I was shocked to read in a reputable financial newspaper, in my home country Australia, an article written by a known stock promoter singularly contributing Paypal’s success to the first mover advantage.
It strikes me as a simplistic explanation for the success of Paypal, which operates in a complex adaptive system where there are many independent variables that contributed to its success in gaining market share.
The author used a few strawmen and threw in a red herring for good measure to “strengthen” his argument.
The author argued that the reason it won is that it was already winning with innovative leaders who could bring ideas to life.
Sounds like a compelling idea if you think about it for only 15 seconds.
The first red herring is the sporting analogy, which has nothing to do with competitive interactions between firms operating in complex systems.
The author threw in another strawman argument and red herring at the same time, by stating that you cannot identify the first mover advantage by simply looking at the reproduction value of the balance sheet.
Indeed, it is obvious that the reproduction value of a company’s balance sheet's purpose is to help the investor understand the real economic value of the assets and liabilities underpinning the earnings power of the company, as first advised by Benjamin Graham and David Dodd back in the 1934 edition of "Security Analysis."
The author continued to throw cliché words like "network effects" into the mix to further look like he knew what he was talking about.
I wrote the headline "last mover advantage" to demonstrate that anyone can come to the wrong conclusion based on a simple premise.
For instance, it could be argued (not successfully) that Microsoft in the '70s and '80s came to dominate the PC software industry because it was last to market.
By 1982 it became clear that other software companies were developing GUI programs of their own for the IBM computer but Gates wanted to make Microsoft’s Interface Manager (the prelude to Windows) the industry standard for the IBM PC, and only Lotus and VisiCorp stood in his way.
Before Windows became the dominant software system for PCs, Microsoft Dos had lost ground to Lotus and VisiCorp.
In 1983 VisiCorp started shipping VisiOn and Gates' boast nine months earlier that Microsoft would be the first to market with a graphical user interface evaporated like so much hot air. Then another company called Quarterdeck, a start-up software publisher announced that it, too, was building a graphical user interface, named DSQ.
First to market wins right?
Wallace & Erickson described how Microsoft was being outflanked on several fronts by competitors that were further along in the development of their own GUI system. Worse, Gates was having a tough time selling IBM on the product.
More than 20 other computer makers, including Compaq and RadioShack, had indicated their willingness to endorse. But there was one name conspicuously absent from the Windows alliance -- IBM. Gates wanted Big Blue to endorse Windows, but it refused to do so. IBM executives, never particularly happy about sharing revenues with another company, wanted to bring software development in-house. IBM decided to design its own graphical user interface, called TopView.
Gates was furious. This was a technique used by IBM to deflect attention from VisiCorp and Quarterdeck, and also people were willing to wait for the market leader’s product to come out. InfoWorld magazine later coined the term for such a product "vaporware."
Sound familiar? Tesla also uses the vaporware technique today. The company has missed its production targets consistently, and this has been the main reason commenters have recommended investors not invest in Tesla.
The other reason Gates announced Windows was as a pre-emptive strike against Apple, which was secretly working on Macintosh with its graphical user interface and mouse that was going to shake up the industry when released in 1984.
Fortune, in early 1984, made an astute observation about the trouble with Microsoft’s inexperienced management structure:
“...a lot is riding on Windows. If it fails to become an industry standard, Microsoft may not get another chance to take the consumer market by storm. Momentum is an ephemeral quality in any nosiness, and in an industry evolving as fast as microcomputer software, it can be lost in the blink of an eye...Like other fast-growing companies racing to seize transient opportunities, Microsoft has devoted little time to develop the kind of management depth that will be needed to turn temporary victories into long-term dominance.”
Microsoft missed several deadlines, continually pushing back the release date. The first release of Windows 1 was a dud. It would take two major revisions before Windows was made right. Not until the release of Windows 3 in 1990 would it deliver as promised.
General George S. Patton liked to say that a good plan, violently executed now, is better than a perfect plan next week. Vern Raburn, former president of Microsoft’s consumer products division, discussed with Fortune magazine this same ethos of Microsoft’s product launches: "With a few expectations, they’re never shipped a good product in its first version. But they never give up and eventually get it right. Bill is too willing to compromise just to get going in a business."
Using the faulty logic of our author, you would argue that being last to market is the single reason for Windows' success. Now that might help sales for their stock promotion business but it misleads investors into thinking it’s as simple as identifying a single variable.
I want to draw your attention to a W. Brian Arthur, who over 20 years ago introduced important new concepts to understanding how new technology companies operate within new economic models.
Bill Miller, who beat the S&P 500 every year from 1991 to 2005 at Legg Mason's Value Trust fund, attributed his success to Arthur's work, and it is easy to see why.
Arthur wrote a piece to explain why first mover advantage was misleading back in 1996 for Harvard Business Review, called Increasing Returns and the Two Worlds of Business.
Identifying the variables that contribute to the success of an organization is hard. It requires the investor to conduct a multivariable analysis.
That’s why both Warren Buffett (Trades, Portfolio) and Charlie Munger, along with other billionaire investors, recommend you stay within your circle of competence.
