First-mover Advantage

Speaker A: 00:00:00

Hello and welcome to the Cognitive Engineering Podcast produced by me, Fraser McGruer, for Aleph Insights. In this series of podcasts, we take a look at interesting topics and discuss what we think they tell us about analysis and decision making. I'm here with Peter Coghill, Jordan Fermanis, and Nick Hare of Aleph Insights, and this week we're discussing Amazon's drone delivery service. Nick, you're leading us off on this. What's going on with Amazon's drone delivery service? It's all coming, right? It's very exciting. They're at the cutting edge. Amazon's all over this, yeah? Yeah, well, that's the interesting thing. I was very excited. If you're anything like me, you'd have been excited by the thought that you could order your next packet of frozen peas and have it delivered by a robot who would turn up either on wheels, on tank tracks, one assumes, trundling along, or even more excitingly, flying in to drop it presumably in your garden or something. Within minutes, I would hope. But apparently, they're having to cut their staff back there. The drone delivery service now looks like it's imperiled usual things about costs and all of the unanticipated technical problems, and whether or not there's actually the right level of demand, all of those things, which is fun. But I think what we want to talk about is whether or not- Because they were amongst the first to tout this. Right. And now, of course, they've happily made all the mistakes. And presumably, when Facebook starts its drone delivery service, they will be able to already forge down that trodden path. So the question is, when is it good to be the first person in a new, innovative market? And when is it not? And is there some way of knowing, apart from actually trying it out, is there some way of knowing which one of those you are, if you're planning to create and hopefully exploit a new market? Okay. I want to go to Peter. What have you got to say at this point?

Speaker B: 00:02:11

Yes. So my research highlighted that being a first mover is sensitive to a number of environmental factors. So principally around what the market is like, or the latent market of the area you're selling into, and what the technical environment is like. How novel is it? How well-trodden is it? Those are two really important factors. So a market that's new or latent or fast-moving, so the expectation of consumers-

Speaker A: 00:02:47

What do you mean by market being latent?

Speaker B: 00:02:49

That it's sort of unexplored. So there's people who want this thing, but there's no one selling it yet. Or people will want this thing if they know this thing exists.

Speaker A: 00:02:58

Like social media, which wasn't even a thing people knew people wanted until it came along.

Speaker B: 00:03:06

So the market's like, if it's new or fast-moving, so the expectations of consumers shifts quite quickly. By early days of social media, things changed very quickly in that, because it was finding its feet. But also, it's the same ideas for technology. So if it's cutting edge, if it's new, if it's rapidly expanding, these key factors make the waters in which you're treading more or less turbulent. So a market where things are, an established market where technology doesn't change very much, say things like paper or cars, it's relatively easy to, as long as there's additional market capacity, to get into that market. You just keep doing the same things that everybody else does. But if you're selling something that's new and into a market that isn't really founded yet, it gets much more complicated for lots of reasons.

Speaker A: 00:04:06

Okay. All right. Are we ready? Actually, I'm slightly disappointed. I think we moved away from drones too fast. I wanted to talk about drones a bit more. Give me hope. There are other people out there talking about drones and developing drones. Yes? Well, yeah, I think there's lots of people looking at drones. But the first delivery by drone may now be a bit further away than we thought. Right, that's what I'm talking about. Okay, that's a shame. Are we ready to talk about examples of stuff where it's worked out or stuff where it hasn't worked out? Well, I've got some, a few examples of just, you know, historical examples of... Of where it worked out? Not necessarily. I've just gone through some document, documentary examples of inventions that we knew and, you know, what happened to the people who invented it and the company that first produced it. We'll come on to that because I think Jordan's got some that didn't work out, yeah, as well.

Speaker C: 00:04:54

it in the dot-com boom in the: 1990

Speaker A: 00:05:54

effectively had a monopoly in: 1905

Speaker C: 00:09:48

Say again? Are they Chinese?

Speaker A: 00:09:52

quired by English Electric in: 1956

Speaker B: 00:13:43

So yeah, so another area I researched was like, reasons why first mover advantages fail. And these are good examples, I think, that map on to various reasons. So I've developed this little taxonomy of mechanisms of failure. I was looking at tech companies mainly. The Coghill taxonomy of failure. The Coghill taxonomy of failure. Will it take off? At least he's a first mover in this. Is that a good, yeah, let's see. Yeah. So poor management and incompetence is one of my sort of, one of the mechanisms of failure. And I think Wright Brothers, you could argue- Don't point to Nick. The Wright Brothers, had they been a bit more commercially savvy in terms of sharing the IP or being a bit more open with the IP, perhaps they would have been more successful. But there are other things. So understanding of, lack of understanding of your consumer. So this example, I think, is Betamax versus VHS. One of the main reasons that failed, Betamax failed to-

Speaker A: 00:14:46

I'm going to guess they thought people would be more interested in quality than they actually were? They were, yeah. Right.

Speaker B: 00:14:50

That's exactly what they thought. They thought, well, sacrifice play time for quality, which meant that you couldn't get feature length films. Were they shorter? I didn't realise that. They were shorter. They were like 60 minutes or something rather than four hours. There was some technical decision they made, which was wrong. Technical inferiority, or I would call it pioneer disadvantage. So this is playing into the technical space moving too quickly. So you build something and pour resource into that. And it turns out to be not as good as somebody who comes along afterwards having benefited from the lessons that you've learned and comes out with something better and quicker and cheaper. Product or service dogmatism or barking up the wrong tree. So this is deciding on a thing and I'm being inflexible in it. Yeah, not pivoting.

Speaker A: 00:15:45

Yeah, that makes me think of that, what were they called? Just Friends, Friends Reunited. Yeah, who refused to allow you to share contact details and stuff like that.

Speaker B: 00:15:56

Friends Reunited just had weird restrictions that Facebook didn't. But the example I like is MySpace, which failed for other reasons. MySpace didn't see itself as a social media network. It saw itself as a traditional media network whose job it was to produce content for people to consume and buy. Whereas Facebook said, we're not interested in making content. We just want people to connect, harvest their data and sell them and advertise. Facebook flexed into that because they originally weren't really doing any commercialisation. The data harvesting and everything else came later.

Speaker A: 00:16:37

I wonder how they did think they might make money. But anyway, let's get the users and then get the money.

Speaker B: 00:16:44

Finally, it's about price to the consumer or internal costs. If your first mover picks the wrong suppliers, picks the wrong enablers, and you're tied into greater costs than your competitors might necessarily be, then that's going to be a problem that you're going to pass on to consumers and consumers are going to pick one or two cheaper options. Any well known examples of that? Yeah. Apple in the 90s, Apple is obviously now a pretty successful company. But in the 90s, they were really struggling and they were being bullied out of the market by Microsoft Intel cartel who could produce things cheaper and quicker than Apple could. That partnership between the software and the hardware manufacturer meant that they could do things cheaper than Apple who was trying to do everything at once with different suppliers.

Speaker A: 00:17:40

Okay, I feel we're getting into this. Jordan, anything to add on this one? Any thoughts?

Speaker C: 00:17:45

Yeah, I was just thinking that it seems like historically, first mover advantage has been really significant. And it's played a big part in the success of the company. But in more recent examples, it looks like the opposite is true. So with anything to do with the internet, when Nick was speaking earlier, I was thinking about Google, which wasn't the first search engine, but is indisputably probably the most popular now. Starbucks is another example of coffee shops were around before Starbucks went into the market, but they managed to sort of be successful without first mover advantage. So I'm just thinking whether it's something, it's a sort of outdated theory, perhaps. And in the sort of more innovative industries or in the modern world, it's not as such an important thing.

Speaker A: 00:18:38

Yeah, I think there's a... What do we reckon? The economics might shed some light on this. Go on. So the theory is, from a sort of production economics point of view, is that you are meant to find yourself in a first mover position. And at that point, you've got a few means by which you can generate an advantage. So the main one being cost advantages, like you're able to generate some scale when there's nobody else in the market. At that point, you're now theoretically cheaper. So I mean, that's, I guess, traditionally. You know, manufacturing, that would be the big advantage is that you're the one with a factory. Somebody else hasn't got a factory, you're already cheaper and you can exploit that to sell more cars. And the new guy is not going to be able to cover his costs because he's not at the same scale you're at. Also generating a monopoly on scarce inputs, so the idea being you grab the prime spot in the centre of town for your restaurant, and that's gone now. And similarly, if McDonald's is buying all the potatoes, it's harder for other people to find potato suppliers who are willing to sell to them. Of course, big one, and I think this is where the interesting bit comes in with Jordan's observation, is if you can get switching costs, so network effects and switching costs. Sorry, what's switching costs? Well, like, you know, like it's, if you've got locked into the Gillette razor system, it's harder for you to switch to. Gotcha, okay, yeah, yeah, yeah. That happens in my industry. VHS, Betamax. Canon, Sony, you know, when you invest in your lenses and your cameras and also your know-how. And, you know, all of that. Yeah. So, and if you can have switching costs, you've got now, if you think about nearly all of that really only applies to real world production. So, cost advantages, I could set up a network, a new social network tomorrow, and if people liked it, it would be very easy for me to scale up. It will be, you know, well, not free because I have to pay for server time and stuff, but it's a linear scaling up. I don't need to buy a warehouse full of servers to create a new social network. Not so with something like Amazon. So, I couldn't invent my own logistics network. Amazon have a real world cost advantage that I don't have as a new entrant. So, all they have actually is that sort of what's left, if you like, of first move advantage, which is familiarity, brand recognition. What about how important or not is scarcity of the product or service that you're offering, i.e. if you're the only one selling it? Well, if you can, that's the whole point is that you're trying to get into a position where you're a monopolist. But with online services, the problem is there's no real cost advantage, you know, to being the first entrant. It's very easy for someone to invade a market, and they don't need to have invested billions of pounds because they can just be better and come from nowhere, like Facebook did with MySpace. So, I think that's the thing. If we're talking about the information world, a lot of these purported first move advantages disappear, and some of the problems, which are all to do with, effectively, positive externality. So, in other words, my mistakes are good for everyone else. I can't sell my mistakes to you. I'd like to. It'd be great if I can say, oh, I can teach you how to not make these mistakes. But it's free because other people can read the business press and find out about it. So, this backs up what Jordan was saying, why first move seems to be historically an advantage, but less so now. Yeah. Or I would say, you know, an advantage in real world manufacturing, not so in information. And of course, since all of the kind of new business, the new sectors that we think of are information based.

Speaker B: 00:22:32

And I think that's borne out in intuition. If you think about the rapid rise of new online services like Zoom just exploding during pandemic, and now being one of the biggest online chat programs, TikTok has only been around since very recent, now is comparable in competing with Facebook and Twitter. So, it's like it's a very turbulent place because the constraints are lifted in the online world. I would say there are still a few constraints, like scarce resource constraints around availability of talent, the people you're going to have to build and maintain your products. But people are pretty adaptable. So, skill sets can be developed quite quickly in a workforce.

Speaker A: 00:23:23

That's a really good point. I mean, that's almost a side effect. If you're the first person in there, you've got more knowledge about that domain than anyone else in the world because you kind of invented it. But, and I've only just had this thought, but it occurs to me that actually one of the whole points about the modern information industry is that you are looking to automate as much as possible, to dehumanize and also

Speaker B: 00:23:48

reuse. I mean, everything that kind of Facebook, you could build a Facebook using open source stuff that other people have built, but more general purpose blocks will build a Facebook. You can use the same general purpose blocks to build a Google. They're kind of blocks that are good at doing their one little thing and in composite will build a more complicated thing. So, yeah. So, the skills required are achievable by people.

Speaker A: 00:24:18

Again, I mean, I think it's interesting. Actually, I'm surprised we're sort of towards where we need to start thinking about stopping. But I think the Zoom thing is interesting. I mean, they're definitely not the first mover. Some probably something like Skype or maybe someone else I've never heard of. I don't know. I mean, that feels very like the Wright brothers getting taken over by someone who better at it. Skype is awful. Right. Yeah, I agree. And like Peter's example of being stuck in old paradigms, Skype was stuck in the idea that this was about phone calls. I was calling you rather than essentially this is a website that you click on and you're in a meeting. Yeah. And I remember that's what you always liked about Google Hangouts. And I think what's interesting, Zoom was already doing really well, right? And I was already just through my work a big user of Zoom. But what's interesting is this thing about events, right? And something happens, which no one, maybe you can predict it, but just something just completely, you know, a curveball that completely changed the market. And is it a question of, you know, what would Zoom share price, right? Were it not for the pandemic, right? And were they always going to be, we don't know how successful they will be in 10, 20, 30, 40, 50 years from now, but now they're looking really good. But what would have happened? What's going on with their trajectory without that pandemic? And does it really affect things in the long term? I don't know. These are just musings. As I said, we're near, we're kind of at the end almost, but also it's one of those rare podcasts where I feel we have actually addressed the question, answered it and have a definitive answer, more or less, which is does... That's always satisfying. Yeah. Well, no, I find it weirdly disquieting. I don't, I much prefer it when I just at the end go, well, we have no idea what's going on, but we talked about something for half an hour. Yeah, we still don't know what dust is, but we had a good chat. Yeah. So I think we've more or less answered it. Is first mover advantage still a thing? Is it a thing? Not as much as one might think, but it can be important, especially with sort of, you know, manufacturing and stuff like that instead of information business. Oh yeah, I guess, but just to relate it back to drones. I mean, I think, you know, actually the probability is the people doing the drones probably do have a significant first mover advantage. So, I mean, you know, I think that's the answer. What do you mean, the people doing the drones? Well, it's hard to make drones. It's easy to make a website, but you and me couldn't in a month of Sundays create our own drone program. Hey, you give me an idea, right? Let's do it. We've got the IP on that right now. Okay. Look, before we kind of wrap up on something, anything we want to throw in at this last minute, anything at all? No, lots of blank stares. Okay, let's finish off. Got a question. Thinking about disruptors, thinking about, you know, there's already those first movers or second, third, fourth, fifth movers out there. If you wanted to disrupt a market, if you wanted to invade a market, which market do you think is ripe for the taking, Nick? Well, you see how shops, remember them? Shops, yeah. Yeah, like which you used to go in and buy clothes. I walk past all these empty places all the time. I think those were once shops. Yeah, yeah, yeah. Right. So, you used to go there and buy them and then, you know, online services came along and you might have thought 25 years ago, you might have said, well, BHS and Marks and Sparks, they're going to be the big player in the new digital world because they've already got the infrastructure. They've already got the, you know, the production lines and the logistics chains. We'll be buying our clothes online from Marks and Spence, but no, we're not. It's a whole new load of firms that have taken over the economy, like Amazon, you know, because they've done something quite different. Now, it hasn't happened with food yet, right? We've still got the likes of Sainsbury's and even, you know, McDonald's and Burger King and things like that. Aren't you late to the party on this? So, no, because listen, because it's only recently, no, you've only really just seen and the pandemic has given it a good nudge up the hill, the massive rise of like your kind of Uber Eats and Deliveroo and all that. So, what I'm saying is McDonald's' time has come. Right. I'm going to invade McDonald's. Yeah, because now I can instantly get a huge reach just through, you know, getting some good reviews on Uber Eats. So, I think we're going to see- What's your service? Burgers. Burgers. Really nice ones. Yeah. Okay. Now, I'm just saying that, you know, all of that infrastructure, I can now jump on top of that didn't exist before. Well, in the old days, I used to have to, you know, create restaurants and a brand and marketing and employ people. Now, I can just scale up burger by burger. And are you doing, is it a delivery service? Yeah, it's all delivery.

Speaker B: 00:29:08

It's only delivery, just like Amazon, right? But you're making use of existing delivery services. So, you're not going to employ drivers to- Don't need to do any of that.

Speaker A: 00:29:15

So, you want to be a burger restaurant that-

Speaker B: 00:29:17

Yeah, you're going to cook burgers in your kitchen and sell- Yeah, exactly. Entirely online.

Speaker A: 00:29:21

Artisanal burgers, fresh from North London. All I've got to do is scale up a burger at a time. I haven't got to worry about opening restaurants and that kind of thing. I've just got to get a production line for burgers, getting them out the door. Look, I'm just saying that should happen, right? By analogy with- because you would have said, no, you can't, you're not going to, you know, create an online clothes business because Marks and Spencers will do it, but I think you've got a problem here, which is I don't think McDonald's is about burgers. McDonald's is about consistency and cheapness and it's about value. I can do all of that. So, just give me a chance. Come on, don't- All right, I'm going to give you the startup money. You've convinced me. You've convinced me. I'm not convinced at all. Actually, one of my sons, what he wants to do, he wants to have a burger shack when he's- not even when he's that much older, he wants to do it pretty soon. Lulu's Burger Shack. I'll totally go to that. Yeah, and like this- I think it's more about the whole artisanal thing. I think that's what- that's your market. We'll mass produce artisanal burgers. But we also talked about how- Enthusiastic, dystopian factory, where whole cows go in and like perfect burgers.

Speaker C: 00:30:25

And the drones come out with the burgers. Jordan? Nick actually stole mine slightly, but- Oh no, Nick, he literally stole your chip. But I'm constantly looking at Deliveroo and Uber drivers whizzing around London and wondering sort of, you know, the explosion of food delivery, like what is the next kind of delivery service? Deliver to Lincolnshire, please. But anyway, go on. So I don't know what it could be. Food seems like it's done, but I think there's something else probably that we haven't realized we're too lazy to-

Speaker A: 00:31:00

Let's just hold on. So we've got stuff which comes from Amazon and food which comes from Deliveroo. What else is- there must be something else. What about medical supplies? What about, yeah, doctors? What are things you need that you never have or you forget to take with you? Because also maybe the medical thing is something, because you can get your online services, but is there some way of bridging, like you get an actual doctor, like by drone, I don't know, with a hamburger. Yeah, I don't know. Have we sort of- Something. Something but delivered. That's the idea. Yeah. I feel it needs more work this month.

Speaker B: 00:31:43

Peter? A fairly boring tech example. I think there is a bit of a resurgence, a reaction going on, particularly among the younger, more tech savvy reaction against the Googles and the Facebooks and the Twitters and the TikToks harvesting all their data and the end of privacy. I think there's a market for an Apple style whole stack closed ecosystem that builds laptops and phones and the operating systems that run on them, plus all the apps and services with a promise, a contract to your consumer that you don't harvest any of their data. Their data is completely their own. They're completely in charge of their own data and they can share it with it, share it with whom they want. We as a company don't do that. We're not interested in reselling any of your data. I think there's a market there for that. But the entry costs are astonishingly high. That sounds like the final series of Silicon Valley. Yeah. Yes, it is. It's a reaction to the end of privacy. Because there are little bits going on like this already. There are sort of social medias which provide that kind of service. There are laptop manufacturers who want to make it as easy as possible for you to fix and maintain your own laptop rather than it being throw away when it breaks. So there's this partly eco, partly privacy based company.

Speaker A: 00:33:12

Are there higher costs to these sorts of things to the consumer?

Speaker B: 00:33:16

There would be because you as a company are not harvesting as much.

Speaker A: 00:33:19

I'm not giving you my investment money. Yeah, but I would be more than willing to pay for that if I could. I think the consumer would be interested in buying that as a thing. I feel like there may be a bit of optimism there in that I never use free apps. I want to pay for that. I don't want all the ads. Oh, I see from that sense. I don't want all the pop-ups. What am I giving them if it's free, supposedly? But unfortunately, I'm one of very few people. I think you're in a minority. Everyone is making money from free stuff that is actually secretly a means of advertising. Maybe you want to make your market just North London.

Speaker B: 00:34:03

Well, and all the preppers in America as well.

Speaker A: 00:34:06

What's a prepper? Doomsday.

Speaker B: 00:34:08

We've even done a podcast about preppers. Crazy. You were there. I should remember this stuff.

Speaker A: 00:34:12

I should remember this stuff. I don't have an example.

Speaker B: 00:34:16

Privacy paranoid libertarian type.

Speaker A: 00:34:18

Yeah, yeah, yeah, yeah. Okay. I think, again, you might need to pivot somewhere along the line and sort of make it some kind of alt-right sort of website about moon landings or, you know, and yeah.

Speaker B: 00:34:31

4chan, the laptop company.

Speaker A: 00:34:34

I don't have any actually, but I can... Maybe that's part of my problem actually. But I can think about businesses that I want to have and I consider having. I guess in that some sense they are disruptive, but I don't really have one. But yeah, I too want to have a... I'd like to do a barbecue restaurant. That's what I'd like to have in my back garden in Lincolnshire. And maybe I should do that because I like barbecuing. Yeah. And also, most of the food up there is just not the products, not the cooking is rubbish up in Lincolnshire. Yeah. So maybe I need to do that. The other thing, I'm really into painting cupboards. Not as in Magnolia. For a hazelut sandwich, grilled hazelut. I was going to bring you a hazelut today. Oh, that's a shame. But I forgot. But yeah, I like painting cupboards. I like Indian truck art. Yeah. I feel this also needs a bit of work before it's a really punchy elevator pitch. It can be polished up. But also, I'd have to go one of two ways with that. Either I sit there and I really enjoy... It takes a long time. It's very labour intensive doing my Indian truck art. Okay. One of the problems is consistent supply of what you're actually painting on. Trucks. Well, I mean, this is where I've been disruptive. That's why I'm doing it on a cupboard, not on a truck, you know. But also, I'd have to go on the full-on artisanal thing. Yeah, that's 5,000 quid for that. Yes. Or I could just import stuff from Pakistan. But then where's the fun in that? But... This is the worst business plan I've ever had. But it's good that you're thinking about it. Exactly. All right. We're going to stop there. As always, thanks for listening. If you've got any thoughts or suggestions for topics, you can email us at podcast.alephinsights.com. We'd love to hear from you. Also, if you've enjoyed the podcast, Peter, what should you do?

Speaker B: 00:36:25

You should move first and quickly and hit that like and subscribe button.

Speaker A: 00:36:29

Damn right. Quick, quick, quick, quick. All right. We'll stop there. Thanks, as always, for listening. I'm Fraser McGruer. We've been here with Jordan Fermanis, Nick Hare, and Peter Coghill of Aleph Insights. Until next time, goodbye. Bye.