The second-mover advantage
                  By Joan Indiana Rigdon
                  Red Herring magazine
                  September 1, 2000

                  All over the world, entrepreneurs who haven't even named their companies yet are bent on one
                  thing: being first to market. Everything else in their business plan is malleable, but not that. So
                  they meet in unmarked offices, angle their laptops just-so in coffee shops, and engage in other
                  007 behavior, like trying to hire people without telling them what their jobs will be. They're driven
                  by their belief that it's the first mover in the market that gets the glory and the profits; showing up
                  second is death. That's axiomatic.

                  It's also wrong.

                  Sure, first movers grab the glory. But they also grab the most unglorious position of guinea pig.
                  More often than not, when a company is first to market with a new product, it's incomplete, or it's
                  flawed, or the pioneer has no clue how to sell it. Or, in the case of technology innovations, the
                  pioneer has no idea how customers will use it. Then some latecomer comes along-startup or titan,
                  it doesn't matter-and wins out by capitalizing on the pioneers' mistakes...or bludgeoning the
                  pioneer into submission with more marketing dollars, better distribution, or a combination of both.
                  (Did someone say Microsoft (Nasdaq : MSFT)?)

                  There are plenty of black eyes among those who went first. Apple Computer (Nasdaq : AAPL) was
                  the unlucky perpetrator of the first commercially marketed personal digital assistant, the Newton
                  (and yes, the handwriting recognition was horrible, but that wasn't why it didn't catch on; the
                  Palm (Nasdaq : PALM) Pilot's handwriting recognition isn't great either). Royal Crown Cola sold the
                  first diet, decaffeinated cola, RC 100, in 1980. Sony's (NYSE : SNE) Betamax, once a hot new
                  videotape technology, quickly became a synonym for being swiftly and absolutely destroyed by the

                  Meanwhile, how many people remember that England's De Havilland Aircraft Company was the first
                  to market passenger jets? Or that Union Carbide (NYSE : UK) beat Procter & Gamble (NYSE : PG)
                  to (test) market with disposable diapers that allow water to pass away from the body, but not

                  "There's this belief, and it's very, very American, that to create things and be an innovator is a
                  glorious path to success. But it doesn't work out that way," says Steven Schnaars, who wrote
                  Managing Imitation Strategies (Free Press, 1994), a playbook for attackers. Mr. Schnaars is a
                  professor of marketing at the Zicklin School of Business, Baruch College, City University of New
                  York. As an innovator, "you get bought out, or you go under," Mr. Schnaars says. "A company very
                  rarely goes from small to large as a pioneer."

                  All this may seem gloomy. It certainly adds an element of doom to all of those festive company
                  launches we hear about each week. But there's good news here, too. For starters, getting bought
                  out by a rival is not such a bad thing; it makes for more millionaires. The other good news is that
                  there's hope for attackers who come late to the game. In fact, their lateness is an advantage-the
                  "attacker's advantage." If an attacker is smart, he can steal a market away from a pioneer with
                  better timing, marketing, technology innovations, or-easiest of all-any one of those, piggybacked
                  on a major shift in technology or industry standards that catches the pioneer unawares.

                  Being late, of course, is the easiest part of a smart attack. And although it's usually unintentional,
                  it can work out to be a key advantage. Because by definition, first movers are first, they don't
                  have anyone to copy from; they can't really know what their product should look like or how it
                  should be used. They can ask consumers, but they usually don't know at first, either. So the
                  pioneers can only guess.

                  They almost never guess right. Some of the first guys to market the telephone thought it would be
                  perfect for broadcasting concerts into homes. Soon after, the radio was hailed as a great tool for
                  point-to-point communications (it wasn't used for broadcasting until a decade after its debut). And
                  the Internet -- that digital backbone that has changed the way we all do business and flirt --
                  spent most of its initial decades in the hands of government, military, and academic researchers.

                  Even when pioneers make a very good guess about what their products should do, they can
                  sometimes be too early -- which opens the door for an attacker to swoop in months or even years
                  later., for one, was first out of the box with outsourced email in 1991. George Zachary,
                  general partner at VC firm Mohr, Davidow Ventures, remembers hearing their pitch, and thinking
                  that it didn't excite him. Years later, in 1998, Critical Path (Nasdaq : CPTH) showed up to make a
                  very similar pitch. This time, Mr. Zachary was all ears. Critical Path may have been late to market,
                  but the market had changed. Five years earlier, hardly anyone knew what outsourced email was.
                  By 1998, thanks to Hotmail, almost everyone had heard of Web-based email. From there it was
                  easy to explain that outsourced email was like Hotmail for corporations.

                  With the market primed like that, "we could get enough critical mass," says Mr. Zachary. (And he
                  liked Critical Path's management team better, too.)

                  Next attacker's advantage: even when the pioneer has the right product at the right time,
                  positioned in what seems to be the right way, it's vulnerable to major technical flaws. In most
                  cases, "the first product doesn't work very well, it's not formed very well. Then some company,
                  typically a better company, has a better product," and walks away with the market, says Mr.

                  That was De Havilland's problem. In 1949, the Hatfield, England, company was first to market with
                  a jet-powered passenger plane, the Comet. The Comet cruised at 450 miles per hour, twice as fast
                  as propeller-powered airliners, and considerably more smoothly and quietly, too. After the Comet's
                  maiden commercial flight on May 2, 1952, De Havilland seemed unbeatable. It was filling orders from
                  airlines in Europe and America, while Lockheed and the rest were looking like wallflowers.

                  But De Havilland didn't get to enjoy its first-mover advantage for long. A year to the day after the
                  Comet's first commercial flight, De Havilland reported the first of a string of crashes in which its
                  envied Comets mysteriously disintegrated in midair, killing all aboard. The first one succumbed to a
                  thunderstorm over Calcutta. The following January, a second plane fell apart over the
                  Mediterranean island of Elba, Italy. Three months later, a third plane disintegrated over Stromboli,

                  Early investigations didn't turn up much, except suspicion of a bomb in the Elba crash. But after
                  examining the wreckage from Stromboli, tests showed that the problem was metal fatigue. Metal
                  wears differently on jets than it does on slower planes because jets fly at higher altitudes and
                  speeds. De Havilland had to learn this the hard way. It redesigned its planes, but in the years it
                  took to do that, Boeing (NYSE : BA) introduced its own passenger jet, the 707. The new design, of
                  course, took into account what De Havilland had learned about metal stress. De Havilland had done
                  Boeing's product research for free.

                  So in the end, it didn't matter that Boeing's 707 came five years behind the Comet's debut. Boeing
                  walked away with the market.

                  When the pioneer isn't making any obvious mistakes, an attacker can gain by innovating on the
                  pioneer's product or the way it is marketed. Making something slightly faster, smaller, or cheaper
                  isn't enough. Those incremental technology changes won't change the way people think about a
                  product. Marketing counts more. "Great marketing and average technology always beats average
                  marketing and great technology," says Mohr, Davidow's Mr. Zachary.

                  Advanced Micro Devices (NYSE : AMD) is a great example of a latecomer that's trying to go after a
                  pioneer on the strength of incremental advances in technology. AMD has spent the better part of
                  the last decade as an also-ran to Intel (Nasdaq : INTC), not doing much more than picking up the
                  crumbs Intel left behind. But lately, things have been looking up. In March, AMD beat Intel to
                  market with a 1-gigahertz chip, the Athlon. Intel followed two days later with its 1-gigahertz
                  Pentium III. But Athlon beats Intel's current Pentium III by a hair in some tests, says Nathan
                  Brockwood, principal analyst at research firm Insight 64 in Saratoga, California.

                  Customers are starting to notice. Vendors including Hewlett-Packard (NYSE : HWP) are now using
                  AMD chips to power their high-end machines. And even before Athlon sales have had a chance to
                  contribute much, AMD's finances have perked up; after losing money every quarter last year, AMD
                  posted a shockingly large profit this first quarter. But could AMD's by-a-hair victories of today ever
                  translate into market dominance, the kind that makes us forget Intel's name 25 years down the

                  "That would be a stretch," Mr. Brockwood says. He won't even rule in AMD's favor on the less
                  dramatic question of whether AMD will ever enjoy a comfortable lead in the market. "I would be
                  surprised if that happened," he says. The reason: AMD may have a slightly better chip for now, but
                  Intel (due to introduce its own new chip at the end of this year) has way more capacity and
                  distribution. Not to mention that Intel has spent at least a few billion more building its brand.
                  There's a reason most consumers don't stalk the aisles of Fry's looking for boxes with AMD inside.

                  So much for incremental innovations. An attacker's best bet, as the experts tell it, is to take
                  advantage of major technology shifts that can recast an old product in a new way. "You cannot be
                  a me-too product. What you must do is differentiate yourself in some substantial way," says
                  Gurumurthy Kalyanaram, a marketing professor at the School of Management, University of Texas
                  at Dallas. Mr. Kalyanaram has researched first-mover advantages.

                  Federal Express (NYSE : FDX), for one, used an automated package tracking system to offer-and
                  teach customers to expect-reliable overnight document delivery. The U.S. Postal Service is still
                  trying to win that market back.

                  The Web, of course, is a huge technology shift, the biggest one business has seen since the
                  computer, and before that, the telephone. Most Internet startups aren't using the Web to invent
                  entirely new products; instead, they're using the Web to change the rules of existing industries, so
                  that under the new rules, they are the market leaders.

                  That's what Dell Computer (Nasdaq : DELL) did. After years of unsuccessful headbanging with
                  Compaq, Dell finally beat it out for the top spot in the U.S. market last year by using the Web as a
                  way to change customers' expectations of how computers should be sold. In 1996 -- two years
                  after Dell had pulled its PCs out of retail stores, complaining that there were no profits there -- Dell
                  began selling directly to customers through its Web site. There, Dell offered customers something
                  they couldn't get in stores: the ability to specify which components they wanted and have the
                  whole shebang built, supported, and guaranteed by one company. No more being forced to buy a
                  souped-up CD-ROM just because you had to have a 19-inch monitor.

                  That was enough to unseat Compaq, in the U.S. market anyway. Last year, Dell scraped into top
                  spot in the U.S. PC market for the first time, with 16.6 percent market share, compared to
                  Compaq's 16.0 percent. And though Dell has stumbled since-its profit warning sent the whole
                  Nasdaq tumbling on one day this spring-analysts say that's a problem with the whole PC market,
                  not Dell's strategy.

                  Webvan (Nasdaq : WBVN) is another attacker that took advantage of the Web to whomp on a
                  pioneer, Peapod (Nasdaq : PPOD). Putting aside the fact that both companies are losing money,
                  and both of their stocks are in the toilet (barely above 52-week lows, at press time), Webvan is
                  widely viewed as the winner in the nascent category of selling groceries online. In fact, it has done
                  so much better that some people are reluctant to say there was ever a competition. J. Neil
                  Weintraut, a partner at 21st Century Internet Venture Partners, is one of them. Peapod "died on
                  its own," he insists. (Peapod, for the record, hasn't died; but it is having a very bad time.)

                  Still, Peapod was first, and so it did have a presumed advantage when the unknown Webvan
                  entered the market last year. But Peapod was pre-Web, and therefore so was its business model.
                  It used a proprietary online ordering system. When Webvan came along, it didn't have to reinvent
                  its own online ordering system; it just used the Web. Webvan also didn't have to spend years
                  figuring out if, what, or how customers would order online; Peapod had done all that market
                  research for them.

                  Webvan saw and avoided many of Peapod's other flaws, like its high-cost system of hand-picking
                  orders at existing grocery stores, high delivery fees, and long delivery windows (two hours at last
                  count, compared to half an hour for Webvan).

                  Attackers don't always have to go head-to-head with the pioneer. It's often better just to find a
                  "protected niche, where you can make money for awhile," says David Montgomery, professor
                  emeritus of marketing strategy at Stanford University's Graduate School of Business, who cowrote
                  a prize-winning paper on first-mover advantages and disadvantages, with Marvin Lieberman,
                  business strategy professor at the Anderson School, University of California at Los Angeles. From a
                  niche like that, he explains, a smart attacker might be able to grow strong enough to take on the
                  competition in the main part of the market. Maybe that's what Webvan is doing with United Parcel
                  Service (NYSE : UPS). Talk to Webvan, as we did, about the online grocery business, and the first
                  thing a spokeswoman will tell you is that Webvan is not in the online grocery business.

                  In a larger sense, that's true. Webvan is actually just using the online grocery business as a
                  staging ground for its assault on -- depending who you talk to -- FedEx, UPS,
                  (Nasdaq : AMZN), and maybe even The idea goes like this: first, instead of
                  declaring its intentions to go after big-name competitors, Webvan sticks to its unthreatening niche
                  of selling mostly groceries, which just about everyone needs. In the process of doing that, Webvan
                  hopes to get customers hooked on the convenience of having their orders delivered not only to
                  their homes, but into their homes, by prompt, friendly drivers who unpackage the goods, take away
                  all that bulky packaging, and, when necessary, order replacements for damaged or missing items.

                  Once customers are comfortable with having Webvan delivery people hanging around their kitchens
                  two or three times a month, Webvan plans to expand; lately, its list of deliverables has grown to
                  include ball caps, digital video recorders, books, videos, and CDs. Eventually, Webvan hopes to
                  offer a large gamut of stuff, to become a kind of Wal-Mart on the Web.

                  Sometimes the niche can be a geographical one. (Nasdaq : HOMG), for instance,
                  initially competed against both Peapod and Webvan for online grocery sales -- but in different
                  cities. Dan Beldy, a partner at Hummer Winblad Venture Partners, says his firm saw promise in
                  HomeGrocer -- even though it was clearly a latecomer -- because the entire grocery market has
                  room for more than just a few players.

                  "Why would you fund an attacker even if it's up against two major players, like Coke and Pepsi? If
                  the market is big enough," Mr. Beldy says. And there is plenty of room for all to play:
                  brick-and-mortar grocery sales totaled about $16 billion a year in the United States. (As it turns
                  out, he made a good decision. Although HomeGrocer didn't win the market, it lost in a lucrative
                  way; in late June, it agreed to sell itself to Webvan for a shade more than $1 billion in Webvan

                  Attacking a pioneer on price is always an option, but with a cost, because it hurts the attacker's
                  profits too. On the other hand, when a price cut works, it works really well: the larger the share of
                  the market a pioneer has grabbed, the more vulnerable it is. "The biggest guy in the market has
                  the most to lose in a price war," says Stanford's Mr. Montgomery. "If he goes across the board on
                  the price war, then he's cutting his margin on a really wide swath of income." And if this is the
                  pioneer's first and only product, all the more unlucky.

                  Of course, that was part of the recipe for Netscape's death as an independent company.
                  Netscape's Web browser dominated almost all of its little market, and accounted for almost all of
                  Netscape's revenue. Then Microsoft launched its me-too Explorer browser for free. We all know
                  what happened next.

                  The trouble, of course, with the attacker's advantage is that it only lasts as long as the attacker
                  is attacking. After the kill, the attacker becomes the incumbent. Then the fun starts all over again.

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