The Monopoly Manifesto
Unraveling the Monopoly Myth: Why Thiel's Recipe for Success May Be Bittersweet
note: This is the second part of my review of Peter Thiel’s book “Zero to One”. If you are reading this first, I recommend starting with the first one here. While I have great admiration for his work, (reflected in Part I), this piece is more critical.
In Search of a Monopoly
What makes a company successful? Thiel posits, "Monopoly is the condition of every successful business."
In Thiel's eyes, the competitive market is akin to an endless maze, where businesses lose themselves in a desperate search for differentiation. As they struggle to stand apart from the crowd, they resort to slashing prices, often at the cost of quality and innovation. Take, for instance, the airline industry, where in 2012, companies waged an all-out war for passenger loyalty. The outcome was a race to the bottom, with a single passenger trip generating a meager profit of $0.37. The steel industry, once a titan of the 19th and early 20th centuries, saw its golden age eclipsed by the darkness of commoditization. With the advent of technological advancements and improved transportation, competition soared, leaving once-mighty players like ArcelorMittal and Nippon Steel as mere shadows of their former selves.
The retail colossi, Walmart and Amazon, the Yin and Yang of offline and online, have similarly upended the retail landscape, driving down prices with the relentless efficiency of a finely tuned machine. (Yet, it is worth noting that, despite predictions to the contrary, brick-and-mortar stores continue to persevere, with online sales as a share of total retail falling from the COVID-19 peak of 19% in April 2020.)
So, if the race to the bottom is indeed the bane of industries, what resolves it?
Thiel asserts that monopolies, unencumbered by the incessant onslaught of competition, can devote their energies to conjuring up innovative and unique products and services. And in doing so, they can command premium prices. Thus, monopolies enjoy the luxury of investing in research and development, while also reaping the benefits of economies of scale, creating barriers to entry (“moats”) that secure their long-term success and generate significant value for shareholders.
The Great Monopoly Debate: Thiel's Vision vs. the Voice of Dissent
Thiel's controversial claims about monopolies is not without its detractors. Personally, I believe Thiel's theories should be taken with a grain of salt, and his assertions deserve a healthy dose of scrutiny. Monopolies, while seemingly ideal for businesses, can have detrimental effects on consumers, innovation, political systems, and socioeconomic equality.
Let us explore these criticisms:
1. Bad for Consumers - In the absence of competition, monopolies are free to dictate prices and quality with little regard for the needs of the consumers.
2. Stifling the Flames of Innovation - The lack of competition can lead to complacency, where investment in research and development is seen as an unnecessary expense.
3. With great Power comes Great Misuse of Power - A company with a monopoly often wields significant political power, able to influence the game in its favor. This can result in regulatory capture and other forms of corruption, ultimately undermining the integrity of the political system.
4. Inequality - As the economic power of monopolies grows, it can lead to a concentration of wealth within a select few companies and individuals. This can exacerbate societal inequality.
In sum, while Thiel's argument presumes that companies operate as highly efficient and ethical systems with the best interests of their customers at heart, history has shown that monopolies can stray from this utopian vision, resulting in a significant cost to consumers and the economy.
The Profit Potluck: Why Thiel's Monopoly Obsession Isn't the Only Dish in the Buffet
In the epic journey of business success, one might envision a vast landscape with numerous paths leading to the ultimate destination – profit.
Let’s consider two such contrarian approaches in this profit potluck. Peter Thiel and Warren Buffett, both giants in the world of investing, have chosen different routes to reach their goals, embodying a diversity of philosophies that challenge the notion that monopolies are the only way to make profits. Thiel, the daring innovator, focuses on early-stage tech startups, taking risks and seeking out the next game-changing recipe. Buffett, the steady and methodical maestro, opts for the tried-and-true ingredients, investing in undervalued companies with strong fundamentals and competitive advantages in their industries.
Buffett is unswayed by Thiel's monopoly-centric approach. His impressive portfolio brims with companies like Costco, General Electric, General Motors, Goldman Sachs, IBM, Kraft Foods, MasterCard, Proctor & Gamble, and Verizon – all of which operate in fiercely competitive industries. In fact, the Oracle of Omaha is famously indifferent to new tech companies, as he believes that predicting the industry's growth is feasible, but consistently selecting the winning companies is not.
The lesson we can glean from these two investment virtuosos is that there is no single path to success in the realm of business. Thiel's perspective is indeed unique and tailored to early-stage (tech) startups, and he has found success in his own right. However, it is essential to remember that in the grand buffet of options, there are many flavors of success to be savored.
The Great Impact Conundrum: Tending Virtual Crops or Harvesting Real Change?
The final question we must ask ourselves is whether chasing profits and monopolies is the only way to make a difference, or if there are alternative paths to creating lasting and meaningful change?
Zynga, the creator of the once-ubiquitous FarmVille game, serves as an intriguing example of a startup that captured the attention of high-profile investors like Reid Hoffman (through Greylock Partners) and may more like him. At its peak, FarmVille boasted 80 million monthly active users, collectively dedicating billions of hours to tending their virtual farms on Facebook.
Yet, as we marvel at the success of Zynga's FarmVille, we must also ponder the opportunity costs. Consider the vast amount of time and resources – from hours spent clicking away at virtual crops to the energy consumed in the process – and imagine if even a fraction of that effort had been redirected towards tackling pressing issues like cancer or climate change. Could we have made more significant strides in addressing these challenges?
The pursuit of profits and monopolies may seem like the ultimate prize, but Zynga's story also highlights the fleeting nature of success. Despite initial triumphs with games like FarmVille and Words With Friends, the company struggled to replicate its winning formula and now occupies a position of relative mediocrity in the industry.
Thiel's (justifiable) critiques of clean energy startups underscore the imbalance in the book's focus. As he questions the potential of these enterprises, one can't help but feel that this skepticism misses the larger point – that businesses can and should seek to make a difference beyond their bottom lines. The crux of the matter is that the world of business should not be a single-minded pursuit of profits and monopolies. Rather, it should be a delicate interplay between the quest for financial success and the unwavering commitment to driving social progress.
For in the end, it is the pursuit of meaningful change and social progress that may prove to be the most fulfilling and enduring reward of all.
Enjoyed the fresh approach? Or prefer the classic book summaries, like Wanting? Share your thoughts in a comment. If it resonates, don't forget to like, share, and subscribe.