Peter Thiel On What Makes a Monopoly Business
An excerpt from Peter Thiel’s book Zero to One.
Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. So why do people believe that competition is healthy? — Peter Thiel
In the world of business, sometimes we end up being so obsessed with competition and rivalry that often lose sight of what matters.
Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past. Competition can make people hallucinate opportunities where none exist.
Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.
Every monopoly is unique, but they usually share some combination of the following characteristics:
1. Proprietary Technology
The market is crowded. Your product must be significantly valuable.
Making your product difficult or impossible to replicate, by making it at least 10 times better than its closest substitute in some important dimension can lead to a real monopolistic advantage.
The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite. Or you can radically improve an existing solution: once you’re 10x better, you escape competition.
2. Network Effects
Network effects make a product more useful as more people use it — if all your friends are on Facebook, it makes sense for you to join, too.
Network effects can be powerful if you’re able to make them valuable to its very first users when the network is necessarily small. These type of businesses must start with especially small markets, so small that they might not even appear to be business opportunities at all.
Mark Zuckerberg initial’s product was designed to attract his classmates to sign up, not everyone on Earth.
3. Economies of Scale
A monopoly business gets stronger as it gets bigger. A good startup should have the potential for great scale built into its first design.
Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
Twitter already has more than 250 million users today and it doesn’t need to spend much more to acquire more users.
Creating a strong brand is a powerful way to claim a monopoly but beginning on brand rather than substance is dangerous. Working on techniques that polish the surface won’t make your company successful without a strong underlying substance.
No technology company can be built on branding alone.
These 4 characteristics in some combination define a monopoly, but to make them work, you must choose your market carefully and expand deliberately.
It is not enough to make a few things better than your competitors, it has to be at least 10x better. If you can’t beat a rival, it may be better to merge.