3.1 Is Skype a First Mover?
This is a question that can be looked at and analyzed from many dynamic perspectives.
You might find that the answer is not what you may think. You will, however, see that Skype indeed benefitted from similar advantages that are categorized in previous cases. According to models that outline the definition of a first mover, Skype meets most of the criteria. The guidelines consolidated by previous research shows an agreement on the basic mechanisms that are common in many first mover firms (Lieberman, Montgomery, 1988).
In review of the question of whether or not Skype is a first mover, the mere definition of the term allows Skype to be both. It is possible that Skype introduced a disruptive technology and is merely a late entrant to an existing market. It is also possible that they created a whole new market with the mechanisms similar to a first mover. By looking at the actual advantages and model behavior of Skype over time, the answer becomes clearer. Skype is a first mover and the following 4 chapters will explain why. In the next section we’ll explore what the consensus is of a first mover and look at some past cases of how pioneering firms were subject to first mover advantages.
3.2 Measures of a First Mover
The existence of first-mover advantages has been, for a long time, a highly debated topic (Suarez & Lanzolla, 2007). There are skeptics that say it doesn’t exist at all. Moreover, there is no doubt that there can be disadvantages due mostly to external factors such as economic environments and consumer behavior (Gal-Or, 1987). However, much research has been conducted to say that there can be first mover advantages given the correct environment with the correct firm. As you will see, some research has even calculated factors such as luck (Lieberman & Montgomery, 1988).
The definition of first mover is not, by any means, a simple and straightforward statement. Just as a business environment can be manipulated, so can the definition. During my research, I tried to select works that pertain mostly to the situation of Skype. In taking this
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unbiased approach, I also found that Skype’s mechanisms and advantages were synonymous with a majority of those that I reviewed. The definition proposed by Lieberman & Montgomery is a good representative of Skype’s case for being a first mover, because it takes a neutral stance compared to other research efforts.
Lieberman and Montgomery define it as follow:
“...the ability of pioneering firms to earn positive economic profits (i.e.
profits in excess of the cost of capital). First mover advantages arise endogenously within a multi stage process…”
They describe two categories to support the existence of first mover advantages: The economic theories behind barriers to entry due to a firm's utility functions, and an amalgamation of consumer behavior between pioneering brands and later entrant brands (Lieberman &
Montgomery, 1988)..
The definition is comprehensive; therefore we should look at the first mover advantage at a deeper level. What are the exact economic theories behind the firm’s functions and how do they attribute to creating entry barriers? Relating to their second category, what are the forces that attribute to brand loyalty or at least switching costs? The answers to these questions are the building blocks in creating first mover advantages. These are what a company must have in order to survive long enough to see their investments pay off. Achieving this foundation is difficult and therefore first mover advantages are by all means, a rare occurrence. No research has ever produced a perfect framework that was 100% effective. However, with the right timing, some luck, and the right mechanisms, the chances become increasingly better.
3.3 Examples of First Movers
In this section we will try to get a better understanding in regards to the broadness of successful first movers. To do this, we will look back at previous first movers and see what their opportunities were to pioneer given their company’s proficiencies and any change in the environment they conducted their business in. There are many discrepancies in the area of empirical evidence to show how these opportunities comes about, and the endogenous nature is often difficult for managers to predict (Kerin, et al., 1992).
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3.3.1 Proctor and Gambles’ Disposable Baby Diaper
Some critics say that P&G were not the first to move into the disposable baby diaper market (McKenzie & Lee, 2010). This may be true; however they were the first to move into the mass consumer market. They learned how to bridge the gap between the product and the consumer, something that Johnson and Johnson was not able to do. Johnson & Johnson might well have been the first mover from a time perspective, but they didn’t posses all the resources needed to make a market (McKenzie & Lee, 2010). When P&G developed their diapers, they created a market that was never there before. This example shows that even if you are the first to think of a new product that does not necessarily mean you are able to move on that creation or idea. The advantages are only given to those who can move to the market first with the tools necessary to be successful and, therefore accept the rewards.
3.3.2 DuPont
DuPont is a chemical company that has seen significant first mover advantages in numerous markets entered. Many of their advantages have come from the fact that the company has had a huge technological lead over other companies and a current number of more than 3,500 active patents (Lieberman & Montgomery, 1988). Technological leadership has constructed entry barriers for competing companies. Time constraints and high learning costs are mechanisms that contribute to a firms advantages sustained over time. This was much different from the case of Procter & Gamble who used product differentiation and placement as the mechanisms for their sustained advantage. DuPont uses its technology and patents to ensure theirs (Chandler, 2005).
3.4 Luck and Opportunity
A firm and its management have very little control of where the opportunity for a pioneering decision will become realistic. According to the model put forth in a paper by Fernando Suarez and Gianvito Manzolla, the initiation of an opportunity for a first mover to pioneer is sparked by an asymmetry in an external environment that the firm has no control over.
This phenomenon has been looked at in many research attempts, however none have been
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able to give an empirical explanation to how these opportunities rise. Most research has had to concede that these are the external forces that sometimes cannot be predicted for every different situation (Kerin, et al., 1992). Capitalism is a free ride economy system, and when you have this much freedom, the variables become difficult to explain. It’s similar to the stock market; when reverse engineering this phenomenon, the answer is clear, however predicting them is nearly impossible.
In the title of this chapter I highlight that the first mover advantages presented themselves endogenously (Suarez & Lanzolla, 2007). The reasons this opportunity was exposed by Skype deal has to do with luck and timing , but at the same time, Skype’s business proficiency in IP and P2P networking worked in their favor as well. There was some sort of asymmetry in a consumer market that had not been taken advantage of until Skype entered. In the next section we will look at the facts behind the endogenous growth of a new emerging market. The network effect will play a major role in how this opportunity came to be. Later we will identify why Skype was in a good position to use the network effect in harmony with their technology.
3.5 The Network Effect
The network effect is a widely used term for describing how a good or service can become more popular and/or valuable as it increases its number of users (Madden, et al., 2004).
Although negative network effects occur, we will only look at those cases where a positive network effect is present. The four most typical kinds of network effects are: two sided, direct, indirect, and local. Skype has benefitted from a direct network effect. This positive externality allows anyone who is part of the network to benefit whenever another user enters the network.
In addition, the person who enters does not necessarily intend to create a positive effect on the network. The economic side of the network effect has been studied and shows that the demand-side of economic scales relates closely (Madden, et al., 2004). As demand for a product becomes greater, the economic value also increases. Therefore as others demand and use a particular good or service, every user can derive value. This is the economic value of network effects and there are 2 kinds. Inherent value is produced when I use the product, and on the other side, network value is produced when others use the product (Weitzel, et al. 2000).
Skype has the position to create both of these economic values with their services. Currently, we can see the network effect in almost every form of media. The internet itself is a
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phenomenon that was created by and for a huge positive network effect. Within the World Wide Web, we see social media sites that have also been positively affected by this phenomenon.
Facebook and Twitter are great examples of this. The more people that you can incorporate into your private social network, the more valuable your network becomes (Weitzel, et al,. 2000).
3.6 Examples of the Network Effect
The network effect played a significant role in the generation of Skype’s first mover opportunity; therefore it’s useful to look at the 2 most renowned network effects in our recent history. You will see that both of these occurrences were built on by previous ideas; however they split and emerged to appeal to the public in ways never before seen. Their impact has been profound enough to change our everyday lives, and allow us to become more connected to each other. In return, more opportunities have spawned from their frameworks.
3.6.1 The PTSN (Public Switched Telephone Network)
Based on the telegraphic technology commercialized at the end of the 19th century, the Public switched telephone network or PSTN was developed in the 1960’s. The telegraphic method of communication only uses symbols or pulses to transmit an encoded message. This encryption must be known by both the sender and receiver. Morse code is an example of one of these encryption methods. The telephone worked differently in a way that it was able to transmit sounds. The PSTN was not a well demanded product until some later technologies were produced. The first telephones were connected directly to each other. Therefore you would need as many lines as you would have contacts. Teletraffic lines and switchboards were developed which allowed telephone users reach a far greater number of people. Now telephones are networked together in a local exchange. These exchanges were then grouped into trunks. This trend kept expanding until customers were capable to call anyone in the world that had a receiver (Rappaport, 1996).
In this example we see a direct network effect. As the amount of users increased, so did the network. A new customer immediately had the access to the telephone network and directory, and the existing user’s telephone had a higher economic value (Katz & Shapiro, 1985).
The operators are the facilitators of these networks, they cost money, and therefore they must
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have a cost structure. The basic idea is that the farther the receiver you are trying to telephone, the more it will cost. In most countries the operators are privately owned, however some countries use government to regulate the telephone lines. In any case, due to this network effect, the carriers were investing large amounts of money into the infrastructure of the network.
This is where most of the barriers came for late entrants. Then when the internet began to emerge, many people saw an opportunity to invest in a new disruptive technology (Husig, et al., 2005).
3.6.2 The World Wide Web
As the web grows and expands, its network effect on society has had a huge impact on our everyday lives. The telephone cannot compare to the effect the internet. We now can find any piece of information at any time. We can create online marketplaces and websites to hang out with friends. Almost anything that carries internet value has some sort of economic value.
As mentioned earlier, social networking sites are only as valuable as the amount of users registered, and the value rises with each additional user (Richardson & Domingos, 2002).
Online auction sites also gain value with each user. This is particularly important for this style of websites. In order to make the auctions competitive, they need to have a large user base.
Google has made a business on cataloging information. They supply users with accurate information and sell advertising space to appeal to the vast amount of foot traffic that flows through their servers. The internet was a disruptive technology that was based on the same networking effect that the telephone was based on.
3.7 An Endogenous Opportunity
In the next chapter we will discuss what proficiencies and business decisions were the mechanisms for Skype’s advantages. However, in order for Skype to derive its economic advantages from being a first mover, we must first understand where this opportunity came from.
When you look at the environment from which Skype was created, it is almost a mimic of why Skype exists. From the first network environments found in telegraphs and telephones, to an internet of connected computers, the endogenous rise of a first mover opportunity looks quite obvious from Skype’s perspective. By using their technology, they found this opportunity in VoIP, or “voice over internet protocol”. They wanted to help customers turn their computers into
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telephones. The infrastructure already existed and the customer base was basically that of any telephone user (Rao, et al., 2006).
The beginning of Skype’s pioneering achievement was when they noticed an imbalance in the symmetry of the telephone network. In some sense, they were aiming to use the disruptive internet technology to improve upon an existing technology. It is this asymmetry along with 2 other factors that allow for a first mover to gain advantages in the market.
Published in a paper by Lieberman and Montgomery, the endogenous growth of a first mover is shown in figure 1 below.
Endogenous Growth Model of First-Mover Advantages
Figure 1 Source: Lieberman and Montgomery, 1988
This model begins at the top with an environmental change, this being the formation of the internet, and the outdated and costly PSTN. Next are the 2 factors of luck and firm proficiency which ultimately lead to the opportunity. This is where Skype begins to find its chance to be a first mover. As I mentioned, Skype or any company, is not able to predict or enhance the opportunity present, however they had the correct resources and timing so that they were able to realize the opportunity before any competitors.
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