Friday, February 19, 2016

Monopolies Are Better Than Competition

Competition is good.


That's what I was taught in economics. Competition leads to lower prices and better products, otherwise you'll go out of business.

Well... Maybe not...

Maybe... monopolies are better than competition

According to the book Zero To One by Peter Thiel & Blake Masters, a book on entrepreneurship, the goal of companies should be to create monopolies. Monopolies are actually what lead to lower prices and better products (and are generally better for the economy). If you fail to create a monopoly, you'll go out of business.

Let's start with their definition: "by 'monopoly,' we mean the kind of company that's so good at what it does that no other firm can offer a close substitute." It's a monopoly that, based on creativity, created a better product; not because of some law or unnatural barrier. This is a really important distinction. It also means that if a company stops being creative and relies on past ideas, it won't be a monopoly for much longer. See Kodak & Blackberry for examples.

How do monopolies lead to lower prices and better products?

Creative monopolies give customers more choices. Sometimes is saves money: like taking an Uber instead of a taxi, which many would argue is also a better experience. Same thing for Airbnb. Or how Facebook makes it incredibly cheap and easy to stay connected with friends.

Other advantages are more subtle: Apple makes a lot of money from each iPhone. Not only do the profits allow them to invest in new features and new product categories. It also allows them to reinvest that money into pre-buying materials and fabs. This lowers the overall cost to manufacture an iPhone and allows them to lower the price of older generation phones over time.

Contrast this with Android where almost all manufacturers are breaking even or losing money. That makes it much more difficult to add new features. Thankfully, Google makes monopoly level profits from their search ads, and is able to spend the money creating better Android operating systems. Just think, if Google barely made any money because of search competition, Android most likely wouldn't exist. Neither would their autonomous vehicles.

And a final example: if Paypal didn't make monopoly level profits, Elon Musk would not have been able to use his money to start Tesla and SpaceX.

So you see, competition is good. But it's only really good in the long term to the extent it pushes companies to find creative ways to do something that no other company can do and therefore become a monopoly. If a company can't escape competition, it'll eventually die. That won't help create jobs, create better products, or help the economy.

As for me, I find myself asking this question for my website ProDIYLandlord. How can I offer a creative product or service that other real estate websites can't copy? I started by interviewing other landlords to learn about their pain points. I now have a few areas of focus and am investigating different product offerings. It's certainly difficult to create a unique idea that will also help people, but it'll be worth it when I find it.

If you're looking to create a new company, product, or service, I recommend reading the book. It'll get you thinking about creative offerings that customers happily pay for because you're the only one that offers it.