Apple, Google And Second-Mover Advantage

Includes: AAPL, GOOG, MSFT
by: Dana Blankenhorn

When I started my weekly newsletter in 1997 I called it because even then I had seen patterns repeat in technology, again-and-again. I called these patterns “clues” and called reader attention to them.

One of my earliest clues involved what I came to call “second-mover advantage.” Everyone back then was talking about being the first company to do something, but I'd seen that it was the company which studied that first-mover, and managed to overtake them, which ultimately triumphed.

The classic example is Microsoft (NASDAQ:MSFT) Windows and the Apple (NASDAQ:AAPL) Macintosh.

Apple had first-mover advantage, delivering the Macintosh in 1984 while a truly-useful version of Windows didn't appear until 1990. How did Microsoft do it? Steve Jobs said Bill Gates stole from him, and in fact he didn't even build a “better” mousetrap. He built one that was good enough.

So how did Microsoft win? It won by building a bigger ecosystem, by bringing more people and companies into its orbit. It let others build Windows PCs. It didn't demand that everything under its banner be super-great. It didn't go for the last dollar.

Generosity is one clue. Another is focus. That's what got Google (NASDAQ:GOOG) over Yahoo (YHOO). While Yahoo listened to Wall Street idiots chant it needed to become a “portal,” a one-stop shop for all your Internet needs, Google focused strictly on search and on operating the business. This led it to a broader focus on operations, which led to cloud computing, and which left Yahoo in its dust.

So we come to 2011. Once again the same dynamic is playing out, this time between Apple and Google.

The iPhone had first-mover advantage, but by encouraging OEMs and focusing on its own operations, Google's Android has passed it by. The introduction of the iPhone 4S did not change the trends.

The Android isn't the iPhone, but the Android is good enough. Thus we have 10 billion Android app downloads but a much smaller Android “app” market, measured in dollars. It's not your own value that matters, but the value the market places on something that counts.

Rigid control doesn't work. Good enough will usually beat outstandingly good. The top end of the market is always going to be a smaller slice of the market than the middle part. The Cadillac was a better car than the Chevy, but the Chevy always outsold it, and earned more of GM's profit.

One more important point. While first-mover advantage can be overcome, second-mover advantage usually can't be. That's because the second-mover learns things in overcoming the first-mover, and grows the market so that the effort needed to overcome it is exponentially bigger than what it had to do itself.

Sorry Microsoft. Sorry Nokia (NYSE:NOK). Y'all missed the clue and the game is over.

Disclosure: I am long GOOG.