In his book, Zero to One Peter Thiel describes how from an early age, students push themselves to check off as many extracurricular activities as possible. They believe this is supposed to make a difference getting into the best school, the best opportunities and the best jobs. Parents support this ‘more is better’ view and believe it will pay off. By the time they get to college, most students have a vast array of jobs on their resume, as if they can do anything the world throws at them. The strategy of doing a little of everything often leads to mediocrity, according to Thiel. Instead of doing ten things, Thiel says a student should become a ‘definite person’ – or someone, who can determine the best one thing to do and then go and do it. He or she must focus and strive to be very good at something substantive and become a ‘monopoly of one’.
Thiel did not pursue a monopoly of one strategy during his academic career. Instead, he competed hard during his undergrad at Stanford followed by Stanford Law School. Like most law students, he competed with thousands of students for a supreme court clerkship. He got an interview for the clerkships but was unsuccessful. Like many , he believed, “if only I got clerkship, I thought, I’d be set for life. But I didn’t. At the time, I was devastated.” Thiel believes the ultra competitive education creates people who think the same and pursues similar conventional and non-innovative jobs in areas like law and management consulting.
Thiel wonders why people and companies compete so hard because this mentality is ultimately destructive. People and firms lose sight of what matters most when they focus on rivals instead of customers. Microsoft and Google are two big companies, who ended up clashing due to their size and similarities. They both have Windows vs. Chrome OS, Bing vs. Google Search, Explorer vs. Chrome, Office vs. Docs and Surface vs. Nexus. Microsoft and Google decided to go to war and compete for dominance. Instead, both lost when Apple quietly overtook them by focusing on customer value. Apple’s market capitalization was $500 billion in January 2013, while Google and Microsoft’s combined value was $467 billion. Ironically, Microsoft and Google were each more valuable than Apple a few years earlier in 2010.
Should companies strive to become a monopoly? Thiel thinks so. He believes the most valuable companies create something new or improve an existing service or product by a factor of 10X. Smartphones existed before the iPhone. But Apple was the first to get it right by dramatically improving the customer experience by creating a phone that people loved. Monopoly companies with significant cashflows share common characteristics that other companies can look to compare and evaluate themselves.
Characteristics of a monopoly company
1. Create proprietary technology – Create something proprietary that gives your company a big advantage and head-start. With respect to proprietary technology, the rule of thumb is to be at least 10 times better than the closest substitute in an area that is important to customers. One way to achieve this is to make something new that results in a 10x improvement. A second way is to radically improve an existing solution. Amazon achieved this in 1995 when they claimed to be the world’s biggest bookstore. Apple improved the design of the iPad by an order of magnitude beyond earlier tablets released by Microsoft and Nokia in 2002 and 2005 respectively.
2. Capture network effects – Everyone uses a phone and email because most of the population has a phone and a email. Similarly, if most of your friends use Facebook, you will probably join Facebook. Network effects don’t work unless you have a valuable product or service that is valuable, which is used by a small network early. To illustrate, Facebook was succeeded first with colleges and then with high schools before going after everyone else.
3. Obtain economies of scale – If the industry you operate in has high fixed costs and low marginal costs to create a product or service, it becomes important to scale quickly. For example, the initial costs to create a new software is high while the cost of producing future versions is relatively low. If competitors want to enter, they must have substantial capital to enter into a sector and compete effectively. For example, it would be hard for a new search company to enter and compete with Google. Yet, DuckDuckGo, a competing search engine did enter the search market in 2008. DuckDuckGo value proposition of anonymous search took off with customers after the Edward Snowden document leak and subsequence publicity. It was revealed the National Security Agency was forcing companies like Google to share identify information with the government.
4. Valuable Brand – A company becomes popular when customers perceive it as valuable. Two of the biggest brands today are Apple and Disney. Both companies have spent an enormous amount of time on creating substantive products and services that made their brand valuable over time. When Steve Jobs returned to Apple in 1996, Apple’s brand was weak and their product line was fragmented. He killed of weak product lines and focussed on a few bets with the highest chance for a 10x improvement. What followed in 2001 was the launch of one the most successful string of Apple products and hits over the next decade.
Creative monopolies are important in free markets. They offer unfair advantage to a market leader. Creating a service or product that is new or better than competitors by 10x is hard. In a competitive environment, striving to offer a product or service with one strong differentiating feature can make all the difference for a new customer segment that must have it. Successful companies have the creativity and ability to find value in unexpected places where others are not looking. Whether you are a student, a professional or a company, nobody knows what the future holds. But that does not mean you cannot take steps to work hard to shape the future you want with a concrete plan of action. As writer Denis Waitley says, “Winners are people with definite purpose in life”.