Wasn’t Competition supposed to enhance value?
Money is made where the money is present.
Competition creates value for the customer.
We have all heard of these quotes, right?
But what if someone said ‘ Competition is for Losers.’
What if this someone is Peter Thiel.
Peter Thiel, for the uninitiated was one of the early investors in Facebook. He co-founded PayPal with Elon Musk and is also acclaimed highly in the Silicon Valley.
[Commencing today, I am going to start a new series of posts wherein I would be taking up a good long format video and break it down for the benefit of your reading. I have always believed that collaboration and andragogy (learning from others) can go a long way in pushing our cognitive abilities. Today is a humble start to that attempt. Feel free to let me know of your thoughts in the Comments section below.]
In a address to the students at Stanford, Thiel remarked that ‘Competition is for Losers.’
If you look at any business today, it is either about getting X of Y or Y of X.
More often than not, X & Y are independent variables with not enough correlation between them.
I have been a big fan of Thiel’s framework ever since I read the much acclaimed book – “Zero to One” but more on that later.
Thiel argues that all businesses today, lie.
On a broad overview, businesses can be put in either of the two buckets.
The folks on the left will always argue that they are a ‘non-monopoly’ business and the folks on the right will argue the other way.
The businesses that fall on the left circle do this to fend off regulation or unnecessary oversight. The businesses on the right need to keep arguing that they are unique to continue receiving money from Investors.
Thiel takes a beautiful example of a Restaurant Business.
He argues that most of the Restaurant Businesses don’t make money. But if one can build an Idiosyncratic Narrative, something in the lines of
‘British Food Restaurant in Paola Alto’ – that will clearly attract a few investors’ attention who would want to invest in restaurants.
To firm up on the monopolistic behavior, Thiel takes the example of Google.
While Google today is synonymous with every internet search in the world, the narrative that Google would probably build would be around being an advertiser.
An Advertiser going after the US Online Advertisement Market.
An Advertiser going after the US Advertisement Market.
An Advertiser going after the Global Advertisement Market.
An Advertiser going after the Global Consumer Technology.
At every stage of the narrative, it is basically reducing it’s business market share by 10 times ultimately communicating that at the very core, it is still a very small company.
Evidence of Narrow Markets
The fact that ‘big tech’ today (Apple, Google, Facebook and Microsoft) sit on healthy cash balances on their balance sheet and have favorable margins drive home the point about existence of Narrow Markets.
Thiel argues to create ‘Monopolies’ in Narrow Markets before scaling up.
Amazon started with being the online bookstore. It did that category so well that when Barnes and Noble tried touching it, they ultimately ended up filing for bankruptcy!
You start so small that no one knows!
For Facebook going from 0 to 10,000 users was a brilliant journey where they almost had a 60% repeat and retention rate.
It started with a deeply narrow network at Harvard.
Compare that to all big ‘clean tech’ companies of the world – most of them started big and ultimately had to shrink to a point where they filed for bankruptcy.
Technology is destined to give you the best delta over the next big thing.
- Network Effects – Incredibly hard to start, but if cracked you can create disproportionate value (Facebook)
- Economies of Scale – The Marginal Cost in any software product is 0. If you can make it work, scaling is quick and market share gain is exponentially better
Last Mover Advantage
This is a very interesting angle that Peter puts up.
Google will probably be the last Search Engine, Microsoft the last Operating System and if all goes well, Facebook the Last Social Network.
Thiel argues that while undertaking a valuation exercise almost 80-85% of the value is derived from terminal cash flows present towards the end of the project exercise. The approach is more qualitative than quantitative.
(Hence you see this whole game of burning cash to acquire users, achieve scale and capitalize on network effects.)
A Monopoly is characterized by the following 4 factors –
- Proprietary Technology – This can be tricky (Think Disk Drives in 1991)
- Network Effects
- Economies of Scale
- Value of the Future
A lot of people argue that competition is a proof of validation but in essence Thiel argues that it is a proof of insanity. More often than not, the ferocity of the battles are much higher compared to the stakes.
To truly create a monopoly, one needs to think of a vertically integrated monopoly structure.
Tesla did not become successful because they were able to get the battery storage right but they went all up the value chain and truly solved all problems from car distribution and dealers right to the point of battery swapping.
Start asking bigger questions on what is truly valuable and important.
“Don’t always go through the tiny little door everyone is rushing through. Maybe one should go around the vast gate that no one is taking.”
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