Innovation Station, Part 1

First is Not Always Best

There is tremendous pressure when an individual has a new idea or a company has an innovative product and wants to be the first to market.  The rush to launch is intense.  But is that always a good thing?  Some would say “yes” and others “no.”  Rather than argue one side or the other, let’s consider some real-world examples to see the benefits and drawbacks of being first-mover vs. second-mover. 

First case in point:  Netflix. In 1997, Netflix was a fledgling online startup offering mail-order DVD rental through their online store and had $2 Million in seed capital.  Today, it is a $150 Billion Dollar entertainment creation and streaming company.  Netflix co-founder Marc Randolph — who came up with the idea of a mail-order DVD rentals (back when DVDs were brand new and before streaming was even a possibility) — wanted to offer customers a way to rent videos without the whopping late fees charged by brick-and-mortar stores.  The 800-lb gorilla in the video-rental space was Blockbuster, which had built its entire business model on charging customers huge late fees which angered much of its customer base.  And all video-rental brick-and-mortar stores had a finite number of VHS videos in inventory on any given day.  Netflix saw a way to lure customers away by offering every film or program on DVD for sale or rent with zero late fees.  Customers could view the titles (with a short description) online, order it and receive it by mail a couple of days later.  Once viewed, they could put it in the return envelope and mail it back.  This was a new concept.  But, with new online startups popping up daily, there was great urgency to get to market first and fast. 

Some First-to-Market Benefits

As an online mail-order DVD rental company, Netflix did benefit from some first-to-market advantages.  It became the leader in the mail-order DVD rental market and built a strong reputation for quality and innovation, which would make it easier to attract customers and investors in the future (which it did).  And by being the first to enter the mail-order DVD rental market, they did capture a large share of the market before competitors got established (but that did not take long).  It gave them an advantage in terms of revenue and profits, although not as much as hoped.  And it allowed Netflix to set the standard for the business model. 

But more than being first to market, Netflix was a success initially as a mail-order DVD rental company because it filled needs that brick-and-mortar stores could not.  First, ordering online was more convenient for the customer.  Netflix made it easy for people to rent movies by mail. Customers could browse the online catalog, choose the films or programs they wanted, order and pay online, and have them delivered to their door in a few days. This was more convenient than having to drive to a video store, park, search for a particular title (hoping it was available), and stand in a line to pay.  Now, 25+ years later, the convenience of online shopping is obvious, but back then it was a novelty.   

Second, Netflix was more affordable.  Netflix’s subscription model was very affordable. Customers paid a monthly fee, and they could rent as many films or programs as they wanted with no late fees. This was less expensive than renting individual titles at a video store and eliminated the risk of incurring late fees for not returning the video within two days.

Third, Netflix had a wider selection of titles to choose from… more than any brick-and-mortar store could possibly stock. Customers could find movies from all different genres, including classics, independent films, documentaries and more. This made it easy for customers to find niche topics they‘d enjoy without having to look through lots of movies that were of no interest.

Last but not least, Netflix had excellent customer service. Customers could always get help if they had any problems with their account or with a DVD. This made customers feel confident that they were getting a good service.  As a mail-order DVD rental company, Netflix was innovative from the start because they offered a convenient, affordable, and reliable way for people to buy or rent their new-to-the-market product and offer it online.  And, yes, they were first to do it.

The Problem with Being First

However, as the first-mover, Netflix experienced many problems.  When Netflix launched in 1997, DVDs were a new product.  The first DVD movie was released in Japan in November 1996 and the fist DVD player was sold in the US in March 1997.   In the early part of 1997, there were only 60 films that had been made available on DVD.  What’s worse, most people did not even have a DVD player in their home.  At first, Netflix was catering to a niche audience of tech geeks.  Marc Randolph and Reed Hastings took a big gamble that the new DVD technology would replace VHS.  Luckily, it did.  By the end of 1997, there were already over 1,300 movies available on DVD. The DVD format offered a number of advantages over VHS, including better picture and sound quality, and the ability to skip ahead or rewind without having to fast-forward or rewind through commercials.  As a result, the DVD format quickly became the preferred format for home video. 

DVD was key to Netflix because shipping a disc to customers was much lighter and more compact, and thus less expensive, than shipping a heavy VHS tape.  While shipping VHS tapes was more expensive than DVDs, the cost of shipping DVDs back and forth to customers was still high, which impacted Netflix’ profitability. 

That wasn’t the only challenge that Netflix faced by being first-to-market.  The Internet was still in its early stages of development, not as widely used as it is today.  Not only did few people have Internet access, Internet speed was significantly slower. This made it difficult for Netflix to reach a large audience with their website. 

And, while they were first-to-market, they didn’t stay first for long.  A number of other companies started renting DVDs by mail, making it harder for Netflix to stand out from the competition.

Besides the specific risks that Netflix faced, there are other potential risks associated with being a first-mover.

• The market may not be ready for a product or service. This can lead to low sales and a loss of money.
• Competitors can copy the product or service.  Once it is introduced to the market, competitors can copy it. Even if it is patented, just one small change can invalidate the patent.  This can reduce profits and make it difficult to stay ahead of the competition.
• Being first often means making mistakes.  As the first company to enter a market, the company doesn’t know what it doesn’t know.  These blind spots can cause a company to make costly mistakes and can damage its reputation.  Netflix made many mistakes, as Netflix’ founder Marc Randolph described in great detail in his book “That Will Never Work.”

The Second-Mover Advantage

The irony is that, while Netflix was first-to-market for its mail-order DVD rental business, it was not the first to enter video streaming, which is how Netflix grew into the mega company it is today.  In 1999, CinemaNow was the first-to-market providing on-demand Internet streaming media to viewers in the US, Canada and the UK.  Users could rent or purchase films and shows to watch on their computers, TVs, and mobile devices.  This was a huge innovation in 1999 (eight years before iPhones were introduced to the market in 2007).  CinemaNow also offered a subscription service that gave users unlimited access to a library of flicks and shows.

While first-to-market and very popular in its first few years in business, CinemaNow faced competition from other streaming services.  It is no surprise that Netflix was a second-mover into the space in 2007.  Soon thereafter, Hulu and Amazon Prime jumped in as well.  Soon, every major entertainment company was entering the space.  CinemaNow struggled to compete.  Pirated content was also a problem.  And the company changed hands repeatedly.  Facing so many challenges, CinemaNow’s business declined, and it eventually shut down on August 1, 2017.

The closure of CinemaNow was a sign of the changing landscape of the entertainment industry. As more people gained access to high-speed Internet, they increasingly turned to streaming services for entertainment.  Streaming not only caused the demise of the video rental industry but it impacted the cable television industry which produced seasonal programs and the movie theater industry where new films were shown.  

Netflix was first-to-market with its mail-order DVD rental business.  From there, it learned a lot about how films and programs are distributed and how customers consume media.  Even though streaming started in 1999, they waited until 2007 to pivot into that space.  They could see the writing on the wall but timed it to where not only enough people had access to high speed Internet but also owned laptops and televisions that could stream media.  They also watched what CinemaNow did right and what they did wrong.  And they had a built-in customer base to which they could offer their new streaming service.  Being second-to-market with steaming was a savvy move for Netflix.

There are many other examples of companies that were not first-to-market but ended up being more successful than those that were first-to-market.  Next week, we’ll look at some other examples of how innovation is the key to overcoming first-mover benefits.  Stay tuned. 

Quote of the Week

“Don’t be afraid to be the second mover. In fact, embrace it. It’s a great way to succeed in business.” Sir Richard Branson

© 2023, Keren Peters-Atkinson. All rights reserved.

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