How soon businesses forget how loony the loony ideas of yesterday were
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.
Labels: Economics, History, Technology
Your analogy of disease immunity reminds me of the theories of Hyman Minsky (a crash of Ponzi finance moves to Hedge, then Speculative, then back to Ponzi), who I believe would be on the opposite side of the political fence from Liebowitz. After the Great Depression, people were very cautious for a long time. Eventually the next generation, who had been used to stability, came of age and took their place.
“First mover” here seems to be the modern version of “early bird gets the worm”. Forgotten is that the second mouse gets the cheese, for it looks before it leaps.
Actually, during my MBA, I don’t think 1st mover advantage was ‘The One Solution’ to anything. It was presented as one of a few other strategies to outcompete competition. A strategic move, with emphasis on the latter not the first. Most Business Strategists these days are much more into ‘creating markets’ by being innovative, like, say Blue Ocean strategy of Mauborgne and Kim. If you can combine first mover advantage with a great new idea, you’ll be in business.
The idea of first mover advantage isn’t an end in itself, that’s mostly bizniz pundits talking their talking points in a similar vein most political pundits do. They just hammer it down their columns without reflection. OTOH, The first mover advantage isn’t all stupid. It’s just a first step to get your company out of zero-sum hypercompetitive situations with low margins and oligopolies.
Anyway, what’s your idea about innovation + first mover advantage? I’ve always thought it was the way forward for small/medium companies to keep economies fresh, youthful and growing.
There has got to be some advantage from being first! So isn’t the real question how big that advantage is, and how it varies according to circumstances? Has anyone tried to address that?
The idea of first mover advantage isn’t an end in itself, that’s mostly bizniz pundits talking their talking points in a similar vein most political pundits do.
It’s true that the pundits were the craziest, but you should read through that third chapter of Re-thinking the Network Economy — Liebowitz has some pretty good (or rather, bad) quotes from Morgan Stanley, internet start-ups, and other people who you’d expect to have somewhat cooler heads.
Anyway, what’s your idea about innovation + first mover advantage?
Since it doesn’t really matter when you get to the market, you should take your time and innovate. When it seems like your product is better than the others, put it out there and it’ll start growing.
There has got to be some advantage from being first!
Not if your product is slipshod because you rushed it to market in order to start generating market share. It’s how well received your product is that makes the difference. Again look at all the big counter-examples (as well as examples).
“First mover” here seems to be the modern version of “early bird gets the worm”.
It’s a bit more than that, since the proponents were claiming that being first was so important that you could essentially put your concerns about the product’s quality aside. After all, if market share leads to more market share through positive feedback, you can lock-in your product even if it isn’t superior.
Or from another view, if someone else tries to beat you to market, your product would have to be 2 to 3 times as superior to even hope to dislodge the entrenched incumbent (actual quote — 200 to 300% better!). So nuts to improving quality — just get there first!
Is first mover a useful, though generally false, heuristic? The evidence cited negates a first-mover theory, but not an “early-mover” theory. I’m willing to say that Bing.com is an interesting experiment in this. Path dependencies seem to be fairly widely present (one example on my mind is yahoo games which benefits from thick markets but is not a “good product” in the sense that it easy to envision low cost improvements that are not adopted or a better strucuture that had it been adopted early on would be a pure improvement. Isn’t it fair to cite path dependency whenever there is an improvement that might be made but is rejected because switching cost is high, or put differently a better decision that had it been made in an earlier phase would create an improvement.
The post suggests that rising popularity of bunk academic theory is a cause of bubbles. Seems much more likely to me that rising discussion of first-movers correlates with events which are harder for people to make good risk evaluation of.
Sega Genesis was before Super Nintendo
As I recall, Sega Genesis held its own against the Super Nintendo pretty well, despite the fact that the Super Nintendo was clearly a superior piece of hardware. Remember Sonic the Hedgehog? That game was damn popular.
Isn’t it fair to cite path dependency whenever there is an improvement that might be made but is rejected because switching cost is high, or put differently a better decision that had it been made in an earlier phase would create an improvement.
Liebowitz and Margolis have a useful distinction between 2nd-degree and 3rd-degree path dependence. (1st-degree is just the banal claim that “history matters.”)
2nd-degree is what you talk about in the second clause — some superior alternative exists, but no one could have known about it at the time or it wasn’t feasible. So landing in a sub-optimal world is not an inefficiency — we just don’t have perfect information and perfect foresight about all of the universe.
3rd-degree is the case that everyone is interested in, where at least two alternatives exist, one is superior, but because we can’t coordinate our actions (or whatever), we end up adopting the inferior one.
The post suggests that rising popularity of bunk academic theory is a cause of bubbles. Seems much more likely to me that rising discussion of first-movers correlates with events which are harder for people to make good risk evaluation of.
I meant it more in the sense that during a bubble phase, the drivers will pluck whatever supports their enthusiasm from academia — not that academic theories cause bubbles. After all, academics rarely agree, so how could one camp cause the bubble rather than their rival? It’s whoever’s views resonate with the powerful.
If it’s harder to make a risk evaluation of internet companies, why would all involved be so certain and euphoric about the first-mover advantage? They should have said, “Because we have no clue here, we should be even more wary of what a new idea in economics (with hardly any empirical support) suggests that we do.”
As I recall, Sega Genesis held its own against the Super Nintendo pretty well, despite the fact that the Super Nintendo was clearly a superior piece of hardware. Remember Sonic the Hedgehog? That game was damn popular.
The Genesis, worldwide, had only about 60% of the sales as the Super Nintendo — better than during the NES days, but still not very neck-and-neck.
And remember, the Genesis was released in North America *two years* before the SNES, so sales per time would show an even greater lead for the SNES. Anyway, the main point is that the first mover into the 16-bit console market got crushed by a new entrant 2 full years later. The Turbo Grafx-16 also came out the same time as the Genesis, and it got clobbered too.
So landing in a sub-optimal world is not an inefficiency — we just don’t have perfect information and perfect foresight about all of the universe.
-That’s fine, but it means for a business facing a trade-off between taking more time to get things right and launching there is some incentive to launch. If this is true, doesn’t it follow that “on the margin” there should be some company which succeeds for entering early. On a deeper level your point also applies to the decisions investors make. Its not “irrational exuberance” its rational investment, but with very little basis to create good models and a reason to think its worth making your best guess anyway. Since one easy observation is who entered first, and there is a theoretical and some empirical basis for thinking that this makes a difference.
-That’s fine, but it means for a business facing a trade-off between taking more time to get things right and launching there is some incentive to launch. If this is true, doesn’t it follow that “on the margin” there should be some company which succeeds for entering early.
Well, launching “early” in that case means within the next 50 to 100 years. If the claim is that we should launch soon because we don’t have perfect information or foresight, that’s very wrong, just an excuse. It’s not as though it takes more than a few years to figure out that you could have done better.
Its not “irrational exuberance” its rational investment, but with very little basis to create good models and a reason to think its worth making your best guess anyway.
No it was definitely exuberance — just read what people said during any bubble. And it definitely was irrational, since many companies were getting tons of investment despite not turning any profit. Or communities were being given lots of loans despite having poor ability to pay back. That’s no mystery.
The best guess is that a pack of newcomers to the business world who aren’t turning a profit, or a group of people who earn squat, are not worth investing a lot in or giving huge loans to.
some empirical basis for thinking that this makes a difference.
Like I said, there’s almost no empirical basis. Sometimes the early entrant won, sometimes the winner came very late. What matters is the quality of the product, as judged by third party reviewers. (For example, computer / tech magazine reviews of various spreadsheet software programs.)