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First Mover Brands Rely On More Than Timing

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First Mover Brands: The Timing Factor

Nolan Bushnell knew he had a hit when he heard about the trouble at Andy Capp’s Tavern. The founder of Atari had created only one prototype machine of the company’s first video game, Pong, and it had stopped working after just two weeks. The problem was that the can for collecting coins was getting overstuffed. The bar’s owner said that on some mornings there was a line outside before the doors opened; people came just to play the game.

These are the kinds of problems we all should have. In 1972, Bushnell’s Pong became the first commercially viable video game, and it churned out money. Yet it followed a string of failures. Bushnell himself had created perhaps the first video arcade game, Computer Space; it was so complex that its instruction manual ran to several pages. That flopped.

Magnavox had launched a Pong system for home use at the same time that Atari targeted arcades, but it was sold only through Magnavox dealers, who were most interested in selling televisions. That failed as well. Atari’s Pong overcame earlier entrants’ shortcomings. It was simple. The arcade setting allowed for new users to easily observe others’ play and to try the system out for just a few cents. Arcades were motivated to get people to try the game. By overcoming barriers to trial and adoption, it created a runaway success.

Atari’s win in the arcade seeded the market for a home system. The company’s home version of Pong sold 150,000 units, but Bushnell had his sights on building a system that could play a range of games through inserting cartridges into a machine. He could not raise funds adequate to that task, so in 1976 he sold the company to Warner Communications for the seemingly princely sum of $28 million.

Atari Creates An Industry, Then Vanishes

Six years later, Atari’s revenues were over $2 billion. It had become the fastest-growing company in U.S. history. Atari introduced video games to millions of consumers, and its 2600 system console defined the category, with over 15 million units being sold. Atari had a market share of 75 percent and seemed utterly dominant.

Then it collapsed. Atari’s revenue halved in just one year. The company was sold off in 1984 and, despite a few comeback attempts, never recovered.

Why?

As often happens in promising new markets, a host of competitors entered. Mattel, Coleco, and others launched sophisticated systems, whereas Warner held off investing in a follow-on platform. Personal computers attacked from a completely different angle, being able to run simple word-processing and other programs as well as games; one PC manufacturer advertised its product as “a real computer for the price of a toy.”

Another problem was the company’s strategy toward games. Atari made most of its money from selling game cartridges, not the console, but it did not control the supply of games. The company could not hold onto its most talented programmers—a cadre that included two youngsters named Steve Jobs and Steve Wozniak, who figured they might do better by co-founding Apple Computer. Other programmers created rival games publishers such as Activision. Many more competitors emerged from nowhere, often with low-quality games that degraded the overall experience.

Of course, the industry later rejuvenated. Nintendo launched a highly successful, more complex system, only to encounter tough competition from Sega, Sony, and Microsoft. These companies built progressively more advanced and expensive systems catering mainly to hard-core gamers, until Nintendo reinvented the category again with its groundbreaking Wii, a console so straightforward that it is found at many senior centers.

There Are Several Take-Aways From Atari’s Story:

Atari did not need to be the first home videogame system, and in fact, it was not. But it was critical for a startup like Atari to be early. Well-funded companies such as Sony and Microsoft could take more time, although eventually there was room left only for competitors to attack from a completely different direction (Zynga is one such firm, building an estimated market value of over $5 billion just three years after its founding in 2007 by amassing huge numbers of players through Facebook and other browser-based environments).

  • In environments of rapid flux in technology and customer preferences, there may be many competitors entering, each with slightly different assumptions about what formula will win. Early winners such as Atari can do very well through reaping quick profits or selling themselves to bigger companies. Some early movers may become long-term winners. Even runners-up can succeed if they watch their expenses; Mattel and Coleco each sold more than 2 million video game consoles before withdrawing from the market.
  • When a company leads a burgeoning market, by all means it should fight to stay there. Warner Communications looked at the large investment needed to create newer systems and thought it could squeeze further profits from the Atari 2600 before plunging forward. Meanwhile, Mattel and Coleco brought out competitive products that performed better and eroded Atari’s status as the clear leader. By the time Atari launched its successor systems, the competitive landscape had changed fundamentally.
  • An industry’s business model profoundly affects the fate of early versus late movers. Atari had a razors-and-blades business model that sold the console at a small profit and aimed to make more money on the cartridges containing its games. Unfortunately, it ended up making worse games than its competitors. If Atari could have limited games to only select titles, as later games systems have done, it could have ensured a better-quality experience and made greater profits. The imperative would have been to clobber its target market segment with terrific games that made it unattractive for consumers to switch systems. Alternatively, Atari could have focused on creating ever-improving premium priced consoles with backward compatibility to play older games, thereby making its system the de facto industry standard. It did neither.

Timing The Market

Companies that have a basic thesis about the advantages and disadvantages of their market timing should be able to avoid many of Atari’s missteps. The thesis is straightforward—it is better to be early when a company can.

  • Preserve an early market lead stemming from barriers that later entrants will face.
  • Build resources and competencies that larger firms eventually could imitate but which they will prefer to acquire.
  • Avoid becoming locked in to inappropriate technologies or business models before the market is deeply understood.
  • Avoid incurring large upfront costs because it is early to market.

If a company cannot meet at least two or three of these conditions, then it may be better off as a fast follower that learns from others’ mistakes.

The Blake Project Can HelpThe Brand Strategy Workshop For Startups

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Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Licensing and Brand Education

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