The Myth of First-Mover Advantage

This week’s launch of iTunes radio is critical to manufacturers – here’s why.

Apple announced Monday that it is getting into the internet radio business, currently dominated by Pandora. Does this matter to you? It should, because the outcome will demonstrate a principle you should be touting in your R&D departments and shouting in your boardrooms.

The pundits’ opinions on Apple’s launch of iTunes radio are scattered. One newspaper warns, “Apple ‘radio’ could crush Pandora” while another proclaims just the opposite: “Pandora has nothing to fear from iTunes radio.” Which forecast will prove prescient? The answer matters less than why Apple ends up taking over internet radio or toddling along as a minor player in that market.

The argument favoring Pandora rests on the idea of first-mover advantage. An expensive, high-powered business course that is currently popular with online marketers stresses the overwhelming advantages bestowed on those who act quickly. Their support comes from Al Ries and Jack Trout’s first “Immutable Law of Marketing,” called the Rule of Leadership: It’s better to be first than it is to be better.

For example, eBay was first to market with an online consumer auction process and all latecomers have withered into oblivion. Xerox invented photocopying and used their 15-year head start (protected by patents) as the springboard for a global business. Coca-Cola is still considered one of the most valuable brands in the world 130 years after they launched the first cola drink. Nike in running shoes, Microsoft in desktop computing, Howard Stern in shock jocking—just a few examples of businesses whose reward for being first on the scene was decades of robust business.

Should Pandora take heart from those examples? Should you, as a manufacturer, stoke the fire beneath your innovation group to move faster? Probably not. During the internet bubble, unsophisticated, excitable entrepreneurs gobbled up venture capital with promises of a “land grab” that would cement big fortunes for the fleet of foot. Dumb, dumb, dumb.

For every example of first-mover advantage there are 10 demonstrating just the opposite. Where’s Atari? Mentadent created the market for peroxide toothpaste. Who? Exactly. Netscape predated Internet Explorer, MySpace was supplanted by Facebook, Yahoo’s search engine has been eclipsed by Google.

Sprinting to market affords an advantage in a unique set of circumstances, which you are unlikely to see:

1. Scarce resources– Most of the naturally-occurring soda ash on our planet is found in one area of Wyoming, and the first companies to stake claims there have held an indisputable advantage in the market. How often are resources that scarce? Rarely.
2. Extremely high switching costs– Look no farther than the credit cards in your wallet to see how switching costs can protect first movers. Smart cards with embedded chips are popular in Europe; however, in the U.S. the infrastructure was built around the original credit card technology and the cost of upgrading the system is prohibitive. The fact is, however, switching costs are rarely as high or as low as you think. Your customers will switch to a competitor who offers a compelling advantage and they won’t switch to you for a marginal benefit.
3. Protectable, difficult-to-imitate technology– iTouch, iPhone, iPad. Need I say more?

In most cases, any first mover advantage is a gift from the latecomers whose offerings are insipid, uninspired and me-too. Apple’s stranglehold on the tablet market remains unbroken because Samsung has not figured out a meaningful reason for consumers to purchase something other than an iPad. What about in your market? Are you developing dull, “evolutionary” improvements that have little chance of stealing your competitors’ customers?

Meaningfully Better Beats First

My recommendations for business-to-business markets parallel those for the consumer space, which I’d summarize as follows:

1. Get to market now rather than conducting more and more and more research to deliver a marginally better product later. It never pays to be late and me-too.
2. Don’t be the first to dive into a pond without checking for rocks. Being the leader can put you at a significant disadvantage if it locks you into an approach, technology or position. How’d being the first on your block with a Segway work out for you?
3. Better—meaningfully better—beats first. Betamax created the video-recording market with “technically” superior quality; VHS followed with good-enough quality and twice the recording time.
4. Serve customers quickly. Don’t confuse customer-responsiveness with speed-of-innovation. While the quality of innovation is far more important than the pace, the importance of rapid customer response can’t be overstated.

Ultimately, if Apple wins the streaming radio wars, it won’t be simply because they are starting with a massive vault of iTunes customers or because Apple is Apple. It will be because their version of internet radio offers a significant advantage over the incumbents. It’s most likely that advantage will be convenience – which is far less sexy than technological bells and whistles, but a surprisingly powerful motive force among customers.

Being first to market has little to do with the outcome for Apple or for you. Contrary to Trout and Reis’ wisdom, better is better. That’s the message you need to bring to your R&D group. Oh, and while they’re figuring out what better means in your market, let them pipe digital radio into the lab.