The Disadvantage of a First Mover

One of the most common questions that comes up when meeting with a potential mentor or investor for the first time is “what makes you different from your competition?” And a lot of founders respond with “we have first mover advantage over all of our competitors”. Do you really have an advantage though?

For some context, a lot of this post is based around one particular paper that was published by Peter N. Golder and Gerard J. Tellis in May 1993. The paper was titled “Pioneer Advantage: Marketing Logic or Marketing Legend?” and in summary, analyzed whether the first mover advantage was a real advantage or not.

Why some believe in first mover advantage

Let’s first talk about where the belief of being a first mover has an advantage. Golder and Tellis point out two different types of first mover advantages: consumer based-advantages and producer-based advantages.

Consumer based-advantages are, “benefits that can be derived from the way consumers first choose and then repurchase the product”. Essentially, this is the belief that because a business is the first one in the market, they are able to obtain a lot of customers quickly and because there’s a high cost to switch to competitors later on, those customers stick around and become loyal to the first in the market.

This theory is probably more effective for B2B businesses because of the financial costs and social capital it takes to switch things up. An example would be if a company was using Salesforce as their CRM and is looking into using a new, different CRM that isn’t Salesforce. For that new, different CRM to have any chance to obtain that customer, they not only have to have a better product than Salesforce, but also have a financial and social cost that is worth taking on compared to the headaches Salesforce might be causing them at the moment.

If you’ve ever wondered why Salesforce is doing well, this is a big reason why.

The second type of first mover advantage is producer-based advantages. Producer-based advantages are, “benefits derived from the supply of the product, and are based on the concept of barriers to entry”.

You can think of this advantage as being economies of scale, technological leadership, and or long-term agreements that prevent particular suppliers from supplying any potential competitors.

An example of this playing out would be a few years ago when autonomous vehicles were really picking up steam as something that could be real. One of the parts to make them more real was the ability to produce a particular lidar sensor so a car would be able to identify what was around it more effectively.

This lidar sensor was an example of technological leadership and one particular automotive supplier ended up purchasing an order so large that they were able to deny competitors from obtaining this particular sensor.

In this producer based-advantage, the theory would be that you would be able to keep competitors behind you because you have a head start in the supply chain of a particular supply.

Let’s now move onto why these first mover advantages might not be advantages after all.

Why some don’t believe in first mover advantage

Golder and Tellis say that there are 7 reasons against the theory of first mover advantage: free-rider effects, shifts in technology, shifts in customer needs, incumbent inertia, improper positioning, changing resource requirements, and insufficient investments.

Personally, I feel that these 7 reasons can be summed up into 3 categories: tech changes, positioning, and investment.

First is tech changes. When a new industry or product category is created, the technology tends to rapidly change. The tech gets more effective, efficient, and cheaper to build. So, if you are the first mover in a product category, you most likely have the least effective, efficient, and most expensive product ever in that category. Congratulations!

An example of this is the cell phone. The first cell phone was the Motorola DynaTAC 8000X created in 1973 and was sold for just under $4,000. It weighed over 2 lbs, had a battery life of 30 minutes, and took 10 hours to recharge.

Flash forward to 2022. You can now buy an iPhone 13 for $800, it weighs only 6.14 ounces, can last for up to 19 hours streaming video, and you can get a 50% charge in 30 minutes. Did I mention that the iPhone pretty much put Kodak out of business too?

Second is positioning. Product-market fit is hard and is constantly a struggle because as humans, we are constantly evolving and changing. Our products have to evolve and change with us. This results in some things being fads and some things being trends. If you’re the first mover, you have to make the bet that the new product you have is a trend, not a fad.

An example of this would be Myspace and Facebook. Myspace became a place where celebrities, artists, and others could connect. The strategy they took was to turn it into another entertainment media platform, like a different type of news rather than creating networks. Personally, Myspace was a little before my time. I can't tell you about all of the hype, but Myspace positioned themselves incorrectly as being one of the first movers in this new social media age.

Facebook, a settler as Golder and Tellis would call them, ones that came after the pioneers, positioned themselves as a better way to network with friends and didn’t see themselves as a traditional media company. Facebook positioned itself as a tech company rather than an entertainment media company.

I’m simplifying this quite a bit, but the difference in positioning between Myspace and Facebook were decisions that caused billions of dollars in differences between the two.

Third is investment. Being a first mover is expensive and in a lot of ways, you have to get lucky and read the market signals almost perfectly as they come in if you are going to be successful.

If you’re the first mover, there’s most likely no off the shelf types of tech to build your products. Your products are built from scratch - even the minimum viable product. So, to be able to even prove that you have a venture maybe worth pursuing, you most likely have to raise millions of dollars mostly based on your team, market opportunity, and timing. That’s a pretty big bet.

If you make it past that hurdle, you have to then continue reading the market to make sure that the market isn’t changing rapidly beneath your feet. You may even have signals to show that you should keep going down a particular pathway as that is leading you towards profitability in your financial models, but really a different pathway is the better one. You just can’t see it as clearly.

Even if you do see the need for a pathway change, the amount of an investment it takes to change pathways is hefty. It’s not for the weak at heart.

An example of this is Blockbuster and Netflix.

Blockbuster was one of the biggest players in sharing movies and shows. In 1994, it was sold to Viacom for $8.4 billion. In 2000, a struggling startup, Netflix was available to Blockbuster for purchase for $50 million. The pathway wasn’t clear for blockbuster to make the argument internally that mailing and shipping dvds or even online streaming would be the future of sharing movies and shows.

In 2010, Blockbuster filed for bankruptcy. On the other hand, Netflix had gone public and was valued at over $2.5 billion at the start of 2010.

Blockbuster had invested so much into one particular pathway that it couldn’t divest and invest into this new business model. It was first mover disadvantage for Blockbuster.

Now, is a similar dynamic occurring to Netflix at the moment with all of these new streaming services popping up? Potentially! Time will tell if Netflix is having their own first mover disadvantage happening.

I want to leave you with one last data point. According to Adam Grant, the author of Originals, 47% of first mover companies [or pioneers] would fail in their early years compared to only 8% of so called “improvers” or [settlers].

If you feel like you’re too late to emerging industries like Web3, autonomous vehicles, or green energy to name a few, you’re definitely not late. You know what they say - good things come to those who wait.