Many business owners assume that being the first to market with an innovative product or idea will win. Get those early customer conversions and let it spread as quickly as possible and your company will be ahead forever. The history of innovation shows that the opposite is just as likely. Unless the new product is so radical that no one else can copy it for years or the pioneering company behind it has excessive financial backing, most pioneers eventually fail. Innovative pioneers disappear, get bought out, and move on to other things. Few come out the other side still producing the product they pioneered.
What does it take to be an innovative company and survive when you develop a breakthrough product or service offering? With the right approach, not all is lost for innovative pioneers.
Innovators and entrepreneurs treat innovation like a race. They think getting a head start is the best way to get an advantage that will continue down the track. Really, innovation can be more like a boxing match. One boxer shows up to the gym early and trains for months to exhaustion with no one to train against. Meanwhile, the boxers competitors are biding their time and saving their energy. They watch through the gym window, taking notes as the lone pioneer boxer blunders with the training equipment. Come match day, the boxer who trained by themselves was tired, predictable and exhausted. The same is often true for innovative companies.
For example, Magnavox introduced the first video game console to the world in 1972, but it, along with a whole series of other video game pioneers, collapsed in the inflated video game market during the early 1980s. Instead, Nintendo, who took its time to ‘do things right’, flew into the US from Japan and went on to dominate the market with a video game console worth people’s money. Even Nintendo, although it still survives today, couldn’t keep up with the market after big-money players Sony and Microsoft entered the market in the 1990s and 2000s with the Playstation and Xbox.
The story of the video game market has happened over and over again to innovative pioneers. Mosiac introduced the modern internet browser to the world in 1994, and it is now long gone. Keytronics introduced the cordless telephone in 1975, but who has heard of it today? Friendster and MySpace pioneered the social network, but one is dead and one barely exists. Facebook now dominates the social media market today. Perhaps worst of all, Kodak engineers created the world’s first digital camera in 1975. Not only does Kodak no longer make digital cameras, that pioneering innovation also destroyed Kodak’s film business. Forcing the company into bankruptcy in 2012.
The Friction of Network Effects
The problem, as explained by Srinivasan, Lilien and Rangaswamy in ‘First in, First out? The Effects of Network Externalities on Pioneer Survival’, is that network effects hold back innovative pioneers from the market’s true potential until it is too late. That is, people are reluctant to adopt innovations before enough other people have adopted it first. Not only are the new, innovative, products often expensive, error-prone and sometimes hard to use. Without other people using the product and other companies supporting it, the product often has little value.
For example, a video game system isn’t much good if there is only one company making mediocre games for it. A new social network isn’t much good if your friends aren’t already on it. A new storage medium (hard drive), isn’t much good if no one has a computer that supports it yet. Bitcoin only exploded in popularity after enough people were using it. The jury is still out on whether it will last as a real currency. Its drawbacks, such as transaction times, are being solved by newer blockchain innovators. These newer innovative pioneers may eventually run bitcoin out of the market.
How to Make Network Effects in Innovation Work for You
Srinivasan, Lilien and Rangaswamy did find there were exceptions to the above failures for innovative pioneers. For example, if the innovation was particularly radical, hard to copy or introduced by a large company with adequate financial resources to back it, the company was much more likely to remain in the business they’d pioneered and maintain the position of industry leader.
The researchers noted how Sony–perhaps learning from their problems with Betamax–went to great lengths to make sure there were as few barriers to adoption as possible for their innovative CD player in 1982. Not only did they put years of work into making sure the product was solid before launch. They also set up licensing agreements to make sure imitators would have trouble matching the manufacturing volume of CD players. Additionally, Sony lined up record companies, including their own Columbia line, to simultaneously release a large number of recordings on compact disk. All this meant that over 20 years later Sony was still the leading manufacturing of CD players.
Backing up innovative products with major money or licensing cloned versions to increase initial market penetration is not always possible. Baohong, Jinhong and Cao in ‘Product Strategy for Innovators in Markets with Network Effects‘ suggest instead to consider offering expanded product lines which play to a larger potential customer base. This might mean including loss-leader or low-cost options to get people through the friction of network effects faster.
While Yuxin and Jinhong noted how some companies simply give their primary product away for free to dominate a primary market, but only if they can recoup those costs by using that primary market dominance to increase the value of a secondary product. For example, many free newspapers recoup costs with advertising, and this is also the basic business model for most social media services and free smartphone apps.
For innovation where network effects are strong–products that only have value if many other people use them, such as the telephone or fax machine–some companies might do best simply biding their time. Instead of rushing to copy a new innovation, they might wait until the groundwork has already been done by someone else. Then, once the pioneering boxer is tired from beating themselves up in an empty gym, other companies can step into the ring and land the final punch. But as always with innovation, there is no real sure bet. Leave it too long, and the lone boxer will be too well trained to defeat even if they are tired.