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Competition in the Business World

Ezgi Ozcan 2220812

Peter Thiel explains in his speech that when creating a new firm to emerge in a market, competition should be avoided to succeed. A company can be successful if they start small and monopolize, and survive in the long run.

A company creates a value of X in a market and captures Y% of that value, which is why it’s not possible to say a company makes a tremendous amount of profits just by looking at its size. Thiel gives a comparison to explain this notion clearer. Between Google and US Airlines combined, Google has revenue of $50.2B and US Airlines have $195.6B. Due to their different Y values (Google 21% and Airlines 0.2%), Google makes more than 3 times the profits US Airlines make. The reason of this is that airlines have a small profit margin; they tend to go bankrupt and reemerge after sales of its assets. Google on the other hand, has no competition therefore they have a very high profit margin. These are the two kinds of companies in the market as Thiel highlights; monopolies and perfect competition, there is only very little in the middle of this spectrum.

Afterwards, Thiel begins to convey that companies lie about their standings in their respective markets for various reasons; this creates an illusion that companies are alike. There are two kinds of lies being told. Monopolies lie about being a monopoly to avoid government regulations. Perfect competition companies lie to differentiate themselves from the competition. A monopoly makes it so their market looks as big as possible by defining their market as the union of vastly different markets. A non-monopoly claims to be in a very narrow market. However, Thiel says that this is an illusion even for the companies telling the lie. A company claiming to be “The only British restaurant in Palo Alto” is making a very detailed claim. The intersection might not be valuable at all to begin with. Thiel gives another example. “High School sports team member, joins a group of hackers, to find the shark that killed his friend” might sound like a very different movie however if given thought, it’s just only another movie. He adds, “Something of somewhere is just the nothing of nowhere”. He continues by explaining the lies monopolies tell. Google makes 66.4% of the search engine market. They can increase the size of the market they are in by adding every market they have any relationship with. Google makes 3.5% of the global advertisement market and 1.76% of the global consumer technology market. It certainly does not look like a monopoly if put this way.

Going on, Thiel gives the equation of creating a monopoly, aim for a small market and monopolize it to grow as fast as possible. “Start small and monopolize” if put in other words. He explains by saying that it’s easier to dominate a small market than a large one. Going after a large market means that there will be too much competition to face. Thiel gives examples of large companies and how they started. Amazon was just a bookstore. EBay was for auctions for dolls. PayPal was for power sellers on eBay, which as he puts was a “terrible market” However because the market they aim to control is small, they managed to get 25% of the market share in 2 months. Same goes for Facebook. It was designed for 10000 people and it reached 60% penetration in only 10 days.

Thiel continues by arguing about how most of a firms profits is generated far in the future, to capture this value a company needs to last long enough to reach that future that can be acquired via the last mover advantage, which means to eliminate the competition in a market. He says that the next Mark Zuckerberg won’t create Facebook, because Facebook was the last of its kind. Google was the last search engine. Why these companies thrived is because they managed to improve something in such a magnitude that they eliminated all the competition. Thiel says his rule of thumb is that you want to have a technology that’s an order of magnitude better than the next best thing. Amazon had 10 times more books; PayPal was 10 times faster than paying by checks. The reason these companies succeeded is because they had the last mover advantage, which made it so they were such breakthroughs that the competition failed to reach their speed. He continues by talking about an exercise he did back in 2001. It had been 27 months since PayPal was released and they had a growth rate of 100%. It showed that 85% of the value of the business came from 2011 and beyond. That’s why it’s important to last long as a company. Disc drives created were big breakthroughs but there were better ones every two year, so nobody made any money. He adds, “You begin by studying the endgame, why will you be the leading company 10-15 years from now”

Next, Thiel stresses that even though we have had decades of innovation pretty much nobody made any money. That is because scientists have a naive understanding that the world will award them for their innovations. He says that railroads are an amazing innovation however there was so much competition going into it that nobody made any money. Same thing happened in the textile industry, regardless of the 7% growth rate, at the end, it was still the royal family who had the most money. The only time where innovation leads to X values that were actually captured was the example of oil companies and Ford. They had a vertically integrated monopoly where they capture a various amount of value from different areas and work them together to make a difference. He gives current examples of vertically integrated monopolies that are SpaceX and Tesla. However these require a lot of capital, Thiel highlights. Right now, people do not want to invest in complicated projects therefore these are very hard to implement.

Lastly, he argues about the idea that losers are bad at competing is wrong for the business world, winners do not compete. However, competition makes people better at whatever they are competitive about. He says that people have a misconception that if everyone goes for something, it has to be

valuable. He claims, if everyone tries to do the same thing, it is often a proof of insanity. Before he ends his speech he warns people by saying, “don’t go in the tiny door everyone else is rushing to, and take the vast gate at the back nobody is going for”.

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