Winner Take Most: The #1 vs #2 Gap

A fact few realize: Talladega Nights: The Ballad of Ricky Bobby is really a business movie dressed up as slap-stick comedy.

It touchs on a number of MBA level topics:

Porter’s Five Forces - The French driver as the potential threat of new entrants into the market
Crossing the Chasm - NASCAR is trying to market the sport to a larger, global audience after regional success throughout the USA
Collusion and Coop-ition - Ricky and Cal are teammates who also race against one another. They work together (most of the time) but there’s jealousy simmering as Cal thinks about expanding his marketshare.
Market Premiums - The #1 player in the sport receives more press coverage, sponsors, and public adulation, and tries to use those advantages to separate even more dramtaically from the pack.

In the film, Ricky Bobby, played by Will Ferrell, is the perennial NASCAR champion. Cal Naughton Jr., played by John C Reilly, (initially) accepts the role of loyal wingman and consistent runner up.

Although Ricky only beats Cal by a few fractions of a second in most races, since he’s the top dog, he receives outsized returns. He has mega sponsorship deals, a beautiful wife, a mega mansion, and the public’s love. He’s that dude.

Don’t get me wrong, Cal has a pretty sweet life, too. He’s even sponsored by Old Spice. But he’s very much a second class citizen as far as the NASCAR pecking order is concerned. The two are separated by meters on the race track, but millions in market cap.

Ricky lives his life by one moto:

❝

“If you ain’t first, you’re last.”

-Ricky Bobby

This draws parallels to business, where the gap between number one and number two in the market is usually non-linear. There’s a power law at play.

Said another way, I’ve observed on a few occassions that the top dog is not just 10% bigger than the next place competitor (in market cap, revenue, FCF…) - but 3x to 10x as large. Just take a look at the #1 vs #2 player in the HR Solutions space:

Source: Virtua Research. Thousands, USD. Data as of most recent fiscal quarter.

And this phenomenon appears to be even more dramatic for businesses with network effects. I was hit squarely over the head when I compared Uber’s marketcap to Lyft’s (which we’ll take a look at below).