When I’ll Have Another crossed the finish line at Churchill Downs to win the 138th Kentucky Derby four other horses were within a fraction of a second of the finish line. The second place horse, Bodemeister, led for most of the Derby and finished just 12 feet behind the winner of the mile-and-a-quarter race. Bodemeister ran the race about two tenths of one percent slower than I’ll Have Another but earned about 68% less than the winner. The fifth place horse, Creative Cause, was less than one percent slower but earned $66,000, or 95% less than the winner’s earnings of about $1.36 million.
The payoffs in thoroughbred racing are highly skewed. Fourteen of the nineteen horses that entered the Run for the Roses earned nothing for their efforts. The third place purse is half of second place and fourth place pays half as much as third place despite the fact that there was little objective difference in the performance of the second through fourth places competitors on Saturday. The owners of the Kentucky Derby winner not only earn much more on race-day for a slightly better performance than their competitors, they will receive more in future stud fees because their horse won one of the jewels of racing’s Triple Crown.
There are similarities between the payoff structure for thoroughbreds and entrepreneurs in today’s information technology based economy. The founder and owner of a company with better ideas and better methods for generating revenue from those ideas will earn disproportionately more than the owner of the second place company, even if the objective difference in the quality of their product is quite modest. In that sense Mark Zuckerberg and I’ll Have Another have much in common.
Facebook is the most popular social network sites with over 900 million users last quarter. The value of social networking increases with the number of site users, so relatively minor differences in perceived quality can attract far more users and profits than competing sites. Moreover the technology allows social networking sites to avoid the congestion problems faced by traditional brick and mortar businesses. Yogi Berra never would say “Nobody goes there anymore. It’s too crowded.” about a social networking site.
Mark Zuckerberg is about to begin his Facebook IPO roadshow this week. Experts say that Facebook’s valuation as of its initial public offering could be as high as $96 billion. Mark Zuckerberg will become one of the world’s wealthiest individuals because he developed a site that was perceived to be better than its competitors. In social networks, as in thoroughbred racing, everyone wants to be on the winning team.