The Blog of Harald

A new book by Stan Liebowitz, called “Re-Thinking the Network Economy“, has some interesting insights. This
Economist.com article discusses one, namely that the principle of “first to market” was completely bogus.

The “network effect” describes the condition that a product’s value increases with the popularity of the product to consumers. The typical example is the telephone; one is useless, and the more people have a telephone, the more useful one is.

First to market is the principle that, because of network effects, the first person to produce a product in a given space wins. Superior late-comers cannot gain market share, because “using what everyone else is using” is more important than a superior product.

In refuting this, Mr Liebowitz emphasises the distinction between two kinds of lock-in. The question of compatibility is central to both. One kind of lock-in arises simply because switching to a new product involves a cost beyond the purchase price: costs of learning how to use it, for instance, or the difficulty of using it alongside products you already own. Mr Liebowitz calls this self-incompatibility, or weak lock-in. But there is also strong lock-in. This arises if a new product is incompatible with the choices of other consumers – and if, because of network effects, this external incompatibility reduces the value of the product.

Liebowitz claims (and I agree) that real strong lock-in is nonexistant. Consumers are capricious beasts, and are perfectly willing to adopt a superior product even in the face of incompatability; witness the ongoing success of the Macintosh platform.

Long before the Internet, consumers had plenty of experience adopting better technologies despite network-effect obstacles: cars (you need petrol stations), telephones, fax machines and, most recently, generation upon rapidly succeeding generation of network-dependent consumer-electronics devices. If a new product offers a clear margin of improvement over a competing one, consumers not only want to take it up themselves, they expect others to do the same. In this way, even where network effects apply, a sufficient margin of improvement achieves the necessary co-ordination among consumers.

I’ve always believed that the “first to market” principle was false; it’s nice that someone agrees with me.