Competition is for Losers with Peter Thiel: How to Start a Startup | Summary and Q&A

Summary:

Peter Thiel presents a contrarian perspective that monopolies are often ideal business structures that allow for innovation and value creation in a way that competitive markets often do not. He argues that psychologically we are programmed to view competition as validation, when in fact it often distracts from building sustainable companies. Thiel advises startups to resist the crowd mentality and instead find proprietary innovations that open up new markets. While monopolies have downsides and require careful regulation, Thiel makes a thought-provoking case for their economic advantages. His talk prompts a reconsideration of the role of competition versus monopoly in technology, business, and beyond.

• Monopolies are extremely valuable businesses because they capture a large percentage of the value they create. Competition destroys value through lower margins.
• Start with small markets you can dominate. Expand the market over time while maintaining dominance.
• Characteristics of monopolies include proprietary technology, network effects, economies of scale, and branding. These create durable competitive advantages.
• Most innovation historically has created value but not captured it for the inventors. Software businesses are exceptions where both value creation and capture have occurred.
• People are psychologically attracted to competition for validation, even when it destroys value. Resist this tendency.

Questions and Answers:

Q: What are the key characteristics of monopoly businesses versus competitive businesses?

A: The key difference is that monopolies are able to capture a large percentage of the value they create, while competitive businesses see most of the value destroyed through lower margins and lack of differentiation. Monopolies often have proprietary technology that is 10x better than alternatives, network effects that get more powerful over time, economies of scale from near-zero marginal costs, and strong branding. Competitive businesses lack these durable competitive advantages and are unable to escape the trap of commoditization.

Q: How should startups approach new markets if they want to build monopolies?

A: They should start by dominating a small niche market that is overlooked or undervalued. By thoroughly taking over a small market, they can establish the competitive advantages like proprietary technology, before expanding concentrically to adjacent markets while maintaining dominance. Attempting to compete broadly in a large market from the start almost never allows the time and focus needed to establish monopoly power before copycats arise.

Q: Why do most inventors and scientists through history not capture much economic value from their innovations?

A: Because value creation and value capture are independent variables. Most innovations historically have created enormous value but little way for the inventors to capture that value. Software has been an exception where both value creation and value capture have been huge. People falsely rationalize this as scientists not caring about money or software being uniquely valuable, obscuring the structural economic truth around value capture.

Q: What is the psychology behind the appeal of competition and how can it be resisted?

A: People are biologically inclined to imitate and ape behaviors seen as socially validating. Competing for competitive achievements like grades, school admissions, or job titles often provides social proof independent of the value being created. And competing fiercely becomes part of people's identities. However, competitive achievements often contribute little value while destroying margins. Recognizing the psychological appeal of competition as irrational is the first step to resisting its siren call when other paths would create more true value.

Q: What are some examples of monopolies that have been able to capture a large percentage of the value they create?

A: Google in search advertising was able to create a monopoly due to proprietary page rank technology combined with network effects from advertisers going to the platform with the most traffic. Facebook was able to become the monopoly social network by getting to scale first based on its real identity focus before copycats could mimic it. Standard Oil was a monopoly able to control the full value chain in oil and extract the lion's share of profits. Microsoft leveraged the power of Windows as a software platform to capture value in operating systems and office software.

Q: What enables software and internet companies to so effectively create and capture value?

A: Software has zero marginal costs, enabling extreme economies of scale. A piece of software like Facebook or Uber can scale to serve billions of people with no variable costs. This enables a land grab mentality to rapidly grow and achieve monopoly power before competitors replicate you. Software also enables new products and business models like search and social networking that have very deep moats arising from proprietary algorithms, network effects, and branding. The ability to capture value long-term is ultimately dependent on durable competitive advantages.

Q: What role does branding play in monopolies?

A: Strong branding arises from monopolies as customers have nowhere else to go, but causality also flows the other direction. Tesla's brand allows it to capture more value from electric vehicles. Google's brand enables it to expand into adjacent markets. Branding is a powerful signal customers latch onto, often irrationally immune to economic substitution effects. Branding is very difficult to understand or purposefully cultivate, but when a monopoly is able to also have a powerful brand in a category, it enables superior value capture from locked-in users.

Q: How does thinking shift when you view the world through a monopoly vs competition lens?

A: It enables you to cut through distractions and see the economic fundamentals more clearly. Small differences in competitive positioning or short-term growth matter little if structural advantages don't enable value capture. Competing fiercely for careers and status markers that contribute little value is irrational if alternatives compound value over time. People's individual psychology matters less than market structure incentives they react to. Industries thought highly competitive may mask single dominant firms. Questions like "will this still lead the industry in a decade" become pivotal.

Q: What role does timing play for startups trying to build monopolies?

A: Timing is critical because of the advantages of scale and land grabbing. Being the first mover with key technology or network effects allows those advantages to compound before competition arises. But going too early is also risky if the market is not yet ready. An idea that seems like it may one day become a monopoly should be developed and incubated until the market signals readiness through early niche adoption. Being too late and trying to unseat an established monopoly is extremely difficult. But valuable monopolies arise through punctuated equilibrium, not smoothly over time, so there are occasionally opportunities for new monopoly upstarts.

Q: Why do monopolies often pretend they are in highly competitive markets?

A: Because monopolies want to avoid scrutiny and potential regulation. If they admit to having little competition, it draws attention from government antitrust authorities. So monopolies will claim competition is fierce, their market is constantly expanding, and substitutes are emerging that erode their power. This obscures their ability to extract profits and stifle real competition. Ironically, competitive firms will often pretend they are more unique than they really are, claiming small niches when markets are in fact quite broad.

Q: In what ways can identifying small markets lead to building monopolies?

A: Small niche markets are ideal for startups because dominating a tiny market allows monopolistic ownership of the full value chain before expansion. PayPal captured 20,000 eBay power sellers, Facebook started at one college. Whereas large markets signal competition will be fierce. Expanding from a small monopolized market outward while maintaining dominance enables leveraging existing advantages rather than starting from scratch in a big competitive arena.

Q: What role does vertical integration play in certain monopolies?

A: Vertical integration, like Ford owning its entire supply chain or Standard Oil controlling oil from the ground to the pump, squeezes out middlemen to capture more margins. This was characteristic of the second industrial revolution but is rare today due to coordination challenges. SpaceX improved rockets by bringing more manufacturing in-house. Tesla sells direct to consumers bypassing traditional dealerships. Vertical integration only works through a monopolistic position controlling the full value chain. It is operationally complex but enables outsized value capture if achieved.

Q: Why do network effects often lead to monopolies?

A: Because network effects are demand-side economies of scale. The more users on the network, the more value it has. So the leading network pulls away from competitors, as happened with Facebook vs. MySpace. Powerful network effects act as a flywheel - as the network grows larger, network effects compound and create lock-in. However, overcoming the bootstrapping problem of minimal initial value is a major challenge in emerging networks. Sequencing and luck play a big role in whether network effects amplify early or too late.

Q: What role does proprietary technology play in monopolies?

A: Proprietary technology protected by patents, trade secrets, or complex algorithms (for Internet companies) provides several years of exclusivity to establish a monopoly. Google's page rank search algorithms were 10x better early on. But technology advantages are often short-lived as inventions diffuse. Maintaining a technology edge through continuous invention can sustain monopolies like Intel in chips or Amazon in cloud infrastructure. Proprietary technology alone does not guarantee lasting dominance, but provides a window to leverage other competitive advantages.

Takeaways

In closing, Peter Thiel explains that monopolies are extremely valuable businesses because they are able to capture a substantial percentage of the value they create, whereas competitive markets destroy value through lower margins. Monopolies often pretend they are in fierce competition to avoid antitrust regulation scrutiny. They can establish dominance by starting with small, undervalued niche markets that allow them to leverage proprietary technology, network effects, branding and vertical integration before expanding concentrically. Software and internet companies in particular have benefited from near-zero marginal costs and powerful network effects that help them rapidly scale monopolies before competition arises.

Throughout history, most scientific innovations have created enormous value but failed to capture much of it for the inventors. People are psychologically attracted to competitive achievements for validation, even when participating in them irrationally destroys value. Recognizing that value creation and value capture are distinct can lead to focusing more on long-term compounding and landlord-style business models versus competitive ones. Potential questions include examining why monopolies pretend they have more competition than they do, how network effects lead to monopolies, the role of proprietary technology in creating temporary monopolies, how dominating small niche markets allows startups to establish monopolies, and how mindsets change when you view business through a monopoly versus competition lens.

Relevant Books:

• The Innovator's Dilemma by Clayton Christensen - Explores how disruptive innovations can topple established monopolies.
• Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel - Further explores his philosophy on monopolies vs. competition.
• The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone - Looks at how Amazon leveraged economies of scale and network effects.

Relevant Articles:

• "Competition is for Losers" - Peter Thiel's original essay that seeded many ideas from the talk.
• "In Praise of Monopoly" - Article examining how lax antitrust regulation has allowed more monopolies to form.
• "The New Monopolists" - Article exploring monopolies in tech and how they distort markets.
• "Perfect Competition Is For Losers" - Argument for why striving for monopoly makes more economic sense.

Relevant Ideas:

• Identifying small niche markets with potential to expand.
• Developing 10x better proprietary technology.
• Leveraging network effects.
• Building complex systems greater than the sum of parts.
• Rethinking traditional notions that competition is always good.