The Last Mover Advantage in Business

“Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.” – Peter Thiel

First vs Last Mover

Humans love to be first – the first to get the latest Apple iPhone or be the first to watch the latest Avengers movie. In business, many businesses understand the importance of being a first mover to be a leader in their markets. If a company can be the first to enter or create a market, then this business is able to capture market share by being ahead of the potential competition, be seen as a innovator and establish brand loyalty.

However, in today’s rapidly changing world, being a first mover may not be such a huge advantage. In fact, the first-mover advantage is actually turning to a first-mover liability. With today’s technology advancing at a fast pace, competitors can catch up quickly and erode the first mover advantage. Successful businesses today may hold its value if it can maintain its current cash flows for the next few years. However, increased competition will see its profits starting to erode.

As PayPal co-founder and early Facebook investor Peter Thiel notes, “First mover isn’t what’s important — it’s the last mover. Like Microsoft was the last operating system.”

Google was definitely not the first search engine on the internet. Yahoo existed way before Google. Yet Google was the last big mover for search engines and has dominated ever since.

Why is this so?

The late mover arrives studying the first mover’s mistakes and areas of improvements without outlaying huge capital. This leaves them in a good position to judge if a market is worth entering. In this way, it has learnt from the first movers. Innovation often combines the best elements of products and services that already exists; it may copy but able to avoid their mistakes. They can then innovate from that point forth. They then make the last great development in a specific market and enjoy years of monopoly profits.

The Question of Overvaluation

The value of a business today is the sum of all the money that business will generate in the future. Or in more technical terms, by projecting the cash flow generated by the business against the rate of return wanted for the risk that the business represents.

Ironically, it’s also partly the reason for the huge premium on tech companies – the expectation of future cash flow through monopolization of the market by possibly being the last big mover.

Network effects are important in building these companies. They often are loss-making for a few years as it builds up its moat, and that means delayed profits. It is important to note here that the moat of the company is indeed strengthening rather than weakening. The network effect will help the last mover to grow at an exponential speed once it starts to gain traction. This makes it hard to stop, even for the first mover. Huge market share is not enough if the company is not able to generate enough profits or to be able to acquire or block competition. Being a visionary has its benefits, but it is not a must for long-term success.

Sometimes new ideas are just overrated.

Examples:

Amazon: Book Stacks Unlimited founded in 1992 was actually the first Internet bookstore. 2 years later, Jeff Bezos launched Amazon, and blew past Book Stacks Unlimited by capitalizing on the originator’s lack of promotion. The rest they say is history.

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Source: Business Insider

Facebook:  Facebook was definitely not the first social network. Remember Friendster and MySpace? In fact, MySpace dominated social media before Mark Zuckerberg’s smaller Facebook gained traction. More recently, Snapchat who created the disappearing Stories feature and face filters has seen its first mover advantage robbed by Facebook.

“In order to improve your game, you must study the endgame before everything else, for whereas the endings can be studied and mastered by themselves, the middle game and the opening must be studied in relation to the endgame.” – José Raúl Capablanca

 

2 thoughts on “The Last Mover Advantage in Business”

    1. Hi Mark! Yes, if you are a long term investor, I still think Facebook is a buy. Facebook has been beaten down quite badly in recent months, but the long term trajectory is still there. There’s still monetisation potential in both Whatsapp and Messenger. In fact, Facebook has already started to test ads in Whatsapp status. Instagram is also rumoured to be building a standalone app for shopping.

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