Thursday, January 27, 2011

First to Market is Often Last in the Marketplace!

The de Havilland Comet was the first commercial jetliner to market.  It was a colossal failure.  First to market is often last in the marketplace.


The de Havilland Comet is famous for being the first commercial jetliner to make it to the marketplace.  It was quite an accomplishment for postwar Britain.  But it is also infamous as an example of how being first to market can mean catastrophic failure, both for the product and the company.

The Comet was perhaps rushed too quickly to market, as the British needed something to leapfrog the Americans after the war.  And the widespread use of pressurized fuselages was not something that was fully understood.  As it turned out, stress cracks developed at the sharp corners of various windows (including a navigator's skylight, a quaint anachronism of the era) caused by metal fatigue.  After a certain number of landing and takeoff cycles, the metal would crack and fail catastrophically, with the internal cabin pressure literally blowing the plane apart.

The entire fleet was grounded, and every Engineering effort was put into finding out what went wrong.  By the time they found out, it was too late - the reputation of the plane was besmirched for life.  The British Government purchased a number of planes as submarine chasers (the aptly named Nimrod) but de Havilland never recovered its amazing lead in the international commercial jet business.

It is interesting to speculate what would have happened if the flaws in the Comet were caught early.  I suspect de Havilland would still have lost ground, just not as spectacularly.  Boeing bided its time and used government money to develop a line of bombers and tankers, and then adapted this technology to its jetliners - already proven by millions of hours of testing for military applications.  Boeing didn't make the same mistakes de Havilland did.  And moreover, its design was more useful, in that the engine location in the de Havilland (buried in the wing root) was a maintenance nightmare, compared to the easily removable wing pod mounts used by Boeing.  The 707 and 707 Intercontinental ushered in the era of Jet travel, and the Dehavilland Comet is only an odd footnote to the era.

Being first to market has a lot of risks, and historically, the first to market is often last in the marketplace.  You spend a ton of money on ground-breaking R&D, only to have your competitors piggy-back off those efforts, for free.  Boeing learned a lot from Dehavilland - a lot of what wouldn't work!  In addition, since de Havilland pioneered a lot of technology, Boeing could save some money in development by not "reinventing the wheel".

Not only that, your efforts end up establishing the marketplace, so that customers are used to and appreciate the product - and thus create demand.  The general public loved the Comet when it first came out, which, other than its tendency to blow up in mid-air and kill everyone, was a fine product.  Just that one small flaw.  But people liked jet travel - the speed, the smooth quiet ride, the pressurized cabins.  The wanted to fly jets - just safe jets.  Boeing stepped in with a product that filled a public demand that de Havilland created, in part.

And off course, if you are second to market, you can see the various flaws in your competitor's products and come out with a better product.  In addition to not crashing, the Boeing 707, as noted above, was a product that was more maintenance-friendly to airlines, as engines could be changed out quickly, even at remote airports.  In the early days of jet travel, when engines did not last as long as they do today, this was a big savings.  Boeing also realized that the small size and limited range of the Comet made them less economical and not able to cover many overseas routes.  So they designed their plane to be a truly intercontinental-capable aircraft.  Even if the Comets had not crashed, it is clear that the Boeing design would have garnered more market share in the long run.

And Boeing probably realized that being first to market was fraught with hazard, based on its own experiences.  Boeing's first venture into an all-aluminum commercial airliner, the twin engine 247 was a commercial flop.  It was too small, too expensive, and the wing spar went right through the cabin, forcing passengers to step over it and making cargo loading difficult.   Rival Douglas, with its wildly successful DC-3 was late to market, but provided a plane with the range, the load capacity, and a flat cargo floor than the 247 lacked.  The 247 sold few copies.  DC-3's are still flying commercially, today.  So likely Boeing realized that trying to beat de Havilland to market was not worthwhile - let the Brits take the limelight - and the risks involved.  Come in second with a better product, and end up taking over the market someone else created.

Of course, this rule of thumb has its exceptions - but mostly exceptions based on poor management, poor product design, and poor marketing.  The Apple iPod, for example, remains the most popular MP3 music player format, mostly because it has the most number of accessories made for it.  But as a product, it could stand a lot of improvement.  The interface, while fine for a 1 GB model, falls down when you have 80 GB of music - 10,000 songs or more.  You just can't find anything.  And the iTunes software is clunky and hard to use on a PC platform.

Microsoft had an opportunity with its "Zune" player, but failed to take advantage of the second-to-market phenomenon.  Instead of correcting the deficiencies in the Apple product - offering a better product at a better price and then taking market share - Microsoft created a new product entirely and ended up being "first to market" with something else entirely.  The Zune was not a replacement for the iPod, but something else entirely - something that required you to rent your music, not buy it.  And not surprisingly, consumers stayed away in droves, confused as to what the product was, or even how to use it.  Apple won that round, but only because of Microsoft's typical ineptness and clumsy marketing efforts (and blatent attempts to scour money from consumer's pockets).

But Apple has also seen the first-to-market effect work against it.  The much-vaunted iPhone has done well, but due to a poor choice in wireless providers, had a limited market.  Google saw some flaws in how the iPhone was marketed and also in how apps were sold and distributed.  The Droid has taken a larger market share than the iPhone, Apple-branded "coolness" factor notwithstanding.  Consumers, it turns out, were brand agnostic, particularly when Apple limited itself to one of the less popular wireless networks.  Consumers didn't want to change carriers just to change phones.

Too late, Apple is moving the iPhone to other wireless carrier platforms.  But it remains to be seen if this will save the iPhone.  The Droid has garnered a lot of followers, and thus has a large support infrastructure of apps and the like.  And as well, the Droid is more phone-like than the iPhone, with a removable battery, for example, that can be replaced when it fails.  Consumers are not fond of devices that have to be shipped back to the manufacturer when the battery dies.  The "sealed box" technique of Apple is its Achilles heel.

You can see this effect in a number of tech sectors, including the Internet.  MySpace was all the rage only a few years ago, with every tech trends reporter talking about "MySpace This" and "MySpace That" - and hyping the social network as "the next big thing".  Then, for some reason, latecomer Facebook became more popular than MySpace.  How?

MySpace made a lot of mistakes early on - trying to hard to market to their clients in a very clumsy and apparent way.  They made everyone have a mandatory "friend" named "Tom" (one of the founders) who would write on your "wall" every day, promoting a product or a new band.  And you couldn't delete "Tom" if you wanted to, he was your default friend - a walking and talking commerical.

I walked away from MySpace at that point, and since then, they have been desperately working and re-working the site, changing it almost daily, trying to recapture the heat.  But with each change, they annoy more and more users.  Facebook offered a simple format, and for the most part, left it alone.  Adding games that appealed to the compulsive-addictive behavior in computer users increased revenues and interest sharply.  But while Facebook has "succeeded" in terms of popularity, it has yet to succeed in terms of making any serious amount of money.  How much they have made (if anything) is a mystery, as they are being very mysterious about their finances.  Needless to say, most people don't keep wild profits a secret, so we can assume that they are hiding bad news.

In the auto world, the first-to-market phenomenon takes place as well.  Honda was first-to-market with its two-seat Insight, which had astounding gas mileage, but was not a very practical car.  Toyota came out later with the Prius, which did not get the hyper-mileage of the Insight, but was more of a practical, everyday car that could seat four.  Which company today is known as the Hybrid car company?

And just as Microsoft botched their second-to-market opportunity with the Zune, GM seems poised to do the same with the Volt.  Attempting to leapfrog the competition, GM is offering a series-hybrid, where a gas engine charges the batteries, but does not drive the wheels (as in a parallel-hybrid, such as the Prius).  Not only is the technology unproven, the EPA is assigning the Volt a paltry 37 mpg in gas-only mode (the Prius beats 50 mpg in gas-only mode, its only mode at the present time).

As with the Zune, GM is coming to market with something that is not quite the same thing as the competitor's product - in this case, offering a plug-in Hybrid as opposed to the Prius gas-only Hybrid.  And Toyota appears poised to piggyback off of GM's efforts by introducing a plug-in Prius, after GM's introduction of the Volt.  Toyota will learn from GM's failures, to be sure.

And GM has tried this "leapfrog" technique in the past, usually with disastrous outcomes.  The Vega had a novel high-tectate silica engine, that relied on etching the cylinder walls to expose silica bits for long engine life.  The engine ended up being taller and heavier than anticipated (due to an excessively long stroke) and when fitted with a steel cylinder head, tended to warp when overheated.  It was an utter disaster and a black eye to GM's reputation.

Years later, another automaker started using the same technology, with few problems.  That automaker?  BMW.  Being first-to-market is not a good idea in many cases!

So what does this have to do with finances?  Well, for starters, when you hear about a startling new breakthrough in technology, don't run off to your broker to buy stock right away.  Chances are, the company that creates a new type of technology will end up dropping the ball or spending an inordinate amount of money on R&D and thus have high products costs - costs that will be undercut by the second-to-market competitor.

Of course, this is why we have a Patent system in this country (or had one) so that people would spend the money on R&D and have a "safe" market to recover those costs in.  Polaroid spend countless millions developing its instant camera, which was sold at premium prices.  Kodak jumped into the market with its own knock-off product, and it sold like hotcakes - until Polaroid sued them for Patent Infringement - and won.

Today, obtaining and enforcing Patents is far more difficult, and as a result, there is less incentive to be "first to market" with any product.  You are safer watching the competition rush to market, stumble, and then be there with your own product, which corrects the flaws inherent in of any new technology.

First to market is often last in the marketplace!

UPDATE:  February 5, 2011:

I noticed this SLATE entry recently, that discussed the fate of TiVo back in 2002.  Slate refers to the phenomenon I refer to as "first mover disadvantage".

TiVo pioneered the use of the hard drive storage device for TV viewing.  But they charged a $12.95 a month usage fee to use it, which was sort of a bummer idea of the subscription model (why do I need to pay a monthly fee to use a machine again?).

The problem was (and is) that the cable and satellite TV people started putting hard drives (which are a cheap, a terabyte is now $99 at Staples) into their set-top boxes, essentially providing TiVo capability for free, as part of a cable-TV or satellite-TV package.  Um, why do we need TiVo again?

First to market is often last in the marketplace!

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