Most companies want to be number one in their markets. Once there, however, they have trouble keeping the top spot for long. They are flanked by smaller, nimbler companies that have better products or make innovations that change the industry and how its serves its customers. Wall St. reviewed several industries in which the number one company was recently toppled from its position.
We looked at the weaknesses of the market leader and how and why it was replaced by a rival. The reasons often have to do with sluggishness and lack of innovation on the part of the top company. Complacency usually pushes these leaders from their top positions, allowing a once-smaller competitor to take over the first place spot.
America’s top companies — in any industry — are unusually successful. There’s no better example than Apple (NASDAQ: AAPL), the largest corporation in the U.S. based on market capitalization. The iPhone is the most popular smartphone and the iPad is the most popular tablet PC. Apple’s lead position in its markets helps it to be the most profitable company in its industry. Its reputation as the top consumer electronics company even helps it market products. Thinking it must be the best, many customers like to use the first place product.
However, there are disadvantages to being at the top. Market leaders are usually the target of competitors that want to gain market share. Take the premium streaming video business, where Netflix (NASDAQ: NFLX) holds the top spot with 25 million customers. Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), and Apple also want to be successful in the business. To do that, they naturally imitate Netflix’s service and prices in order to take its customers. They wouldn’t normally target the number three or four company in the sector.
Competition is but one of the challenges, and the first place position is hardly guaranteed. General Motors (NYSE: GM) was the world’s largest car company from the end of World War II until three years ago. Poor product decisions and high labor costs nearly took the company under, helping rival Toyota (NYSE: TM) move into the top spot. Blockbuster was the number one company in the video rental business until the model for the industry changed. Instead, DVD rentals by mail became popular because it is less expensive to mail DVDs than to run thousands of DVD stores. That’s when Netflix flanked Blockbuster by creating the DVD-by-mail business and becoming the top video rental company in the U.S.
Despite challenges, many companies have been able to keep the first place position in their industries for a long time. Walmart has been the largest retailer in the U.S. for almost 30 years. Exxon Mobil (NYSE: XOM) has been the largest American oil company since it was formed by a merger in 1999.
The following are nine companies that crushed larger competitors.
Google vs. Yahoo!
It is hard to believe that Google (NASDAQ: GOOG), at any point, was not the undisputed leader in the search world, let alone actually just a small part of the market. In the early days of the Internet, search engines like Lycos, Excite, AskJeeves, and others competed for pieces of the pie. By the end of the 20th century, however, Yahoo! (NASDAQ: YHOO) emerged as the leader, surviving the dot-com bubble that dragged the smaller companies under. Yahoo! then purchased most of these for next to nothing. In 2000, the site had 56% of search engine referrals, six times times its closest competitor. Google had roughly 1% of the market in June of that year. In 2001, Yahoo! began using Google’s search algorithm. And as Google began competing for share, Yahoo! began to quickly lose steam. By 2002, the popularity of Google’s efficient engine had grown exponentially. It referred 31.8% of all searches, compared to Yahoo!’s 36.3%. During the the next eight years, Google rocketed to the top, gaining a near-monopoly on the market. According to Comscore, in July of this year, Google had more than 65% of market share, while its closest competitor, still Yahoo!, had just 16.1%.
Hewlett-Packard vs. Dell
Dell (NASDAQ: DELL) was once the worldwide leader in global PC sales, with 13% of market share. Now-defunct Compaq was second with 11.2% share. Over the past decade, the landscape of the personal computer market has changed dramatically. In May 2002, Hewlett-Packard (NYSE: HPQ) acquired struggling Compaq for $25 billion. In 2005, Dell was still the market leader with a 17.2% market share, but HP was quickly closing the gap with a 14.7% share. In less than three years, by the third quarter of 2008, HP surpassed Dell and it has held the top spot since. By the second quarter of 2011, HP’s lead widened to 5% (17.5% compared to Dell’s 12.5%). Meanwhile, Lenovo has also been gaining market share and is just behind the former leader at 12%. It will likely surpass Dell if its annual growth of 22.5% continues. Dell’s growth was just 3.3%.
Apple vs. Nokia
In the fourth quarter of 2007, Nokia (NYSE: NOK) had more than 50% of the worldwide smartphone market, with Research In Motion’s (NASDAQ: RIMM) BlackBerry at 10.9%, and Apple at just 5.2%. However, Apple, which has been dominating the digital music device market consistently for years, was about to do the same for smartphones in less than four years. As recently as the fourth quarter of 2010 the Apple iPhone still retained only a small portion of the market with a 16.1% share — a little over half that of Nokia’s 28%. But eye-popping sales numbers have quickly driven Steve Jobs’s company into the lead. As of the second quarter of 2011, according to IDC, the company had 19.1% market share with an annual growth rate of 141%. Nokia, which has moved into third behind Samsung, had a 15.7% share, with a growth rate of -30.7%.
Facebook vs. Myspace
In July 2005, Rupert Murdoch’s News Corporation (NASDAQ: NWS) purchased up-and-coming Myspace for $580 million when membership at Facebook was still restricted to college students. According to Comscore, in May 2007, Facebook’s unique monthly viewers were just shy of 30 million, while Myspace’s were at roughly 70 million. In May of 2009, Facebook met and surpassed Myspace’s unique viewers, which had remained at 70 million. By May of this year, Facebook had nearly 160 million users. Myspace, meanwhile, has dropped below 40 million users and that number keeps falling. In June, Murdoch sold the dying company for $35 million, 93% less than the original purchase price.
Fox vs. CNN
At the beginning of the 21st century, CNN was the dominant cable news network with 800,000 prime time viewers compared to Fox News Channel’s 500,000. The war in Afghanistan boosted the viewership of all of the major news networks, but FNC’s skyrocketed. By 2002, Fox had nearly 1.5 million primetime viewers, while CNN fought to stay above 1 million. The trend continued throughout the decade, and by 2004 it was not simply the leading cable news provider, it was completely dominant. Since 2008, Fox has had more primetime viewers than CNN, HLN and MSNBC combined. As of July of this year, Fox had nearly three times CNN’s primetime viewers, and CNN is now fourth in the ratings.
GM vs. Toyota
General Motors has actually experienced two major reversals of fortune in the race to become the top automaker in the world. Since the 1930s, GM had been the dominant U.S. automaker, and for most of the latter half of the 20th century it was dominant in the global market as well. As the global recession took hold in the past few years, the automaker began to lose its grip on the global top spot. By the end of 2008, Toyota officially became the world’s largest automaker, beating out GM by more than half a million units sold. GM’s global market share continued to decline, and even in the U.S. its share dropped. By June 2009, fueled by lagging sales and financial troubles from the recession, the manufacturer filed for Chapter 11 bankruptcy. It took just two years, however, for the company to regain its title. GM’s new IPO was successful and it also quickly reported a profit. And with recall troubles and the Japan earthquake hitting rival Toyota hard, GM again became the world’s largest automaker in August of this year. In the first half of 2011, GM sold 4.5 million cars compared to its Japanese counterpart’s 3.7 million.
Amazon vs. Barnes & Noble
Barnes & Noble (NYSE: BKS) was for years the largest bookseller in the country. However, online retailer Amazon.com has flanked the company by taking book selling online and out of the expensive business of running stores and carrying hundreds of thousands of titles in physical inventory. The convenience and ease of operations was essential to Amazon. Later, its e-book reader Kindle survived, and won, the e-reader war with B&N’s Nook and others. Some bookstores, including Borders, have gone under, while Barnes & Noble has merely lost its profitability. Barnes & Noble’s net income has dropped from $147 million in 2006 to a loss of $74 million in 2010. Amazon, meanwhile saw net income jump from $190 million to $1.2 billion. Some suggest the age of the physical book may be nearly at an end.
Blockbuster vs. Netflix
Blockbuster was founded in 1985 as a VHS rental company. By the turn of the century, the company was the McDonald’s (NYSE: MCD) of movie rentals. In 1999 — the year in which Netflix began operations — Blockbuster, with more than 6,500 stores around the country, went public. By 2006, Netflix had emerged on the scene, making just shy of $1 billion in revenue that year. This was still well short of Blockbuster’s revenue, which was roughly $5.5 billion. But in 2007, the small company introduced streaming video, which allowed viewers the option to watch films on home computers. This feature, along with the growing popularity of the company’s DVD delivery service, led to a steady decline in blockbuster’s profitability. By 2010, the massive company was losing millions each quarter, finally declaring bankruptcy by the middle of the year. While the company was being acquired by Dish Network (NASDAQ: DISH) for a mere $320 million, Netflix was already exceeding 25 million subscribers.
Delta vs. American Airlines
In many cases, a company’s reversal of fortune comes through a natural loss or gain of market share because of the success of its specific products. In the case of the airline industry, American Airlines’ fall from the lead came as a result of mergers. After acquiring a bankrupt TWA in 2001, American Airlines (NYSE: AMR) became the world’s largest airline. In 2007, despite being plagued by rising fuel costs and other difficulties, it still maintained the lead with nearly 100 million passenger miles flown. Delta (NYSE: DAL) came in second, at 73 million passenger miles. During the recession, however, as airlines continued to suffer, two significant mergers occurred. First, Delta acquired Northwest in 2008, instantly becoming the biggest commercial airline in the world. In 2010, the much larger Delta had 109 million passenger miles to American’s 86 million. And after United (NYSE: UAL) and Continental merged in October of that year, American went from second to third place among U.S. airlines.
Michael B. Sauter, Douglas A. McIntyre