’s law

In Zero to One by Peter Thiel, there is a whole chapter on the last mover advantage. As he explains, when looking for a successful business one should ask:

Will this business be around a decade from now?

In fact, what he means is that – this is true for the tech world – the ability of a company to be the dominant player depends upon two main things. First, the ability to monopolize the market. Second, the ability of that business to generate future cash flows.

He suggests to look at four main aspects:

proprietary technology
network effects
economies of scale
and branding

In the end, being the first mover doesn’t mean anything if you’re not able to build any of those factors into your business. The secret then is to be the last mover but then make sure you create a monopoly. How?

How to build a monopoly in four steps

In the book Zero to One, Peter Thiel also explains how – in theory – to build a monopoly.

Start small to monopolize

The first objective is to start very small. We all like the grandiose project to conquer the world. Having that kind of vision is fine. Yet you want to be highly practical on a day to day basis. You need to start from a tiny group of people that might benefit from your product or service.

In fact, by targeting a tiny market, it will be way easier to monopolize it.

Scale-up

One example that Peter Thiel mentions in the book is about Amazon. When it started, it did as an online bookstore. This was, of course, a niche. Amazon could have tried to sell anything from day one. Instead, they focused on books. Until they dominated the market. As of now, Amazon has expanded so much also to sell grocery and gourmet food.

Thus, once dominated a niche, the time will be right to move to the next.

Stop with the BS of disruption

Looking like someone that is trying to innovate and challenge the status quo is cool. Yet it also brings a lot of attention and visibility. In the Silicon Valley startup stereotype visibility has become the goal rather than a means for growth. Instead, as Peter Thiel suggests in Zero to One, you don’t need to disrupt. In the long run, you will. But in the short term, you don’t have to challenge large organizations just for the sake of it. You need to work on dominating your niche and move on to the next. As quickly as possible; and with the slightest attention from the public as possible

Be like a chess player, think about the endgame

Having an ambitious long-term vision isn’t bad. Instead, this is the compass that will guide you toward the successful building of your business. In short, your long-term vision will be endgame. Just like the chess player starts with the last move in mind. However, targeting a small niche, dominating it, move to the next is your primary day to day goal.

First mover examples

First movers are companies that are first to market with a product and service, but they may also be companies that enter a market early and secure significant market share.

In any case, these companies tend to succeed because they enter a new market and rapidly secure a competitive advantage. In some cases, however, first movers have squandered this advantage and have faded into obscurity.

In this piece, we’ll discuss some examples from each scenario.

Coca-Cola

The first soda syrups emerged around 1881 from the likes of Dr. Pepper and Vernors, but it was not until 1886 that Coca-Cola debuted.

While The Coca-Cola Company was not the first to enter the soda market, it was the first to capture a significant market share.

Coca-Cola achieved this by mixing the soda syrup with carbonated water that was sold as a fountain drink in pharmacies.

When Pepsi entered the market in 1898, Coca-Cola was already selling 1 million gallons of the drink annually.

This early advantage would later prove to be an insurmountable lead. In the more than 120 years since the drink was released, Pepsi filed for bankruptcy twice and some believe was only saved when it merged with Frito Lay in the 1960s.

Amazon

When Amazon became one of the first online booksellers, it secured a critical head start on bricks-and-mortar retailers such as Borders and Barnes & Noble.

Amazon maintained this advantage by expanding into unrelated products, which made its eCommerce site more attractive since consumers could purchase everything they needed in the one place.

The company also partnered with Borders in 2001 to launch a branded website powered by Amazon’s eCommerce platform and effectively stole its customers.

It’s also worth noting that Amazon was not the first ever online bookstore, but like Coca-Cola, it was the first to sell products at scale.

The first online bookseller was Books.com, which was founded three years earlier than Amazon in 1992 by Charles M Stack.

Grossly undercapitalized, Stack sold the business in 1996 for $4.2 million just a month before Amazon’s $32 million IPO.

Netscape

The rise of Netscape was synonymous with the rise of the internet itself. As a first mover in web browsing, the company enjoyed over 90% of the market at one point in the mid-1990s before a precipitous decline started in 1998.

Before its demise, all appeared to be rosy at the company. Netscape was a strong brand name with a vast client base and profitable enterprise software.

But when the company went into battle against the much larger Microsoft, its product development suffered and Netscape ultimately alienated its core demographic.

eBay

eBay was founded in 1995 at the start of the dot-com area as the world’s first online auction site.

With users able to hawk everything from a used Cadillac to old vinyl records, the company proved that mass buying and selling online was feasible.

In addition to several copycat sites, eBay also inspired the creation of stock trading platforms and B2B networks.

As a first mover, one of the most significant hurdles the company faced was convincing consumers that the whole process was legitimate.

While most of us now take eCommerce for granted, this was a new frontier in the 90s and there were serious (and pertinent) concerns around payment security and functionality.

To recap:

First movers are companies that are first to market with a product and service, but they may also be companies that enter a market early and secure significant market share.
Coca-Cola was not the first or even the second company to sell soda, but it did enter the market early and establish sales volume and brand equity that no competitor has since been able to match.
Similarly, Amazon was not the first online bookstore, but it was far better capitalized than Books.com and had a strategy to sell unrelated items to lure consumers onto its platform.

Key takeaway: the last-mover takes it all

In this perspective, the last mover arrives at a stage when the public is ready to accept that product and service. It has learned from the first movers. It has copied them. It has avoided their mistakes. Used their strengths but also innovated. From that perspective, by starting small, dominating a niche, moving to the next. The network effects will allow the last mover to gain traction at an exponential growth rate that makes it impossible for the first mover to understand what’s happening and to stop its advancement. This is how the last mover takes it all!

A few other considerations about first vs. latecomer

When implementing a strategy, or building up a new market, a lot of work goes into educating this new market, perhaps around a technology. This effort takes years and it requires substantial resources. As the first-mover educates and builds up the market, if the market is not mature yet, the latecomer still has a wide space to attack the same market the first-mover dominates.

As long as the market is still growing, and the first-mover can’t yet lock-in distribution, the latecomer can manage to steal market share quickly, and establish itself as leader in that market, thus building up a long-term competitive advantage.

Key Highlights

Introduction to the Last Mover Advantage:
- In the business world, the “first-mover advantage” is often emphasized, but there is a less-discussed concept known as the “last mover advantage.”
- While the first-mover advantage emphasizes early entry into a market, the last mover advantage focuses on strategic timing and dominating the market at a later stage.
Timing and Business Success:
- Many startups and companies with promising ideas have stumbled when entering markets ahead of their time.
- Being too early can be as detrimental as being wrong, as the market might not be ready for the product or service.
Risk and Drawbacks of Being the First Mover:
- The first mover takes significant risks by entering a market before it’s fully formed.
- If the first mover fails to gain traction, they can be overtaken by later entrants who learn from their mistakes.
- Market dominance alone isn’t sufficient; a company must also have the financial strength to fend off competitors.
Metcalfe’s Law and the Last Mover Advantage:
- Metcalfe’s Law states that a network’s value is proportional to the square of the number of nodes.
- The last mover benefits from competitors’ mistakes and successes, allowing them to enter with better insights, leading to exponential growth.
Peter Thiel’s Perspective:
- Peter Thiel’s “Zero to One” discusses the importance of the last mover advantage.
- Successful companies should focus on monopolizing the market and generating future cash flows.
- Aspects like proprietary technology, network effects, economies of scale, and branding play key roles in building a monopoly.
Building a Monopoly in Four Steps:
- Start small: Target a niche market to easily dominate it.
- Scale up: Once dominant in a niche, expand to the next market segment.
- Avoid “disruption” for visibility: Focus on dominating niches rather than challenging larger organizations.
- Think about the endgame: Have a long-term vision but prioritize dominating specific niches.
Examples of First Movers:
- Notable examples of first movers include Coca-Cola, Amazon, Netscape, and eBay.
- These companies gained significant advantages by being early entrants or pioneers in their respective markets.
Key Takeaway: The Last Mover Takes It All:
- The last mover advantage revolves around entering a market when it’s ripe for acceptance, learning from competitors’ experiences, and innovating accordingly.
- By starting small, dominating niches, and expanding strategically, the last mover can gain exponential growth and establish a long-term competitive advantage.
Considerations for Strategy:
- Entering a market too early requires educating the market, which takes time and resources.
- If the market is still growing and the first mover hasn’t solidified distribution, the last mover can rapidly steal market share and establish leadership.