A Startup’s Guide to Maximizing Last Mover Advantage

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About a year ago, Peter Thiel spoke at a PandoDaily event where he extolled the last mover advantage:

“First mover isn’t what’s important — it’s the last mover. Like Microsoft was the last operating system, and Google was the last search engine.”

I hear this refrain more and more in pitches. The thinking goes the last entrant to the market benefit from mistakes made by earlier entrants.

But being the last mover isn’t always advantageous. The reality is more nuanced.

When Last Mover Works

Technology, platform or behavioral discontinuities. The last mover is the agent of Clayton Christensen’s Innovator’s Dilemma embodied. It’s the company that pursues an incumbent with faster, better or cheaper solution and in particular a solution that cannibalizes the incumbent’s business model typically because of a lower cost structure.

While Google did develop a better ranking algo, Google also had a fundamental cost advantage. Google served queries at more than an order of magnitude less cost than its competitors, who used expensive Oracle database servers, enabled by Google’s investment in running its software on commodity hardware.

Zynga leveraged Facebook’s Open Connect platform to grow its casual gaming business much, much faster than incumbents Pogo and others. The dramatically lower cost of customer acquisition on Facebook, enabled by an agreement between the two companies, fueled Zynga’s rise.

Instagram, “the last photo sharing service”, took advantage of a behavioral discontinuity, the explosive growth of mobile phone snapshots driven by high quality cameras in smart phones, to threaten Facebook’s photo sharing dominance.

Unbundling is another kind of discontinuity that involves identifying valuable segments within an incumbent’s customer base and serving them with a dedicated product. Companies like AirBnB, Uber, Path, and Axial are pursuing this strategy disrupting Craigslist, Facebook and LinkedIn. Last mover is an advantage because the segment’s needs have become clear and the incumbent’s horizontal product strategy hampers the product customization to serve even the most valuable segments.

When Last Mover is Challenged

Last movers can be a challenged by incumbents when the last movers have no discontinuity to bring to bear, face the network effects of incumbent transactional market places, are challenged by low margin competition, or face significant IP battles.

Priceline, “the last online travel agent” was founded in 1997. Bill Gurley wrote a great post outlining how Priceline won the lion’s share of the online travel market by reducing their rake. The larger the market place, the greater the monopoly, the more it can reduce rake to starve competitors. Craigslist’s strategy of largely ignoring monetization has prevented thousands of competitive market places from competing with it.

Amazon’s ability to operate at zero profit margin prevents ecommerce threats from rising. Compare their revenues to their profit. It’s hard for any ecommerce company to raise the capital required to build a competing business when your competition is happy with zero net margin.

Akamai exerts huge pressure on the CDN market by litigating competitors out of business. Here’s a quote from a Gartner report: “How to tell when a CDN has arrived: Akamai sues them for patent infringement.”

Survivorship Bias

While it’s true that Microsoft and Google eventually came to dominate their industries, it wasn’t necessarily because they were last. Of course, there were operating system companies and search engines that followed (Jollicloud and Cuill) for example. Instead, Microsoft and Google’s market power, their ability to keep their advantage in the market over time by anticipating discontinuities has enabled them to remain top dog — at least for now.

Takeaways for Startups

When looking to take advantage of the last mover advantage, ensure that you can leverage a clear discontinuity in the market.

24 May 2013

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