Winner take most(ly)
Being #1 in your market is a bigger deal than you think
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.”
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:
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).
As a quick reminder, network effects are a phenomenon whereby a product or service gains additional value as more people use it. For example, Snapchat is more valuable as additional users join. Because, you know, it’s not that fun to send yourself disappearing pictures. Same thing with the telephone. I like to imagine that Thomas Edison’s first few sales were pretty damn hard:
“So, ummm, yea right now I’m like the only person you can contact on this here device. But I believe Jim down the street might sign up next week too, so hey, that would make three of us!”
You get the point - each user makes the network incrementally more valuable. Here’s a quick list of examples of businesses with network effects:
E-Commerce: eBay, Etsy, Amazon, Alibaba
Ticket Exchange: StubHub, Ticketmaster, SeatGeek
Rideshare: Uber, Lyft
Delivery: Grubhub, DoorDash, Uber Eats, Instacart, Postmates
Social Media: Facebook, Twitter, Instagram, LinkedIn, Snapchat, Pinterest
Today we’ll test this hypothesis:
The difference between the #1 and #2 player in a market with network effects is a non-linear step-function.
A big thanks to my friends over at Virtua Reserach, who harnessed the powers of their lifecycle analysis tool to help me bring this analysis to life.