First mover advantage, network effects, winner-takes-all markets. Where is the moat for electric scooters?

First in, first out? Or first in, first in? One of the core dynamics and concepts in management and strategy disciplines is the so-called first-mover advantage. A complete literature and categorization of this concept is offered by KerinVaradarajan, Peterson (1992). The idea is simple: the first who arrives gets the pie, leaving competitors with crumbs. 

Often time this has been the case. Numerous have been the instances of companies entering and conquering: one notorious example is Sky Television versus British Satellite Broadcasting (BSB) in the ‘80s whereby the entrance of the former de facto blocked the adoption of BSB’s devices, raising insurmountable entry barriers. 

If this is true however, there is also the other side of the story: first movers do not always manage to maintain their competitive advantage. Take the Myspace-Facebook instance: whilst the former was the undiscussed social media site leading with millions of active users it took just a couple yearsfor Facebook to go from zero to the whole market,condemning Myspace to an inevitable (un)happy ending. 

Source: Statista

What happened? What were the main reasons behind such uncontrollable decline? If we leave besides firm-specific choices, one important driver causing such competitive dynamics are network effects. Network effects can be generally defined as outcomes which are strictly linked to the nature of the good in question. To put it more simply, we are in presence of network effects when the utility deriving from the consumption of a certain good (where for “good” we consider also services) is affected by the number of other people using the same or compatible products. For instance, the utility deriving from the usage of telephones is directly affected by the number of people owning and using a telephone. This is due to the fact that if no one would use a telephone, there would be no one to call, thus no benefit nor utility in owning such a device. Similarly, social networks: their success is strictly linked to the number of people onboarded. The more of friends online, the more the utility for me in chatting, communicate, texting them and so on and so forth. 

So far, so good. What is more interesting though is that markets characterized by strong network effects are usually winner-takes-all markets, given the strong competitive advantage that such effects allow: Facebook is one example leading with more than 70% of market share according to StatCounter. 

Having in mind this framework one question was lately buzzling in my mind: are undocked electric scooters a winner-takes-all market? Are there network effects? Since 2017, across the European continent scooters startups have gained momentum with VCs willing to close round of millions of euros. 

Source: Sifted

Jumping back to network effects, according to technology analyst Ben Thompson, e-scooters have some similarities to ride-hailing networks. Following his reasoning, the motive we have just a few of ride-hailing companies is that drivers and riders create two-sided network effects: “as one service gains share, its increased utility of drivers will restrict liquidity on the other service, favouring the larger player.” More drivers of a certain provider will mean that “riders will, all things being equal, use one service habitually”. E-scooters, however, lack this two-sided dynamic as he argues that: “companies are just plopping a bunch of scooters on the street […]  Absent two-sided network effects, the potential moats for, well, self-riding scooters and e-bikes are relatively weak: proprietary technology is likely to provide short-lived advantages at best, and Bird and Lime have plenty of access to capital. Both are experimenting with “charging-sharing”, wherein they pay people to charge the scooters in their homes, but both augment that with their own contractors to both charge vehicles and move them to areas with high demand.”

Considering this framework in mind it is reasonable to look elsewhere for potential competitive advantages, and many analysists suggest that without network effects, the most powerful moat is regulation. As a matter of fact, besides habit which can be a reasonable driver for customer retention and preference of one scooter company with respect to competition, in loco regulation can be a hurdle defining borders and competitive strength of incumbents. Each city has its own rules and decides how many companies and scooters are allowed to circulate. Thus, it could be potentially impossible for a provider to enter a specific area without authorization. 

If this is the case, then the real question becomes: what makes this moat larger? What pushes cities to open up space and pushes them to adopt such means of transportation? Various are the reasons. One for sure has been the recent pandemic. If before scooters companies had to fight and lobby to push municipalities to adopt their technologies, now such scooters have become vital to guarantee viable alternatives of transportation capable of maintaining social distancing. 

Thus, are undocked electric scooters a winner-takes-all marketwith strong network effects? Perhaps not. According to analysists the most important hurdle still remains regulation. However, how strong regulation will be is an evolving situation as exogenous unexpected shocks, as the recent pandemic, could shake up the market, potentially changing competing equilibriums. 

Bibliography

Kerin R.A. , Varadarajan P., Peterson R. A., (1992) First-Mover Advantage: A Synthesis, Conceptual Framework, and Research PropositionsAmerican Journal of Marketing

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