This past fall Peter Thiel, founder of PayPal and Palantir, delivered a talk entitled “Competition is for Losers” at Stanford University’s Center for Professional Development.
Thiel’s lecture title sounds confounding. In fact, it subverts some basic social and cultural assumptions: mainly that competition reveals winners and losers. The shared belief is that competition encourages people to perform better. Thiel does not dispute these motivational factors, but he does express concern that competition often dilutes what’s actually important and valuable.
Thiel’s message contradicts the competitive atmosphere of business. He argues that no competition represents the ideal business model, and he advises founders and entrepreneurs to always aim for a monopoly and to avoid competition.
Here are some of the highlights behind his monopoly theory.
A business becomes successful if it satisfies two conditions: creating something of value, and capturing a fraction of that value. In more quantifiable language, a business creates X dollars of value and captures Y% of X, where both X and Y serve as independent variables. This means that X could represent a substantial number, with Y only a small percentage – or X could be an intermediate number, with Y at a much higher percentage. The latter case demonstrates the idea of holding a large piece of a small pie, where a business captures a highly profitable portion of value from average revenue number.
Perfect Competition vs. Monopoly
For Thiel, there are only two categories of businesses: perfect competitions (non-monopolies) and monopolies. These binary models define the spectrum, with nothing else in between. Regardless of their classification, all businesses cast themselves into the opposite grouping. They actively distort their images and create counter narratives to hide their actual status. Monopolies dispute their own monopoly and portray themselves as members of a big market, while non-monopolies promote their uniqueness in a small market.
A new restaurant exemplifies the non-monopoly strategy. To avoid the hyper-competitive restaurant industry, a new restaurant crafts a unique identity that belongs to a seemingly smaller market. The startup scene also manifests this same principle. New technology startups employ marketing campaigns from a web of buzzwords that often overlap and intersect. These efforts aim to shape a distinct image and reduce the size of their market.
Conversely, Google offers insight into the monopoly mindset. Google has a monopoly over the search market, but the company frequently labels itself as an advertising company and a technology company. Within these respective industries, Google owns only a small part of the heavy-populated markets. These tactics help downplay their monopoly in search.
How to Build a Monopoly
Many businesses subscribe to the idea of starting big, then shrinking. As in the restaurant example above, they enter colossal markets filled with like-minded competitors vying for a share of the market. However, big markets make it difficult for businesses to take off.
Instead, businesses should embrace the opposite approach: start small, then monopolize. It’s far easier for a business to dominate a small market than a larger , more established market. Control over a small market can catapult a business into new areas and markets for expansion. For example, Amazon launched as an online bookstore, then transformed into a giant purveyor of ecommerce.
Last Mover Advantage
Entrepreneurs prize the title of first mover, but there’s much more value in becoming the last mover. A business that serves as the last entity in a category has tremendous future worth and longevity. The recipe for a monopoly is having the last breakthrough and constantly improving on it.
This unveils a popular fallacy in the business world: overvaluing growth rates and underrating durability. A successful monopoly isn’t measured by current results, but instead, by its projected stability in the future.