Wednesday, July 15, 2009

How soon businesses forget how loony the loony ideas of yesterday were   posted by agnostic @ 7/15/2009 10:37:00 PM

Mathematical models of contagious diseases usually look at how people flow between three categories: Susceptible, Infected, and Recovered. In some of these models, the immunity of the Recovered class may become lost over time, putting them back into the Susceptible class. This means that if an epidemic flares up and dies down, it may do so again. If we treat irrational exuberance as contagious, then we can have something like a recurring exuberant-then-gloomy cycle within people's minds. That is, people start out not having strong opinions either way, they get pumped up by hype, then they panic when they figure out that the hype had no solid basis -- but over time, they might forget that lesson and become ripe for infection once more.

I'm in the middle of Stan Liebowitz's excellent post-mortem of the dot-com crash, Re-thinking the Network Economy, and in Chapter 3 he reviews the "first mover wins" craze during the tech bubble. According to this idea, largely transplanted into the business world from economists who'd already spread the myth of QWERTY, the prospect of lock-in was so likely -- even if newcomers had a superior product -- that it paid to rush your product to the market first in order to get the snowball inevitably rolling, no matter its quality.

The idea was bogus, of course, as everyone learned afterward. (There were plenty of examples available during the bubble, but the exuberance prevents people from seeing them -- Betamax was before VHS, WordPerfect was before Microsoft Word, Sega Genesis was before Super Nintendo, etc. And there were first-movers who won, if their products were highly rated. So, when you enter doesn't matter, although quality of product does.) But when I looked up data on how much the media bought into this idea, I was surprised (though not shocked) to see that it was resurrected during the recent housing bubble, although it has been declining since the start of the bust phase. Below the fold are graphs as well as some good representative quotes over the years.

First, here are two graphs showing the popularity of the idea in the mainstream media. The first is from the NYT and controls for the overall number of articles in a given year. (I excluded a few articles that use "first mover" in reference to the Prime Mover god concept in theology.) I don't have the total number of articles for the WSJ, so those are raw counts. Still, the pattern is exactly the same for both, and it very suggestively reflects the two recent bubbles:

The first epidemic is easy enough to understand -- after languishing in academia during the mid-1980s through the mid-1990s, the ideas of path dependence, lock-in, and first-mover advantage caught on among the business world with the surge of the tech bubble. When it became apparent that the dot-coms weren't as solid as was believed (to put it lightly), everyone realized how phony the theory supporting the bubble had been. Here's a typical remark from 2001:

WHEN they were not promoting the now-laughable myth of ''first mover advantage,'' early e-commerce proponents proffered the idea that self-service Web sites could essentially run themselves, with little or no overhead.

But clear-headedness eventually wears off, and when another bubble comes along, we can't help but feel exuberant again and take another swig of the stuff that made us feel all tingly inside before. Here's a nugget of wisdom from 2006:

Media chieftains may be kicking themselves a few years from now because they didn't step up to pay whatever it took to own the emergent first mover in online video.
And a similar non-derogatory, non-ironic use of the phrase from 2007:

For the current generation of Internet applications, sometimes referred to as "Web 2.0," the data collected from users is the true source of competitive advantage. And the first movers, the companies that understand and apply this insight, have services that get better fast enough that their competition never catches up.

Thankfully we've been hearing less and less of this stupid idea ever since the housing bubble peaked, and at least the most recent peak was lower than the first one, but we can still expect to hear something like this during whatever the next bubble is. Note that the first-mover-wins idea wasn't even being applied primarily to real estate during the housing bubble -- the exuberance in one domain carried over into a completely unrelated domain where it had flourished before. So, if you're at all involved in the tech industry, be very wary during the next bubble of claims that "first mover wins" -- it wasn't true then (or then, or then), and it won't be true now.

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