Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life by Dixit and Nalebuff is a great book. It translates philosophical ideas behind game theory to practical case studies and tools in away that everyone can relate to. I revisited the book today after seeing Chud Hurley’s announcement regarding YouTube’s intention to start sharing revenues with content contributors. The move was naturally covered by Pete Cashmore, Om Malik and Scott Karp, among others. Everybody seems to be concerned with the projected impact on YouTube’s smaller rivals - MetaCafe and Revver - who have established revenue sharing and financial reward programs with their leading contributors already.  

If MetaCafe and Revver were simply trying to differentiate themselves from YouTube then they chose a strategy that can simply never work. The market leader can (and should) play copycat to good things that can be easily copied. As a matter of fact, this is the best strategy a leader can take, one that hedges the impact differentiators and that helps maintain the lead. Microsoft has perfected this strategy to the form of classic art.

However, this is true when the only thing that matters is beating your competitors and in YouTube’s case that’s not the most important game that’s being played. First of all there is a business model to prove and a revenue stream to generate. This, by far, is more important then keeping MetaCafe and Revver on the leash. YouTube enjoys a leader’s privilege - they can observe, learn, improve, implement. They can afford to get “inspired by others” and not work so hard to surprise.

Is this a deathblow to MetaCafe and Revver? Possibly, but I don’t think so. YouTube’s rivals should not compete with YouTube using financial models anyway. It stands no chance. What they can compete with is the brand’s depth in terms of appeal to a certain segment of users. This is done using content and user landscape, not using revenue share programs. MetaCafe can definitely position itself as premium brand compared to YouTube. This will not beat YouTube out of pole position but it may secure MetaCafe’s own position and make them a strong leader of a hefty niche.

How is all that related to game theory and to Thinking Strategically? The following excerpt is worth your time:

“After the first four races in the 1983 American’s Cup final, Dennis Conner’s Liberty led 3−1 in a best-of-seven series. On the morning of the fifth race, “cases of champagne” have been delivered to Liberty’s dock. And on their spectator yacht, the wives of the crew were wearing red-white-and-blue tops
and shorts, in anticipation of having their picture taken after their husbands had prolonged the United States’ winning streak to 132 years. It was not to be.

At the start, Liberty got off to a 37-second lead when Australia II jumped the gun and had to recross the starting line. The Australian skipper,
John Bertrand, tried to catch up by sailing way over to the left of the course in the hopes of catching a wind shift. Dennis Conner chose to keep Liberty on the right-hand side of the course. Bertrand’s gamble paid off. The wind shifted five degrees in Australia II’s favor and she won the race by one minute and forty-seven seconds. Conner was criticized for his strategic failure to follow Australia II’s path. Two races later, Australia II won the series.

Yacht racing offers the chance to observe an interesting reversal of a “follow the leader” strategy. The leading yacht usually copies the strategy of the trailing boat. When the follower tacks, so does the leader. The leader imitates the follower even when the follower is clearly pursuing a poor strategy. Why? Because in yacht racing (unlike ballroom dancing) close doesn’t count: only winning matters. If you have the lead, the surest way to stay ahead is to play monkey see, monkey do.

Stock-market analysts and economic forecasters are not immune to this copycat strategy. The leading forecasters have an incentive to follow the pack and produce predictions similar to everyone else’s. This way people are unlikely to change their perception of these forecasters’ abilities. On the other hand, newcomers take the risky strategies: they tend to predict boom or doom. Usually, they are wrong and are never heard of again, but now and again they are proven correct and move to the ranks of the (rich and) famous. Industrial and technological competitions offer further evidence. In the personal-computer market, IBM is less known for its innovation than for its ability to bring standardized technology to the mass market. More new ideas have come from Apple, Sun, and other start-up companies. Risky innovations have been their best and perhaps only chance of gaining market share. This is true not just of high-technology goods. Proctor and Gamble, the IBM of nappies, followed Kimberly Clark’s innovation of resealable nappy tape, and recaptured its commanding market position. There are two ways to move second. You can imitate as soon as the other has revealed his approach (as in yacht racing) or wait longer until the success or failure of the approach is known (as in computers). The longer wait is more advantageous in business because, unlike sport, the competition is usually not winner-take-all. As a  result, market leaders will not follow the upstarts unless they also believe in the merits of their course.

Need I say more?