In Peter Thiel’s new book Zero to One, he argues that every startup venture should strive to be a monopoly. This is counterintuitive, as Thiel notes, as we live in a culture that glorifies the fruits of competition. The reality of competition is, though, that firms seek to make their own profits greater than those of their competitors so much to the point that there is no profit in the long-run. While there may be greater efficiencies and globalization over the short-run, this all gets asymptotically closer to zero. Firms aren’t creating anything new at this point, so they have to keep scaling, making processes better within the firm, and finding ways to expand the bottom line.
This is what Thiel calls globalization. The world already has a new technology and competitors see how much the original inventor is making, so they enter the market and try to copy the technology. The innovator has taken the world from 0 to 1, now all the competition within this market is attempting to take the world from 1 to n. Though there may be innovations in efficiency and horizontal processes, nothing truly new comes between 1 and n. This is competition.
This isn’t the place from which innovation comes. Innovation comes from monopolies. “[P]eople lose sight and focus on their rivals instead,” while they should really be focusing on providing a product so great that no competitor can copy it. This new product is so great that no competitor could realistically overcome it — they could simply improve upon their own models to come close to the new product. Think of Microsoft and Google in the search engine market. Google has made such a strong product that it is, on Thiel’s terms, a monopoly. It controls more than 60% of the market, and no similar product comes close. It would take Microsoft so much work and resources to make Bing come close to Google — in fact, the resources poured into making Bing a thing were those very resource to take MSN Search close to Google.
Similarly, by Microsoft and Google focusing on each other so much in the mobile tablet and OS market, Apple was able to swoop in between 2010 and 2013 and surpass both of them. Microsoft and Google were focused too much on beating the other. Apple was focused on becoming the best.
By striving to be a monopoly, entrepreneurs can focus on innovating and not focus on their competition. In other words, they can focus not on taking the world from 1 to n, but on taking the world from 0 to 1. Competition is overrated on Thiel’s account not for some ideological or dogmatic reason, but because companies that focus on competing with similar firms lose sight of their products and dreams and focus more on their competitors.
The monopoly tends to have 4 key components:
- Proprietary technology
- Network effects
- Economies of Scale
Any company that commands these components will be nearly insurmountable in its industry.
This happens in education, too. Bright young people in high school who have dreams of changing the world don’t have to pay too much attention to competing for careers with their peers — if anything, they compete with them for places in elite universities — but this changes when they get to the university. Now they are competing with equally-elite students for a limited number of spots at careers like management consulting and finance analysis. They shift from the monopoly mindset (“if I could make my dream a reality, it will be great!”) to the competition mindset (“My dream is distracting me from On Campus Recruiting…John has 15 extracurriculars, and I only have 13…I’m going to have to do more”), and innovation suffers as a consequence.
Elite students climb confidently until they reach a level of competition sufficiently intense to beat their dreams out of them. Higher education is the place where people who had big plans in high school get stuck in fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking. For the privilege of being turned into conformists, students (or their families) pay hundreds of thousands of dollars in skyrocketing tuition that continues to outpace inflation. Why are we doing this to ourselves? — Zero to One, pg. 36
Thiel recounts a story of his own climb towards the top when interviewing to be a Supreme Court law clerk. He eventually did not get the position, but if he had, he would have likely never founded PayPal, Palantir, invested in Facebook and SpaceX, and the world would be a considerably different place.
Students who want to innovate and want to make the next big thing shouldn’t focus on one-upping their competition, then. They should focus on themselves and making their ideas superior to everybody else’s.