Product innovation is not enough to beat a competitor’s network effects
By: Jeremy Liew
Tags: Lyft, Uber, Startup, Network Effect, Venture Capital

Bird Cruiser via Bird

Bird recently announced a new form factor for micromobility, the Bird Cruiser. It’s a cross between an electric scooter, a bicycle and a moped.

It looks remarkably similar to the Wheels “electric bike” cruisers. When Wheels launched their whole value proposition was based around their superior hardware, which promised better comfort, safety and durability than electric scooters.

Wheels electric bike via TechCrunch

I imagine we’ll see a similar form factor from Lime in the future; they’ve already made the transition from bikes to scooters.

If this is the start of scooter wars 2.0, it does not bode well for Wheels.

Product innovation does not beat network effects

We’d all like to believe that innovators with the best product win. Sometimes that’s true. But in the consumer world, where your product is easily observable by your competitors, product innovation is a fleeting advantage.

Product innovation is particularly vulnerable in a two-sided marketplace like micromobility. Where there are network effects, the smallest players can’t win just by building better products. The bigger players can choose to fast follow the most successful innovations. They can outsource experimentation and R&D to the market and then replicate the winners.

Micromobility isn’t the only industry where this has happened. Smaller companies often pioneer innovations which become industry standards. Then the bigger players end up reaping the benefit.

The ridesharing example

Uber started out as a high end limo rental service. Sidecar was the first to come up with now ubiquitous ride-hailing experience including crowdsourcing drivers and indicating destination (instead of origination location).

But Uber and Lyft fast followed and ultimately won due to their larger base of riders and drivers. Network effects beat product innovation.

Even after Sidecar was acquired, the pattern continued. Lyft innovated ride sharing with Lyft Line by allowing two passengers with the same rout to split the cost of a ride. This was quickly followed by UberPool.

The daily deals example

Something similar happened in the daily deals space. LivingSocial led innovation in the industry, introducing features like “LS Escapes” (travel) and “Instant” deals (on demand), which Groupon followed with Groupon Getaways and Groupon “Now”. Groupon was able to roll these out to a greater set of both consumers and merchants. Network effects won out and eventually Groupon bought LivingSocial.

The social media example

The same could be said for Snapchat. Snapchat pioneered the stories format in 2013. At a time when all feeds were reverse chronological order, telling stories end-middle-beginning, Snapchat started telling stories beginning- middle-end. Snap also pioneered AR face filters which are incredibly popular. As a result, Snap grew incredibly fast, quickly reaching 110m DAU by December 2015. But then in August 2016, Instagram launched its own version of stories, and in May of 2017 it launched its own face filters. By mid 2017 it had more users of Stories than Snap. And while Snap is still a major social media company, its growth has slowed.

Conclusion

Network effects are very difficult to overcome. They give lasting benefit to the largest players in an industry. Sometimes smaller players believe that they can catch these winners from behind through product innovation. Often these smaller players have genuinely great teams with genuinely better products and insights. But it is rarely enough. Unfortunately, the leaders in industries with strong network effects cannot be overcome through product innovation alone.